What is the auditor's duty regarding secret reserves? (2024)

What is the auditor's duty regarding secret reserves?

Auditor's Duty Regarding Secret Reserves

These hidden reserves are not disclosed in the financial statements but are kept within the company's internal accounting records. Auditors play a crucial role in assessing and, if necessary, disclosing these secret reserves to ensure transparency and compliance with accounting standards and regulations.

Secret reserve is a reserve which generally does not appear in the balance sheet. It is created by increasing the liabilities and decreasing the value of assets. Creation of secret reserves within reasonable limits is justifiable on grounds of expediency, prudence and preventing competition from other firms.

In conclusion, all the options provided in the question are true regarding secret reserves. Secret reserves involve the appropriation of profit, are not shown in the balance sheet, and result in profits being shown by a lesser amount than the actual figure.

Reserves that are created by overstating liabilities or understating assets are known as secret reserves. They are not shown in the balance sheet. These reduce tax liabilities, as the liabilities are overstated. It is created by management to avoid competition by reducing profit.

The main duty of an auditor is to determine whether financial statements follow generally accepted accounting principles (GAAP). The Securities and Exchange Commission (SEC) requires all public companies to conduct regular reviews by external auditors, in compliance with official auditing procedures.

Practical example is you have paid big amount on advertising which should be written off in 10 years. You showed it as expense in same year. So, it will decrease big amount from your revenue. So, same amount, you can create secret reserve.

Balance sheet does not exhibit true and fair view of the financial affairs of the company if secret reserve is created and maintained. At the same time, the profit and loss account also does not give the exact results since excessive provision for depreciation or reserve may be made for its creation.

Merits of Secret Reserve

Financial stability: Once a dividend has been successfully paid, the obtained profits are kept in the business. This helps increase the working capital available, which in turn boosts the business's financial stability. Helpful during crisis: Easier to deal with unexpected financial crises.

Is secret reserve shown in balance sheet True or false?

Secret reserves are the reserves that are not shown in the balance sheet because they are not disclosed to the shareholders, competitors and government either to evade tax, show bad financial position to the competitors etc.

Basic nature : A provision is a charge against profit whereas reserve is an appropriation of profit. Hence, net profit cannot be calculated unless all provisions have been debited to profit and loss account, while a reserve is created after the calculation of net profit.

These disadvantages include unfair presentation of financial statements, loss to shareholders, potential misuse by management, lack of transparency and accountability, and difficulty in assessing risk and creditworthiness. Following are the disadvantages of secret reserves except (a) Unfair p...

Following is the list of advantages and disadvantages of secret reserves. Secret reserves helps business to survive in adverse financial position. When company faces big losses. No one give loan to company because all the financial institutions trust will go to zero in same company.

Although reserves for contingent liabilities are often set up in business practice, amounts credited to reserves are generally not deductible for income tax purposes because the fact of liability is not fixed ( Portland Copper & Tank Works, Inc., CA-1, 65-2 ustc ¶9687).

The main two reasons why companies keep cash reserves are to cover unexpected short-term costs and to have enough liquidity to finance various investment opportunities.

The rule does provide certain exceptions that facilitate compliance with other professional and legal obligations. The duty to maintain information confidentiality is a legal as well as a professional obligation.

Physical verification of fixed assets is primarily the responsibility of the Management. Therefore, Physical verification of fixed assets is primarily the responsibility of the auditor is NOT correct regarding the duties of an auditor.

The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by errors or fraud, that are not material to the financial statements are detected.

It means company cannot appoint a person as auditor if he is already auditor for 20 companies. It further means – one member cannot be auditor for more than 20 companies simultaneously.

What are the three key responsibilities of an auditor?

Auditor Duties and Responsibilities:

Ensures compliance with established internal control procedures by examining records, reports, operating practices, and documentation. Verifies assets and liabilities by comparing items to documentation. Completes audit workpapers by documenting audit tests and findings.

In your day-to-day duties you might: examine company accounts. identify any risks to the business. assess the company's financial reporting systems.

As an accountant or auditor, you would be responsible for managing military financial records in accordance with policies and procedures and sound accounting practices. Accountants and auditors record and manage military financial records subject to audit.

A security auditor assesses a computer system based on established standards and makes recommendations to help the system become compliant. This assessment covers all aspects of an organization's IT structure, including potential conflicts within the system that can result in glitches and systemic difficulties.

'Proof of Reserves' is a specific audit for crypto institutions wherein a third party assesses the assets they own against their debt, also known as “liabilities”. The third party will count up every asset an institution can prove they own.