Top 10 items of financial statements where external auditors of Dubai put more attention

Audit October 14, 2020

Auditing financial statements in Dubai, Abu Dhabi, Sharjah, UAE have become mandatory for businesses located in the free zone and main lands of the UAE. Each public company has to audit their firm’s financial statements at least annually. They can also conduct auditing semiannually.

In the case of companies with a good record, it may take 3 to 6 weeks for CPA of Dubai to complete auditing function while in case of banks in Dubai, auditing may require 6-7 months. In the end, it is the level of transparency in the client’s records and the size and scope of the client’s business that determines the duration of performing the audit.

Audit firms of Dubai can’t go deep into each business transactions and check for the accuracy of the recorded items within the given time and resource constraints. Rather using experience and intuition, UAE’s CPAs check certain items extensively that are material for the business and the users of the financial statements.

Here are the top 10 items that seem to be material to the external auditors of Dubai.

Inventories: For manufacturing companies of Dubai, one of the main relevant items of the financial statement is inventory. As the item is huge and daily transactions incur regarding delivering and receiving inventories, businesses in UAE may use it as a tool for window dressing.

Independent accounting firms of Dubai at first checks the physical counting procedures their local or international clients follow in recording inventories. They also look into the costing and measurement methods Dubai businesses used in valuing inventories.

Whether the costing methods had been changed in the middle of a fiscal year, whether there is any inconsistency in inventory measurement methods from year to year- all of these are considered carefully. Auditors in Dubai, UAE may also look into the receipts and vouchers related to inventory that are easily traceable.

Revenue: Revenue can be manipulated by Dubai businesses to increase the bottom line and encourage investors within and beyond the UAE for being engaged with the businesses. They can do so by recording revenues for sales transactions that have not been recognized yet.

Examples of revenue overstatement by business firms include recording sales while the goods are still in the firms’ warehouse or the customers have not confirmed the sales agreement or recording return from the sale of non-current asset as operating revenue.

Audit firms of Dubai are aware of such techniques and therefore they crosscheck sales invoice of business with their posting to the ledger, collection of cash from the clients’ customers and clients’ ending balance of accounts receivables. For any susceptible transactions, auditors of the UAE possess the right to approach customers of their clients regarding the accuracy of the sales invoice.

Expenses: Understatement of expenses by capitalizing them or recognizing them in the later period will cause an overstatement of a firm’s bottom line. WorldCom is the relevant example here that capitalized expenses amounting to $3,800,000,000.00. This type of accounting scandals made auditors of the UAE aware regarding their technique to look for misstatement.

CPAs of Dubai can check the purchase documents of their local clients according to ledger posting of these expenses and income statements. If they guess any presence of discrepancy, they can check whether recorded payments have been made to the correct parties.

Accounts receivables: Dubai’s business organizations may follow the tendency of showing their accounting receivable balance lower in their balance sheet to pamper investors about their efficient cash collection process. On the flip side of the coin, there are audit firms in Dubai who know the techniques to detect this type of misstatement.

External independent auditors can assess the relevancy between sales invoices, cash received from trade receivables, A/R ageing reports, journal and ledger postings, subsidiary accounts maintained for each receivable etc. to trace the accurate balance of this current asset. They can also send letters to the existing accounts receivables especially those with substantial balance asking for confirmation regarding their due amount.

Accounts payables: In Dubai, during the business operation stage, firms can overstate the balance of accounts payable in a particular period to underestimate associated expenses and thus violate the matching principles. By doing so they can demonstrate a higher level of profitability intentionally.

To test whether the firms recorded accurate balance of trade payables, accounting firms of Dubai will match source documents such as- purchase documents, suppliers’ invoice, bill payable etc. with the ledger balance.

For more extensive assessment, they can look into the subsidiary ledger accounts of each supplier and communicate with them to test whether their client has been accurate in recording payables. Another important thing that can consider is how their client has determined and applied their cut off periods.

Cash and bank balance: There remains a common tendency among the businesses in Dubai to balance any inequality in the asset and liability sides of the balance sheet by manipulating cash and bank balance and it is challenging for audit firms to check thousands of transactions that are related to cash.

Though it seems to be challenging for the auditors, they still go for detail assessment of cash and bank balance. Auditors in Dubai can do so by checking the statement provided by the banks with the bank statement prepared by their client, by checking source document of significant transactions and by checking some other documents fully through selecting them from numerous transactions using random or selective sampling.

Depreciation: By changing depreciation methods, assets’ estimated life, depreciation rate etc., businesses of the UAE can manipulate depreciation expense and use this for fulfilling their particular objective, such as- understatement or overstatement of profits, enjoying tax advantages etc.

In the case of Dubai, independent audit firms can assess their client’s depreciation system’s consistency and ask for logical reasons if the client is found to have changed their depreciation method all on a sudden.

Also, the external auditors should apply their professional scepticism in identifying whether the depreciable value of assets has been priced right and whether the accumulated depreciation account is accurate.

Non-current assets: Dubai’s large business firms can take the opportunity of revaluing their fixed asset when in the market the price for that asset rises suddenly. Sometimes these assets may be revalued intentionally to reflect overstatement from their intrinsic value. Such action may pamper their balance sheet but at the cost of wrong investment decision made by unaware investors.

To prevent such event from bringing about the intense consequence for the prospective investors, external auditors can ask for the reason of revaluation of an asset and test whether the revaluation technique is relevant enough. Also, they should look into the initial cost of the assets by asking for the source documents such as vouchers prepared by their clients to make payment for these assets.

Provision on doubtful accounts: Exactly how much provision to make for a significant level of doubtful A/R has not been specified in IFRS or GAAP and therefore business organizations operating in Dubai can make their best guess to form provision account. In doing so, they manipulate the accounts according to their advantages that will ultimately make the financial statements look better.

What can Dubai’s external auditors do here? They can look into the reason and relevancy of the provision account. In this case, they compare the balance of accounts receivables, sales revenue and cash collection from the receivables at a time to get the insight on the relevancy of doubtful account’s provision.

Debt: Complete assessment procedures are completed by external auditor firms of Dubai while checking their clients’ debt items. They usually check this item by diving its long term and short term portion.

Auditors go through the lease and loan agreements of their client and previous transactions’ recording to determine whether the actual due balance was recorded in the financial statement.

For enquiries, call +971 5679 52590 / E-mail: info@aviaanaccounting.com

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Top 10 items of financial statements where external auditors of Dubai put more attention

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