Last updated on Mar 7, 2024
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Check the source
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Compare the numbers
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Analyze the narratives
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Ask questions
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Seek feedback
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Apply logic
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Here’s what else to consider
Financial reports are essential documents that provide information about the performance, position, and cash flows of a business. They can help investors, creditors, regulators, and other stakeholders make informed decisions and assess the risks and opportunities of the business. However, not all financial reports are equally reliable and accurate. Some may contain errors, omissions, misstatements, or even fraud. How can you verify the accuracy of financial reports and avoid being misled by inaccurate or deceptive information? Here are some of the most effective ways to evaluate the quality and credibility of financial reports.
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- Oleksandr Karpenko Chief accountant at FLO Magazacilik
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- Altaf Noor Ali Lead Practitioner, Altaf Noor Ali, Chartered Accountants, Karachi Pakistan
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1 Check the source
The first step to verify the accuracy of financial reports is to check the source of the information. Who prepared the report, and for what purpose? Is it an official document issued by the company, or a third-party analysis or opinion? Is it audited by an independent and reputable auditor, or self-reported by the management? Is it based on actual data, or projections and assumptions? The source of the information can affect its reliability, objectivity, and transparency. You should look for financial reports that are prepared by qualified and authorized parties, that follow the relevant accounting standards and regulations, and that disclose any conflicts of interest or limitations.
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Pay an authorized auditor to perform an audit. Then you get a qualified person to give an independent opinion on the report. I still haven’t seen the system that can validate accounting estimates. Ten years ago we thought that was blockchain, but now we all talk AI.
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- Altaf Noor Ali Lead Practitioner, Altaf Noor Ali, Chartered Accountants, Karachi Pakistan
Prepare an analytical report to summarise what is happening. Review. Compare. Visualise. Go to the source of the expense. Link the expense with the asset, as much as possible. For example, find the asset for which repair was undertaken. Where there is no expense, find out the person responsible for it. Verify from the source, as in case of fuel for a car. Think logically who is responsible for generating the expense. Why?
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- Brandon D. Art, Science, and Communications oriented
Ask Henry Kissinger (Subject matter expert) and get his opinion on shell companies. Or the CIA. And ask them what they would say If there was no fear of reprisal or punishment. (And actually have it that way) A financial report should be approached as how someone removes a bandaid. Profit should not always be placed above safety.There should be an automatic assumption that you will not obtain all the money’s journey on paper. Once that has been accepted, you can create categories that will accommodate this. Basically a buffer for corruption or things that will not be accepted by popular opinion despite the harsh realities of our world.If one entity is able to print unlimited money, you can’t track that. That’s wishful thinking.
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- Arlene Bahall Trailblazer Accounts Payable Manager | A processes improvement champion | DIY fanatic
Importance of inputting accurate data into accounting softwares that feeds financial reports like the trial balance, P & L and balance sheet etc. cannot be emphasized enough. "Garbage in garbage out". Example: supplier invoice processing should entail a meticulous level of due diligence checks to ensure accurate inputs.
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2 Compare the numbers
The second step to verify the accuracy of financial reports is to compare the numbers with other sources of information. To cross-check the figures and ratios in the report, you can compare the current report to the previous reports of the same company, and look for any significant changes, inconsistencies, or discrepancies. Additionally, you can compare the report with the reports of other similar companies in the same industry, and look for any outliers, anomalies, or deviations from the industry norms or benchmarks. Furthermore, you can compare the report with market data such as stock prices, earnings announcements, news articles, or analyst ratings to identify any gaps, contradictions, or surprises. By doing this, you can identify any red flags, errors, or manipulations in the financial report and gain a broader context and perspective to evaluate the performance and position of the business.
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- André Kennedy Business Development⏐Customer Success Manager⏐Fitness Professional
Based on my experience, having multiple sources of the same financial data is advantageous for all parties involved. This practice establishes an unbiased system of checks and balances, ensuring accuracy and transparency. Since the technology is created by humans who are not perfect, having multiple sources to verify information against each other helps to eliminate errors and mistakes.
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For the 2nd step, one can do accounts correlation analysis such as revenues, the increase/decrease of account receivables, the increase/decrease of account payables, the increase/decrease of cash, and so on. Finally, one should not pursue full/all true because there are principles such as materiality, methods of measurement, interpretation in accounting & auditing which might limit the presentation and opinion.
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3 Analyze the narratives
The third step to verify the accuracy of financial reports is to analyze the narratives that accompany the numbers. These narratives can include the management discussion and analysis (MD&A), the notes to the financial statements, the auditor's opinion, or any other explanatory or supplementary information. The narratives can provide important insights into the assumptions, judgments, estimates, policies, and risks that underlie the numbers, and also reveal the goals, strategies, challenges, and opportunities of the business. However, the narratives can also be used to influence, persuade, or mislead the readers by emphasizing, omitting, or distorting certain information. You should analyze the narratives critically and carefully, and look for any signs of bias, vagueness, inconsistency, or discrepancy with the numbers.
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Analyze the narratives entails scrutinizing the written explanations, descriptions, and context that accompany the numerical data in a company's financial statements. Auditors and analysts can acquire insights into the underlying transactions, accounting rules, and potential areas of concern by evaluating the narratives. This procedure helps to ensure that financial information is presented honestly and in compliance with generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS), thereby improving the financial reports' dependability.
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- Ayush Goel CA | US CPA (2/4) | M.com | Financial Reporting Expert | Public Speaker
Inquiry, observation and walk through help auditor to analyse the process narratives. It will help to develop sample planning for substantive procedures
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4 Ask questions
The fourth step to verify the accuracy of financial reports is to ask questions. You should not accept the information at face value, but rather question its validity, relevance, completeness, and clarity. You can use different types of questions to probe deeper into the report, such as what is the main message or conclusion of the report and how is it supported by evidence? How reliable, accurate, and timely is the data used in the report and what are the sources and methods of verification? How reasonable, realistic, and consistent are the assumptions, estimates, and projections used in the report and what are the uncertainties and contingencies involved? Moreover, you should consider how transparent, comprehensive, and understandable is the presentation and disclosure of the information in the report and what are the key terms and concepts used? Finally, you should determine how relevant, useful, and actionable is the information in the report for your purpose and what are the implications and recommendations? Asking questions can help you clarify, verify, and evaluate the information in the financial report as well as identify any gaps, weaknesses, or issues that need further investigation or explanation.
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5 Seek feedback
Verifying the accuracy of financial reports requires seeking feedback from other sources. You should not rely only on your own judgment, but instead consult experts, peers, and stakeholders with relevant knowledge, experience, or interest in the report. Sources of feedback can include the authors or preparers of the report, the auditors or reviewers of the report, the users or beneficiaries of the report, and the critics or challengers of the report. This process can help you gain more insights, perspectives, and information about the financial report, as well as expose you to different opinions, arguments, and evidence that can challenge or confirm your own.
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6 Apply logic
The sixth step to verify the accuracy of financial reports is to apply logic. You should use your critical thinking skills to analyze, synthesize, and evaluate the information in the report, and draw reasonable and valid conclusions and inferences. To do this, you can use deductive reasoning to test the validity of arguments and claims, inductive reasoning to test the strength of those arguments, abductive reasoning to test the plausibility of those claims, causal reasoning to assess causality of relationships and effects, and analogical reasoning to test the similarity of comparisons and analogies. Applying logic can help you assess the soundness and reliability of the financial report, while also helping you avoid any logical fallacies, errors, or biases that can affect your reasoning and judgment.
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7 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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- Oleksandr Karpenko Chief accountant at FLO Magazacilik
Two big A's:1. Regular internal audit (closing, financial reporting)2. Regular external audit (statutory and tax reporting)Also, strong internal controls in place, with regular controls review.
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- Adrian Rutter Analyst, improvement-activist, data-protection and governance wonk, mentor and student.
Overall, it can help to use the principle of the Russian proverb that There’s an old Russian proverb Ronald Reagan used to quote in his discussions with Mikhail Gorbachev during the mutual suspicions around ending the Cold War and its nuclear stand-off - “trust, but verify” (doveryay, no proveryay). It means starting a conversation looking for evidence supporting numbers and narratives, with the expectation that the evidence is available, and only moving to interrogation if the evidence is weak, incomplete or simply missing. It’s a useful principle to bear in mind not just when you’re reviewing something but also when you’re putting forward a report or proposal; what do you need to include to assure your readers?
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- Julieta Bissone ANALISTA DE CONCILIACIONES SR Openpay | BBVA |
En mi experiencia, para lograr informes precisos, hay que tener claro el objetivo del informe, utilizando fuentes de datos confiables, verificación de las variables a analizar, aplicando la lógica y utilizando las herramientas que nos da la estadística. Comprobar los datos con casos muestra y hacerse preguntas sobre el mismo para cubrir cada aspecto que pueda generar dudas. También es oportuno comparar y contrastar con otro informes.
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