Solutions Guide: Please reword the answers to essay type parts so as to guarantee that your answer is an original. Do not submit as is
Case 1-4 Generally Accepted Accounting Principles At the completion of the Darby Department Store audit, the president asks about the meaning of the phrase “in conformity with generally accepted accounting principles,” which appears in your audit report on the management’s financial statements. He observes that the meaning of the phrase must include more than what he thinks of as “principles.” Required: a. Explain the meaning of the term accounting principles as used in the audit report. (Do not in this part discuss the significance of “generally accepted.”) b. The president wants to know how you determine whether or not an accounting principle is generally accepted. Discuss the sources of evidence for determining whether an accounting principle has substantial authoritative support. Do not merely list the titles of publications. c. The president believes that diversity in accounting practice will always exist among independent entities despite continual improvements in comparability. Discuss the arguments that support his belief.
1.The term “accounting principles” in the auditor’s report includes not only accounting principles but also practices and the methods of applying them. Though the term quite naturally emphasizes the primary or fundamental character of some principles, it includes general rules adopted or professed as guides to action in practice. The term does not connote, however, rules from which there can be no deviation. In some cases, the question is which of several partially relevant principles has determining applicability. Neither is the term “accounting principles” necessarily synonymous with accounting theory. Accounting theory is the broad area of inquiry devoted to the definition of objectives to be served by accounting, the development and elaboration of relevant concepts, the promotion of consistency through logic, the elimination of faulty reasoning, and the evaluation of accounting practice.
2.Generally accepted accounting principles are those principles (whether or not they have only limited usage) that have substantial authoritative support. Whether a given principle has authoritative support is a question of fact and a matter of judgment. The CPA is responsible for collecting the available evidence of authoritative support and judging whether it is sufficient to bring the practice within the bounds of generally accepted accounting practices.
Pronouncements of the FASB, APB, AICPA, and SEC, if there are any on the subject in question, would be given greater weight than other single sources. Pronouncements of the FASB, APB, and AICPA constitute substantial authoritative support, and the evidence would tend to be conclusive if the SEC has issued an affirmative opinion on the same subject. These pronouncements include FASB Statements of Standards, Interpretations, and Staff Positions, APB Opinions, AICPA Accounting Research Bulletins, and SEC Regulation S-X, Financial Reporting Releases, and Staff Accounting Bulletins for companies that file with the SEC. However, substantial authoritative support also can exist for accounting principles in other pronouncements.
Other evidence of authoritative support may be found in the FASB’s Technical Bulletins, Questions and Answers, and Statements of Concepts, the AICPA’s Interpretations, Audit Guides, Accounting Guides, Issue Papers, Technical Practice Aids, and, Practice Bulletins, the FASB EITF Consensus Positions and the IASB International Financial Reporting Standards. The affirmative opinions of practitioners and academicians in articles, textbooks, and expert testimony may also provide evidence. Similarly, the views of stock exchanges, commercial and investment bankers, and regulatory commissions influence the general acceptance of accounting principles and hence are considered in determining whether an accounting principle has substantial authoritative support. Business practice also is a source of evidence. Finally, because they influence business practice, the tax code and state laws are also sources of evidence.
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