When an external auditor finds an error in an Indonesian company’s financial statements, management must determine whether it needs to be corrected before the audit is completed.
When Is a Misstatement Material Under Indonesian Financial Reporting?
Indonesian companies prepare their financial statements under the financial reporting standards applicable to them. A misstatement arises when an amount, classification, presentation, or disclosure does not comply with that framework.
A misstatement is material if it could affect decisions based on the financial statements. There is no single monetary threshold. Auditors consider the size and nature of the error, and several smaller errors may become material when considered together.
Where Do Misstatements Arise in Indonesian Subsidiaries?
For foreign-owned companies, misstatements can arise from differences between Indonesian statutory accounting and the reporting used by an overseas parent company.
Revenue or expenses may be recorded in the wrong period, while liabilities may be missing because invoices or other obligations were not recorded before year-end. Inventory and fixed assets may also be incorrectly valued or classified.
Intercompany balances, related-party transactions, management or service fees paid to overseas group companies, and foreign-currency transactions can create further differences between local accounts and group reporting.
Indonesian tax balances are another area that can affect the financial statements. Corporate income tax, VAT, withholding taxes, and deferred tax must be correctly reflected in the company’s accounts.
What Should an Indonesian Company Do When Its Auditor Finds an Error?
Management should determine why the error occurred and which accounts, transactions, or disclosures are affected. If the same accounting treatment has been used elsewhere, the company should check whether other transactions or periods are also affected.
The company should then compare the auditor’s proposed adjustment with its Indonesian accounting records and supporting documents. If the adjustment is appropriate, the records and financial statements should be corrected before they are finalized.
For instance, an Indonesian subsidiary records IDR 5 billion (US$300,000) of revenue before the requirements for recognizing that revenue have been met. If the auditor requires the revenue to be reversed, both reported revenue and profit will fall. If the amount is material and remains uncorrected, it could affect the auditor’s opinion.
If an uncorrected misstatement is material but not pervasive across the financial statements, the auditor may issue a qualified opinion. If it is both material and pervasive, the auditor may issue an adverse opinion.
A disclaimer of opinion generally concerns a different problem: the auditor cannot obtain enough reliable evidence, and the possible effects could be material and pervasive.
What If the Error Comes from an Earlier Financial Year?
An error identified during an Indonesian audit may originate in an earlier reporting period. A material prior-period error generally requires earlier figures to be corrected under the applicable Indonesian financial reporting standards, unless doing so is impracticable. This may involve changing previous year’s figures or opening balances.
The company should also determine whether the correction affects previously reported financial information.
Can an Audit Adjustment Affect Indonesian Tax or Dividends?
An audit adjustment that reduces profit or retained earnings may affect the amount that an Indonesian company can distribute as dividends. Dividend decisions must also take account of the company’s accumulated losses and statutory reserve requirements.
An accounting adjustment may also reveal differences between the company’s financial statements and its Indonesian tax filings. However, an adjustment required under Indonesian financial reporting standards does not automatically require the same adjustment for Indonesian tax purposes.
If the correction changes a tax position that has already been reported, the company should determine whether the relevant tax filing needs to be amended.
Contact MAP Resources Indonesia for Audit Support
MAP Resources Indonesia assists foreign-owned companies with Indonesian financial statement preparation, audit preparation, and accounting corrections identified during external audits. Contact us at info@mapresourcesindonesia.com.
