ISA 710, “Comparatives Information – Corresponding Figures and Comparative Financial Statements,” is an international auditing standard issued by the International Auditing and Assurance Standards Board (IAASB) that provides guidance to auditors on how to handle comparatives in financial statements. Comparatives are the amounts and other disclosures included in the financial statements for prior periods, which are presented for comparison with the current period’s financial statements.
Definitions:
Comparatives Information:
Comparatives information refers to the amounts and disclosures included in the financial statements for one or more prior periods that are presented with the current period’s financial statements for comparison purposes.
Corresponding Figures:
Corresponding figures are the amounts or other disclosures included in the financial statements for the previous period that are presented with the financial statements for the current period. They are usually used when an entity has adopted a new accounting policy, made a retrospective restatement, or corrected a prior period error.
Explanations:
ISA 710 provides guidance to auditors on how to obtain sufficient appropriate audit evidence regarding comparatives in financial statements. It requires auditors to perform procedures to ensure that the comparatives are consistent with the current period’s financial statements and are free from material misstatements. The standard emphasizes the importance of obtaining audit evidence for comparatives, as they are an integral part of the financial statements and are used by users to assess an entity’s financial performance and position over time.
Examples:
Adoption of New Accounting Policy:
An entity adopts a new accounting policy during the current year, which requires retrospective restatement of prior period financial statements. The auditor would need to perform procedures to ensure that the comparatives are restated correctly in accordance with the new accounting policy and are free from material misstatements.
Correction of Prior Period Error:
An entity identifies and corrects a material error in its financial statements for the current year, which requires restatement of prior period financial statements. The auditor would need to perform procedures to ensure that the comparatives are restated correctly to reflect the correction of the prior period error and are free from material misstatements.
Change in Comparative Periods:
An entity changes its comparative periods from the previous year’s financial statements. The auditor would need to perform procedures to ensure that the comparatives are presented in accordance with the changed comparative periods and are free from material misstatements.
Case Studies:
XYZ Inc. is a manufacturing company that adopts a new accounting policy for revenue recognition during the current year, which requires retrospective restatement of prior period financial statements. The auditor, as part of the audit of the current year’s financial statements, performs procedures to obtain sufficient appropriate audit evidence regarding the comparatives. This includes reviewing the changes made to the prior period financial statements, examining the accounting policy change disclosure, and reperforming revenue recognition calculations for the prior period. The auditor concludes that the comparatives are consistent with the current year’s financial statements and are free from material misstatements.
ABC Corp. identifies and corrects a material error in its financial statements for the current year, which requires restatement of prior period financial statements. The auditor, as part of the audit of the current year’s financial statements, performs procedures to ensure that the comparatives are restated correctly to reflect the correction of the prior period error. This includes reviewing the restatement adjustments, reperforming calculations for the prior period, and assessing the impact of the restatement on the financial statements. The auditor concludes that the comparatives are restated correctly and are free from material misstatements.
LMN Ltd. changes its comparative periods from the previous year’s financial statements. The auditor, as part of the audit of the current year’s financial statements, performs procedures to ensure that the comparatives are presented in accordance with the changed comparative periods. This includes reviewing the changes made to the comparative periods, verifying the accuracy of the restated comparative financial statements, and assessing the impact of the change on the financial statements. The auditor concludes that the comparatives are presented correctly in accordance with the changed comparative periods and are free from material misstatements.
In summary, ISA 710 provides guidance to auditors on how to handle comparatives in financial statements. Auditors are required to perform procedures to obtain sufficient appropriate audit evidence regarding comparatives, including ensuring that they are consistent with the current period’s financial statements and are free from material misstatements. Examples of situations where auditors may need to perform procedures related to comparatives include the adoption of new accounting policies, correction of prior period errors, and changes in comparative periods. Case studies illustrate how auditors can apply the guidance provided by ISA 710 in practical scenarios to ensure that comparatives are presented accurately and are reliable for users of the financial statements.
In conclusion, auditors play a crucial role in verifying the accuracy of comparatives in financial statements, which are used by stakeholders to assess an entity’s financial performance and position over time. Adhering to the guidance provided by ISA 710 helps auditors ensure that comparatives are presented correctly and are free from material misstatements, enhancing the overall reliability and integrity of the financial statements.