Answer to Question #211424 in Economics of Enterprise for Huong Pham

Question

Lan and Mai are students at Accounting and Auditing Faculty. After completing Accounting Unit, they are now able to prepare financial statement and discussing about the figures on financial report. Mai said, "all the figures on financial statement are definitely reliable because accountants have to adhere with strict code of ethics, integrity standards, and set of accounting rules and standard such as IFRS when preparing the report". Do you agree or disagree with Mai's statement? Provide explanation and real-life examples (cases) to justify your opinion.

Answer 1

Not all the figures on financial statements are definitely reliable even though Accountants have to adhere with strict code of ethic, integrity standards, and set of accounting rules and standards such as IFRS because of Inherent risk.

Inherent risk refers to a risk caused by an error in a financial statement due to a factor other than failure of internal control. Mostly inherent risk occurs when transactions involved are complex.

An accurate financial statements reflects the integrity of the company and it is also a primary document that one can show to various stakeholders. Financial reports affect your business as in the following ways:

1) Financial reports show actual company growth

2) Financial reports improve your financial forecasts

3) Financial reports keep fraudulent cases at bay

4) Financial reports assert your capabilities as a business owner

In essence, not all figures of Financial Statements are relied on, as there is some degree of inherent risk and audit risk that makes these statements  (even audited) unreliable to some extent.