Directors are instrumental in how well an entity fulfils its financial reporting obligations. However not all directors will have a financial background.
While directors are not expected to be accounting experts, they do need to be engaged and seek explanation to support the accounting treatments chosen and, where appropriate, challenge the accounting decisions applied in the financial report.
What are directors responsible for in relation to financial reporting?
|Directors are expected to:||Directors are not expected to:|
Be able to read and understand the financial statements
|Review transactions or reconcilations|
|Understand the processes in place to prepare and review the financial statements.||Prepare the financial statements. Have detailed knowledge of the operation of the system of internal controls.|
Sample questions for directors to ask management
- Can you give us a brief overview of the process for preparing these financial statements, including the review processes?
- What has made you confident about the accuracy and integrity of the financial information reported?
- What were the key assumptions made in preparing the financial statements?
- What were the areas requiring the most judgement and how did you mitigate any bias that may have affected these judgements?
- Have any external financial reviews been undertaken (ie by a regulator)? If so, what were the findings of these reviews and how are recommendations arising from the review being managed?
- If applicable, were the external auditors engaged to undertake any additional engagements (ie tax compliance or consultancy services)?
The CA ANZ and ACCA guide answers five fundamental questions:
1. Who is responsible for financial reporting?
2. Why are directors responsible for financial reporting?
3. What are directors responsible for in relation to financial reporting?
4. How do directors discharge their financial reporting responsibilities?
5. When do directors discharge their financial reporting responsibilities?