The Prudence Principle in Financial Reporting: Auditing Issues

Accounting obviously provides the information about the current financial situation of the business entity which is crucial for financial decision making and also plays an important role in the way of the investment behaviour. Due to this fact there is necessary to pay attention to the fair application of the prudence principle for the area of uncertain or illiquid receivables. Calculation of the impairment on illiquid receivables as well as the calculation of provisions has to lead to the providing of fair value of all assets and liabilities.

One of the major problems of Czech financial reporting is its interdependence on the income tax issues. Therefore the majority of companies stress their attention on minimising of the taxable accounting profit (the only exemption is the situation when the management is financially motivated on achieved accounting result).

Therefore these accounting treatments shall be carefully audited. Current Auditing Act states that all auditing standards in the Czech Republic are in full compliance with the international auditing standards issued by IFAC (International Federation of Accountants and Auditors). However IFAC also states that the application of its standards on SMEs leads towards excessive administrative burden for auditing companies which leads to the higher price for the accounting job order.

Acknowledgment

This paper is one of the research outputs of projects GA402/09/0225 and GA403/11/0002 registered at Czech Science Foundation (GA CR).