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CA-Chartered Accountant
Glossary Index


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Glossary of Accounting Terms Result for Audit | Simkover and Associates

Audit of financial statements- The objective of an audit of financial statements is to express an opinion on whether the financial statements present fairly, in all material respects, the financial position, results of operations and cash flows in accordance with generally accepted accounting principles.

Generally accepted accounting principles (GAAP)- This commonly used expression refers to the broad accounting principles that are in general use in Canada at a particular time. The actual rulings as to whether a particular principle falls within GAAP are determined by the Canadian Institute of Chartered Accountants and updated from time to time. An audit of a Canadian corporationís financial statements always includes an evaluation as to whether the statements have been presented in accordance with Canadian GAAP.

Notice to Reader- Financial statements prepared by a Canadian Chartered Accountant without audit or review. This form of financial statement is also known as a compilation engagement, since financial statements are being compiled on the basis of information provided by the management of the company. This form of financial statement is typically used when the main user of the financial statements is the government, as an attachment to the corporate income tax returns. This form of financial statements is not usually appropriate for users like banks or other creditors of the company, since they are not designed to provide assurance that the numbers contained within the financial statements have been verified by the Chartered Accountant and can be relied upon.

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Variance analysis- This term normally refers to the reasons for the variances between actual financial statement data and the corresponding budget or prior year data. For example, the income statement contains different kinds of revenue and expense items such as office expense and cost of sales, which may be disclosed on the statement alongside the original budgeted amounts for the same time period, as well as the prior year amounts for the same line items. The purpose for this kind of disclosure is to indicate the extent of change versus prior year and budget, which of course raises questions if the change is significant. If sales have increased by 5% over the prior year but cost of sales has increased by 22%, this would seem to indicate that the cost of production has gone up for some reason, on every unit produced. Variance analysis consists of two stages: first the identification of the variances, and secondly the explanation of the reasons for the variances. Variance analysis is also used for the balance sheet to explain differences in the assets and liabilities. For example, the current liabilities may have increased significantly over the prior year, but analysis may show that it is not the accounts payable that is the culprit, but rather the creation of a new line of credit that was set up to finance the acquisition of new equipment. Variance analysis is not normally disclosed as an integral part of the financial statements in Canada although it is a requirement to disclose the prior year column for comparison purposes. Chartered accountants will do the variance analysis as part of the audit or review requirements, and maintain the conclusions in their file as evidence of having conducted an appropriate degree of investigation of unusual numbers on the financial statements. Internal accountants will also do the variance analysis in even more depth so that trends can be explained to management as a tool for running the business and making decisions based on current information. This is especially true for monthly financial statements. In such cases, the analysis is normally done versus the same month in the prior year, and also versus the prior month in the same year and the budget for the current month.



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