True and Fair View
Chapter Thirteen
Syllabus topic 3, "Principles of Audit, Materiality, True and Fair view"
Pages 33 to 35 of 98
In one line
A true and fair view means the financial statements are free of material misstatement and present the substance of the position and the result in a way that does not mislead a reader.
Where the phrase sits in the Act
| Section | Whose duty | What it says |
|---|---|---|
| 129(1) | The company's | The financial statements shall give a true and fair view of the state of affairs, comply with the accounting standards, and be in the Schedule III form |
| 143(2) | The auditor's | The report shall state whether the accounts and financial statements give a true and fair view of the state of affairs and of the profit or loss and cash flow |
| 128(1) | The company's | The books of account shall be kept so as to give a true and fair view, on accrual basis and by double entry |
Three sections, one phrase, three duties. Naming all three is a complete answer to "where does the requirement of a true and fair view come from".
Why there is no definition
Because a defined phrase becomes a rule, and a rule can be complied with while the statements mislead. The phrase is deliberately open so that:
- it can absorb new kinds of transaction without being amended;
- it requires judgment rather than checking; and
- it can override a literal compliance that would deceive.
Point three is the important one and the Act provides for it. Schedule III's general instruction 1 says that where compliance with the Act or the accounting standards requires a change in treatment or disclosure, the change shall be made and the requirements of the Schedule shall stand modified accordingly. So the form gives way where following it would not give a true and fair view.
What "true" and what "fair"
| Word | What it demands |
|---|---|
| True | The figures are factually accurate, arithmetically correct, supported by the books and vouchers, and prepared on the applicable standards |
| Fair | The presentation is not misleading: proper classification, adequate disclosure, no window dressing, substance preferred over form |
A set of statements can be true and unfair. Every figure correct, and a large contingent liability not disclosed; a material related party transaction buried in "other expenses"; the whole of a year's profit made on one contract that will not repeat, and nothing said. Fairness is about what the reader is allowed to understand.
What it requires in practice
| 1 | The accounting standards notified under section 133 have been followed, and any departure disclosed with its reasons and financial effect, section 129(5) |
| 2 | The Schedule III form has been used, with the disclosures it requires |
| 3 | All material items are disclosed; nothing material is netted off or buried |
| 4 | Assets and liabilities are properly valued and classified |
| 5 | No material misstatement remains, whether from fraud or error |
| 6 | Contingent liabilities and commitments are disclosed |
| 7 | The accounting policies are disclosed and applied consistently |
| 8 | Events after the balance sheet date are dealt with |
True and Fair View
Eight requirements, and a question asking what a true and fair view requires wants this list.
What it does NOT mean
It does not mean exact. Estimates are inside every set of accounts, and an estimate cannot be true in the sense a cash figure is.
It does not mean the only possible view. Two competent accountants may value stock differently within the standards, and both sets of statements can be true and fair.
It does not mean the business is sound. A true and fair view of a failing company shows a failing company.
It does not mean every figure is right. Immaterial errors do not disturb it.
Where the auditor says it, and what happens when he cannot
Section 143(2) requires the opinion. Section 143(4) requires that where any matter is answered in the negative or with a qualification, the report shall state the reasons.
| Situation | The opinion |
|---|---|
| The statements give a true and fair view | Unmodified |
| A material misstatement, but not pervasive | Qualified: true and fair except for the matter |
| A material and pervasive misstatement | Adverse: the statements do not give a true and fair view |
| Unable to obtain sufficient evidence, and the possible effect is material and pervasive | Disclaimer: the auditor does not express an opinion |
The distinction between qualified and adverse is the word pervasive. One wrong figure, however large, is a qualification. Accounts that cannot be relied on as a whole are adverse.
Quick revision
| Three sections | 128(1) books; 129(1) statements; 143(2) the auditor's report |
| No definition | Deliberate; a definition would become a checklist |
| True | Factually accurate and supported |
| Fair | Not misleading: classification, disclosure, substance over form |
| The override | Schedule III instruction 1: the form gives way where the Act or the standards require |
| Four opinions | Unmodified, qualified, adverse, disclaimer |
| Qualified against adverse | The word pervasive |
Test yourself
- Name the three sections in which the phrase appears and whose duty each is.
- Why does the Act not define it?
- Give an example of statements that are true but not fair.
- Name four things a true and fair view requires.
- What separates a qualified opinion from an adverse one?
Answer in one sentence
1. Section 128(1) on the books of account and section 129(1) on the financial statements, both duties of the company; and section 143(2), the auditor's duty to report whether the statements give a true and fair view.
2. Because a defined phrase becomes a checklist that can be complied with while the statements still mislead, and the phrase exists to require judgment and to override a literal compliance that would deceive.
True and Fair View
3. Every figure arithmetically correct while a large contingent liability is not disclosed, so the reader is not allowed to understand the company's real exposure.
4. That the accounting standards have been followed, that the Schedule III form and its disclosures have been used, that all material items are disclosed, and that no material misstatement remains.
5. Whether the misstatement is pervasive: a material but confined misstatement gives a qualified opinion, and one that makes the statements as a whole unreliable gives an adverse one.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.