Levels of Financial Reporting
Documenting financial activities to communicate critical information is called financial reporting. Financial reporting is indicative of the firm’s financial performance, future profitability, current standing in the industry, etc. The documentation process is carried out over a specific time, generally quarterly or annually. Companies use the data reported in these documents with the help of primary financial statements to assess shareholder equity, evaluate assets and liabilities, track cash flows, and measure profitability.
Four primary financial statements are used when reporting financial data. They include an Income statement, balance sheet, statement of retained earnings, and cash flow statement. They can also have other financial documents like quarterly and annual reports issued to stockholders and press releases covering quarterly earnings reports.
Three Levels of Financial Reporting with MCA
Independent financial reporting is undertaken on three levels to provide information to financial statements.
The first level of financial reporting involves presenting financial information through a financial statement, and this process does not need the preparation of cash flow statements, footnote disclosures, etc. An accountant or an external accounting firm prepares the financial statements, but they do not examine documentary evidence, test any underlying financial records or assess fraud risk.
Financial statement review
The scope of financial statement reporting is far lesser than an audit. This method has proven to be an expensive and laborious process involving performing analytical procedures and interacting with the company personnel. This act is carried out to assure that there have been no material errors in the financial statement.
There is no testing of accounting records or the process involved in obtaining evidence or independent confirmations. However, additional procedures performed during a review could sometimes increase the chances of discovering financial impropriety. The possibility of identifying internal embezzlement increases in this stage, higher than that in the compilation level. But this number is still meagre.
One of the most expensive levels of independent financial reporting is Audit. The purpose of an Audit is to objectively present financial data under the guidelines of GAAP. The audit engagement team typically meets the design audit team to discuss internal control and identify the risk areas.
The auditors sample the internal supporting documents and journal entries. They also make inquiries about select company personnel. It does not mean an examination of all transactions that have taken place. The sole purpose of financial reporting is to have a thorough understanding of the company’s financial statements and to try to form an objective opinion of the same.
Some auditing procedures essential to financial reporting are – Learning about the organization, previous frauds, or errors and analysing internal control systems, Keeping a count on physical inventory, tallying the figures of the receivable account with other accounts with a third party, etc.
In simple words, financial reporting is an accounting practice that discloses a company’s financial information. It is a critical process undertaken by the company to fully inform the potential investors and banks about its financial activities to drive them to invest in your company or provide loans when in need.
Companies regulated by MCA
Companies with a paid-up capital of Rs. 50 million or more, or a turnover of Rs 1,000 million or more & for companies listed in the NSE and their Indian subsidiaries are required to present their financial statements and other documents in e-form AOC-4 XBRL.
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