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How to correct an error in a financial statement

Leszek WOZIŃSKI
Junior Audit Manager at RSM Poland

An error in a financial statement may happen to any business unit. Often, errors will be revealed after the statement has been signed or even approved. According to the National Accounting Standard No. 7, all business entities are obliged to correct any error that has been revealed, regardless whether such errors pertain to the current trading year, or previous years.

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If the error revealed concerns an approved financial statement, amending the statement is no longer possible. In such case, any necessary corrections will need to be included in accounting books of the current year (the year in which the error has been revealed). The statement error must be revealed in the balance sheet under item "Profit (loss) from previous years" - meaning the value resulting in either an increase or a decrease in financial results stated for previous years; the same is to be included on the opposite side of the balance sheet under the item relevant to the origin of the error (e.g. in provisions, liabilities etc.). At the same time, be sure to describe the error in the fifth section (additional information and notes), including data illustrating the error's extent. Revealed errors must also be listed in the statement of changes in equity, if the business entity is obliged to maintain one.

An error that concerns an unapproved financial statement may be corrected provided it bears a significant effect on how the entity is viewed based on its financial statement. Errors are deemed material if they are able to influence business decisions made on basis of financial statements, be it individually or collectively. In such cases, revealed errors are corrected by opening the books and entering relevant corrective notes.

If the error revealed in an approved financial statement does not misrepresent the statement for the current trading year or previous years, we are dealing with an immaterial error. In any case, it is important to consider insignificant errors collectively, since it is their sum that may lead to a misstatement of the financial statement. Immaterial errors should be included in accounting books for the current year and regarded as current transactions.

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