Changes in accounting policies of a company and their impact on the audit of the financial statements
In a dynamic accounting environment, changes in accounting policies are a constant that can have a significant impact on a company’s financial statements. Because of this, auditors must understand, analyze, and evaluate such changes to ensure the integrity and reliability of the financial statements of the company they are auditing.
The Importance of Analyzing and Understanding Changes in Accounting Policies
Accounting policies are the specific principles, bases, conventions, rules, and practices adopted by a company in the preparation and presentation of its financial statements. When a company decides to change any of these accounting policies, it may be due to various reasons: to enhance the relevance and reliability of its financial information, to comply with new accounting standards, or in response to changes in its operating environment or business structure; the auditor needs to analyze and understand the significance of such changes.
Impact of Changes on Financial Statements
The impact of a change in accounting policies can significantly affect certain elements of the financial statements; that is, it can affect key elements such as income, expenses, assets, liabilities, or equity and, therefore, significantly influence the determination of the company’s financial position and/or performance. For example, a change in the depreciation policy for Property, Plant, and Equipment will affect the amount of depreciation, operating result, and book value of the company’s assets.
The Auditor’s Role in Relation to Changes in Company Accounting Policies
For auditors, it is vital to identify, analyze, and understand changes in a company’s accounting policies; as well as evaluate whether they are appropriate and in line with applicable accounting standards. This includes analyzing the following aspects:
- Justification and Consistency Evaluation: The auditor must assess whether the change in accounting policy is justified and applied consistently in comparative periods. This involves understanding the rationale behind the changes and whether they align with International Financial Reporting Standards – IFRS.
- Impact Analysis: It is fundamental for the auditor to analyze how the change in accounting policies affects the company’s financial statements. This involves reviewing any retrospective adjustments, if applicable, and how the impact of changes is disclosed in the financial statement notes.
- Transparency and Disclosure Considerations: The auditor must ensure that all changes and their effects are adequately disclosed in the financial statement notes, providing the necessary transparency for proper understanding of the financial statements by users and stakeholders.
- Internal Control Assessment: The auditor must also assess whether the company has updated its internal controls to reflect the change in accounting policies, ensuring that the new controls are effective, efficient, and appropriate.
Conclusion:
Changes in a company’s accounting policies are relevant aspects in financial statement audits. The effect of these changes on the integrity and transparency of financial statements requires careful analysis and evaluation by the auditor to ensure that such financial statements are truthful, complete, and relevant to users.
