Final answer:
When a company discovers an error in prior period financial statements, corrections must be made through restatement, and the nature and impact of the error must be disclosed. This ensures the financial statements accurately reflect the company's financial position and performance.
Step-by-step explanation:
If comparative financial statements (FS) presented and FS for the year with the error are presented, corrections should be made through a restatement of prior period financial statements. When prior period errors are discovered, companies must adjust the opening balances of their assets, liabilities, and equity for the earliest period presented. This is often done through a retrospective application to the financial statements for the period in which the error occurred.
In the restatement process, the entity needs to disclose the nature of the error, the impact on each financial statement line item and any per share amounts affected for each prior period presented, as well as the cumulative effect on the opening balance of retained earnings or other components of equity as of the beginning of the earliest period presented.
It is crucial for entities to correct these errors to ensure that the financial statements provide a true and fair view of the company's financial position and performance. Investors, creditors, and other users rely on the accuracy of financial statements to make informed decisions.