Few general mistakes from current year’s audits
Don’t you make them as well?
Summer holidays are slowly approaching, also for us, auditors, the busy audit season is finally ending, thus I decided to mention in today’s article few accounting bad habits we faced during current year’ s audit season.
PREPAID EXPENSES
Czech Accounting Standard 017 in its paragraph 3.11.1. states:
"In the relevant account reported under" D.I.1. Prepaid expenses "are recognized payments of a current period that represent an expense of the following accounting period, namely the specific individual accounts in the accounting class 5, for example, costs of a greater range of low-value intangible or tangible assets for put in use, rents paid in advance; the settlement of prepaid expenses to the relevant expense account shall be made in the accounting period to which the accrued costs are related."
From the above quote, I would like to emphasize that these are "current period payments", what, unfortunately, many companies do not consider and use prepaid expenses account even if the invoice has not been paid, thus overstating the balance sheet on both assets and liabilities sides.
However, I consider as a much worse misconduct against the accounting rules in using the prepaid expenses account for any items that the company is not "fit" to have in its Profit and loss account for the current accounting period. Here I will again quote the provision of Czech Accounting Standard 017, paragraph 3.11, which states:
“3.11. Account group 38 - Temporary accounts of assets and liabilities
Temporary accounts of assets and liabilities are accounted for in this account group ; In the relevant accounts, costs and revenues related to a specific title are deferred in a certain known amount, as well as in an estimated amount related to a specific title, namely between two or more consecutive accounting periods. Fines, penalties, shortages and damages cannot be deferred. "
I would like to emphasize especially the part that fines and penalties cannot be deferred as we encountered a case when a company accounted for penalty invoices based on a recommendation of its tax advisor with a justification that unpaid penalty invoices are not expenses, after all.
DEFERRED INCOME
A similar principle as for prepaid expenses applies also for deferred income. Again, I will quote from Czech Accounting Standard 017, which states in paragraph 3.11.4:
"In the relevant account reported under "CI2. Deferred income” is accounted for incomes of a current accounting period that belongs to revenues of a following accounting period, such as rent and lease payments received in advance, amounts of lump sums received in advance for the provision of maintenance services, subscriptions received."
Therefore, companies should not report deferred income in the financial statements unless the amounts have been paid as of the balance sheet date, otherwise they overstate the assets (receivables) and liabilities in the balance sheet as well.
ADVANCES RECEIVED AND PROVIDED
Many companies also use accounts 314 – Prepayments made and 324 - Advances payments received, often within complicated business cases, even if they do not represent in fact receipts or payments of funds. In the accounting books, we see then, for example, identical amounts of several million on a certain analytical account 311 – Trade receivables and on an analytical account 324 – Advances payments received. A similar situation arises when a company accounts for a supplier invoice the following way: 314 - Prepayments made / 321 – Trade payables, ie. without making the payment. In these cases, companies again overstate both assets and liabilities in their balance sheet, as both accounts should only be used for operating advances provided, ie. accounting entry 314 - Prepayments made /221 – Bank Account or operating advances received, accounting entry 221 – Bank Account /324 - Advances payments received.
In a case of any questions regarding the above-mentioned or any other accounting matters, do not hesitate to contact me at: