Common mistakes frequently observed in financial statements

Common mistakes frequently observed in financial statements as per ICAI’s publications and reviews include:

1. Disclosure of Accounting Policies (AS 1)

• Inadequate disclosure of significant accounting policies, especially those governing primary operations.

• Policies merely state compliance with standards (e.g., “in accordance with AS”) without specific application methods.

2. Valuation of Inventories (AS 2)

• Incorrect valuation methods or non-disclosure of valuation methods used (e.g., FIFO, weighted average).

• Failure to recognize inventory write-downs due to obsolescence or market value declines.

3. Revenue Recognition (AS 9)

• Incorrect recognition timing, failing to align revenue with the period in which it was earned.

• Misclassification of revenue streams or failure to disclose significant judgments used in revenue recognition.

4. Accounting for Fixed Assets (AS 10)

• Misclassification of costs between capital and revenue expenditures.

• Non-disclosure of revaluation or impairment policies.

5. Related Party Disclosures (AS 18)

• Incomplete disclosure of related party transactions.

• Omitting material relationships or transactions that could influence decision-making.

6. Cash Flow Statements (AS 3)

• Misclassification of cash flows among operating, investing, and financing activities.

• Lack of reconciliation with cash and cash equivalents.

7. Employee Benefits (AS 15)

• Failure to recognize obligations for defined benefit plans.

• Inadequate disclosure of actuarial assumptions and obligations.

8. Earnings Per Share (AS 20)

• Incorrect calculation of diluted earnings per share.

• Omission of disclosures about calculation methodology.

9. Deferred Tax Accounting (AS 22)

• Errors in calculating deferred tax liabilities or assets, especially in temporary differences.

• Lack of disclosures regarding the basis of deferred tax asset recognition.

10. Segment Reporting (AS 17)

• Failure to disclose reportable segments based on business activities or geography.

• Misalignment between management’s internal reporting and disclosed segments.

• These errors impact the reliability and transparency of financial statements, necessitating strict adherence to standards and rigorous audits.