Financial audits play an essential role in ensuring the reliability and transparency of companies’ financial statements. One of their main objectives is to verify that the information presented by management has been prepared in accordance with International Financial Reporting Standards (IFRS). However, in practice, auditors frequently detect inconsistencies and errors in the application of these standards, which pose significant risks to the reasonableness of financial reports.
These errors not only affect the quality of accounting information, but can also lead to substantial adjustments, qualifications in the audit opinion, and even regulatory sanctions. Below are the most common issues related to the main IFRS applicable to the preparation of financial statements.
Revenue recognition: challenges with IFRS 15
IFRS 15 “Revenue from Contracts with Customers” establishes a model based on the fulfillment of performance obligations. According to this standard, revenue should be recognized when the entity transfers control of a good or service to the customer, not simply when an invoice is issued or payment is received.
In financial audits, the most common errors include:
- Early recognition of revenue without evidence of transfer of control.
- Failure to identify separate performance obligations within a contract.
- Inappropriate methods for measuring progress on long-term contracts, such as in construction or technology projects.
These problems directly impact the results presented, generating distortions in profit margins. Auditors often emphasize the need to review contracts in detail and validate the criteria applied by management to recognize revenue.
IFRS 16 and the accounting for leases
The entry into force of IFRS 16 “Leases” significantly changed the accounting treatment of this type of transaction. Since then, lessees must recognize virtually all lease contracts on the balance sheet, recording a right-of-use asset and a lease liability.
In financial audits, the following are frequently detected:
- Contracts misclassified as services instead of leases.
- Failure to recognize lease liabilities, affecting the correct presentation of debt levels.
- Incorrect calculation of the discount rate, which distorts the present value of liabilities.
These errors are particularly sensitive because they impact key financial indicators such as EBITDA, liquidity, and indebtedness. Financial auditors must apply substantive tests and review contracts to ensure that the rights and obligations arising from leases are properly recognized.
IFRS 9: Impairment of Financial Instruments
IFRS 9 “Financial Instruments” introduced the expected credit loss (ECL) model to measure the impairment of financial assets. This approach requires companies to estimate prospectively the probability of default and the level of associated losses, even before an impairment event occurs.
In financial audits, recurring difficulties are observed, such as:
- Use of simplified methodologies that do not adequately reflect market conditions.
- Unsubstantiated assumptions about default and recovery rates.
- Lack of robust evidence to support the estimation models used.
These problems affect the reasonableness of impairment provisions, especially in the financial, microfinance, and fintech sectors. Auditors must assess the robustness of the models, compare the rates with historical data, and verify consistency with macroeconomic information.
Accounting estimates and disclosures under IFRS
In addition to specific standards, IFRS require companies to transparently present significant accounting estimates and critical management judgments. However, in financial auditing, it is common to find disclosures that are insufficient or too generic, which do not allow for an understanding of the magnitude of the uncertainty.
This occurs, for example, in provisions for litigation, asset impairment, fair value of investments, or calculation of deferred taxes. The lack of detail in these disclosures increases the risk of misinterpretation by investors, regulators, or creditors.
For financial auditors, reviewing disclosures is a key aspect, as their omission or inadequate wording can be considered a limitation to the reasonableness of the financial statements.
Conclusion
The financial audit has shown that errors in the application of IFRS are not only due to the technical complexity of the standards, but also to the lack of robust internal procedures, adequate documentation, and training of accounting staff.
Recurring problems such as inadequate revenue recognition, incorrect accounting for leases, and poor valuation of financial instruments highlight the need for a preventive approach. The preparation of financial information in accordance with IFRS must be accompanied by robust internal controls and a clearly documented accounting policy so that the audit can validate the reasonableness of the financial statements with sufficient evidence.
In an environment where regulators and users demand greater transparency, companies that invest in strengthening their accounting compliance and anticipating financial audit criteria not only reduce the risk of observations or sanctions, but also generate greater confidence in the market.
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