Question

How difficult would be to understate liabilities and revenu?

Answer 1

Answer:-

It is difficult to understate liabilities because of the following reasons:-

1. Liabilities consisting of equity cannot be understated as it is the amount to be paid to the owners.For example,if the same is understated, owners will loose confidence in the company as it will signal low performance.

2.Liabilities consisting of debt and creditors cannot be understated because it is the amount to be paid to outsiders and they will not sit quiet if the same is reported less than the actual amount payable to them.

3.Liabilities consisting of any taxes payable cannot be understated as it is amount payable to revenue authorities which will impact the confidence of the people if the company is non compliant in paying taxes.It will also attract fines and penalties.

It is difficult to understate revenue because:-

1.If revenue is understated it will signal poor performance by the company.

2.The same will result in low profitability and hence loose confidence of the investors.

3.If revenue is understated,accounts receivable will also be affected and hence it will be difficult for the company to track the actual amount receivable from the parties.