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Define Provisions and Reserves

Define Provisions and Reserves

Answers

Wilfred
Provision
Any amount retained as reasonably necessary for the purpose of providing for any liability or loss
which is either likely to be incurred, or certain to be incurred but uncertain as to amount or as to
the date on which it will arise.
Thus a provision:
i. Is a debit on profit and loss account (reducing profit and therefore dividends and retained profits)
ii. Is for a likely or certain future payment.
iii. Is where the amount or the date of payment is uncertain.

Reserve
That part of shareholders funds not accounted for by the nominal value of issued share capital or by the share premium account.
The need for the creation of provision is an important consideration for directors who are responsible for accounts and consequently for the auditors. Post balance sheets events can often cast light on the amount of provision required. The auditor has a duty to see that any provisions set up are used for the purpose for which they were set up and that any provision s which are no longer needed are transferred back to profit and loss account.

The verification procedures are:
Verification of provisions and accruals:
a. Review of post balance sheet events often casts light on the amount of the provision required.
b. The creditor’s duty is to see that any provisions set up are used for the purpose for which they were set up and that any provisions which are no longer needed are transferred back to profit and loss account.
c. Consideration attention needs to be paid to accruals as like prepayments they are not checked by the double entry system and therefore open themselves to distortion of the accounts by the senior management.
d. The auditor must ensure that last years accruals are written back.
e. Accruals do not alter mush from year to year and therefore comparison of last year’s and this year’s listing is an essential audit procedure and any that are substantially greater or lesser would call for investigation.
Wilfykil answered the question on April 12, 2019 at 06:32

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