An Audit Firm’s Guide To Financial Statement Notes
Accurately preparing the financial statements is a critical requirement for companies undergoing an external audit in Dubai. However, most entrepreneurs lack knowledge about the key parts of a financial statement and they overly rely upon their accountant for preparing it. Understanding financial statements will enable you to prepare well for the external audit and help the auditors during the audit engagement. With this in mind, audit firms in Dubai will help you to understand ”notes to the financial statements” through this article. Read ahead.
What are Notes to the Financial Statements?
While conducting an audit, audit firms in Dubai will thoroughly investigate the information presented on the financial statement, including the notes to the financial statements. Notes to the financial statement are supplemental notes included in the published financial statement of a company. The notes explain the assumptions used to prepare the numbers as well as the accounting policies used by the company to prepare the financial statements. Such noted help the stakeholders, investors and analysts to effectively interpret the numbers in the financial statements.
Auditors use notes to the financial statements to determine if the accounting policies used by the company are appropriate and properly applied. The notes can be used to understand the underlying issues connected to the financial health of a company. Apart from the financial statement numbers, auditors in Dubai use the notes to the financial statements to base their audit opinion.
Composition of Financial Statement Notes
Usually, notes to the financial statements are composed of the following common items:
1. Basis of Presentation
This is the first section of the financial statement notes that describes the basis of preparing and presenting the financial statements.
2. Accounting Policies
In this section, we get information about the accounting policies used by the management for preparing financial statements. Providing information about the accounting policies helps the auditors to understand financial statements better. This section discloses some key aspects such as the depreciation method used, how the company values inventory, accounting for intangibles, etc. You are required to disclose all the accounting policies adopted in the financial statements.
3. Depreciation of Assets
Depreciation of assets is defined as the value of a fixed asset over time as a result of normal wear and tear. The notes to the financial statements contain a section for depreciation of assets, which informs us about the method used by the company for depreciation of assets. Based on the depreciation method adopted by the management, we may see considerable fluctuations between the net income in the income statement and the value reported on the balance sheet. By reading the information on the depreciation method, the auditors or other users can understand the differences in net incomes reported in the financial statements.
4. Valuation of Inventory
The fourth section of financial statement notes is usually the valuation of inventory notes. It provides information on how the management valued the company’s inventory. This information makes it easier to compare inventory figures from one period to another or vis-à-vis other competing companies. Auditors in Dubai can glean two major inventory issues from this section such as how inventory amount is stated and the method used to determine inventory cost.
5. Subsequent Events
The financial statement notes also inform us about the details of any subsequent events. Subsequent events are the events that happen after the balance sheet date but before the release of the financial statements. How the company deals with such events is based on whether they change the existing conditions as of the balance sheet date.
6. Intangible Assets
This section provides information about intangible assets owned by the company such as trademarks and patents. It informs us about all the intangible assets owned by your firm and how you determined the value of such assets as reported on the balance sheet.
7. Employee Benefits
This section states the benefits provided by the company to its employees such as health insurance, health savings accounts, retirement plans, etc. Typical disclosures in this section include the health and welfare plans such as the medical, vacation, fringe benefits etc.
8. Contingent Liability
The contingent liabilities section discloses the liabilities that may occur mainly as a result of an uncertain future event. A tax dispute or a pending lawsuit against the company is a typical example of contingent liability.
Hire the Best Audit Firms in Dubai, UAE
Companies add notes to the financial statements to make key disclosures that inform about the assumptions used to prepare the financial statements. Properly preparing the financial statements is the best way to prepare your annual financial audit. Moreover, the audit will be successful if you have leading audit firms in Dubai such as Jitendra Chartered Accountants (JCA).
JCA provides the best audit services in Dubai for companies of all sizes. Our 20 plus years of experience in the UAE market will come in handy for adding value to your business. We can play a key role in your business success by providing services including accounting, VAT compliance, and regulatory requirements related to Economic Substance Regulations (ESR), Anti-Money Laundering (AML) and Ultimate Beneficial Ownership (UBO) etc.