Case 1-4
a.
The term "accounting principles" in the auditor's report includes not only accounting
principles but also\practices and the methods of applying them. Although 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
however, mean 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.
b.
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. Since September
15, 2009 the primary source of GAAP has been the FASB’s accounting standards
codification. However, if the guidance for a transaction or event is not specified within a
source of authoritative GAAP for that entity, an entity shall first consider accounting
principles for similar transactions or events within a source of authoritative GAAP for that
entity and then consider nonauthoritative guidance from other sources (FASB ASC 10510-5-2).. The CPA is responsible for collecting the available evidence of authoritative
support and judging whether it is sufficient to bring the practice within bounds of generally
accepted accounting principle.
c.
The auditor’s report states that a company’s financial statements present “fairly,” in all
material respects, its financial position, based on his or her judgment as to whether the
accounting principles selected and applied have general acceptance and that the accounting
principles selected are appropriate given the circumstances. This statement is necessary
because there are many areas where companies make choices among and between
accounting principles (Depreciation method, inventory cost flow assumptions, etc).
Therefore,, it is expected that financial reports are prepared in a manner that reflects the
underlying economic events and activities of the reporting entity. This expectation was
stressed in SAS No. 90 which stated, "In each SEC engagement, the auditor should discuss
with the audit committee the auditor's judgments about the quality, not just the
acceptability, of the entity's accounting principles applied in its financial reporting. The
discussion should also include items that have a significant impact on the representational
faithfulness, verifiability, and neutrality of the accounting information included in the
financial statements. “ As a consequence, the choices of accounting principles made by
one company are often different than those made by another company.
Case 1-6
a.
Historically, accounting has been considered a highly trustworthy profession. Public
accounting firms trained new accountants in the audit function with oversight from senior
partners who believed that their firm’s integrity rode on every engagement. That is, new
auditors were assigned client responsibility after minimal formal audit training. Most of
the training of new accountants took place on-site, and the effectiveness of the new
auditor depended on the effectiveness of the instructor.
CPA firms have always called their customers “clients” and have worked hard to
cultivate them. Partners routinely entertained clients at sporting events, country clubs,
and restaurants, and many CPA firm employees later moved on to work in their clients’
firms. Any conflicts in these relationships were, at least partially, offset by the CPA
firm’s commitment to professional ethics.
These relationships changed as information technology advisory services grew in the late
1970s and early ’80s. Also in the mid-1980s, the AICPA lifted its ban on advertising. As
a result, revenue generation became more critical to partners’ compensation. Thereafter,
the profit structure of CPA firms changed dramatically and in 1999, revenues for
management consulting accounted for more than 50 percent of the then Big Five’s
revenue.
As a result, the audit function evolved into a loss leader that public accounting firms
offered in conjunction with vastly more lucrative consulting engagements. But as pubic
accounting firms competed more aggressively on price for audit engagements, they were
forced by cost considerations to reduce the number of procedures performed for each
client engagement. This resulted in increased test of controls and statistical models, and
fewer of the basic, time-consuming tests of transactions that increase the likelihood of
detecting fraud. In addition, junior auditors were frequently assigned the crucial oversight
roles usually filled by senior partners, who were otherwise engaged in marketing
activities to prospective clients. This reduced the effectiveness of the instructor–new
accountant training process.
b.
1. Arthur Andersen, formerly one the Big Five audit firms, has gone out of business.
2. In July 2002, President George W. Bush signed into law the Sarbanes-Oxley Bill,
which imposes a number of corporate governance rules on publicly traded companies
3. Establishment of PCAOB.
FASB ASC 1-3 Accounting for the Investment Tax Credit
Search investment tax credit
Found at
740-10-25- 45 7 46
740-10-47-27 & 28
Case 2-2:
a.
i. The FASB was motivated to create the CFP because it saw how
many difficulties that the APB had faced. The FASB wants the CFP
to be viewed as a common basis for identifying and discussing
issues, for asking relevant questions, and for suggesting avenues
for research. The concepts in the CFP are used to establish
standards and to provide reference to resolve accounting issues.
The CFP does not provide every single answer, but it does help by
giving alternatives. The most direct beneficiary of the CFP is the
FASB. Because the CFP reduces personal bias influence on
standard setting, members of the board cannot influence
standard setting with personal frameworks.
ii. In 1984, the FASB established the Emerging Issues Task Force
because there was criticism that the FASB was failing at giving
timely guidance on issues. The EITF’s objectives and goals are to
help the FASB out by giving timely guidance on financial
accounting issues. The guidance given by the EITF is intended to
follow the framework of the Accounting Standards Codification to
keep practice similar in a timely manner.
The FASB uses the term standards overload to describe their concern for the amount of
difficult accounting standards there are. The board agreed to look at being able to issue
standards for basic principles, rather than detailed rules. This problem is especially bad
for small businesses because small businesses usually do not have the resources to be
able to research and apply all of the standards. The FASB and other organizations have
studied the problem, but no solution has been reached.
Case 2-7:
a. The bonds are usually distinguished based on the uncertainty of future cash
flows. Because both bonds are due in ten years, there are many factors that
might make the bond market value of company A’s bond a greater amount
than company B’s bond. The factors include the estimation of future cash
flows such as investment with higher cash inflow will have a higher bond
market, differences in the timing of above stated cash inflows, the time value
of money as characterized by the risk-free percentage of interest and the
amount for bearing such uncertainty in the future, and liquidity and
imperfection of market. The company that yields a lower market rate has the
better credit rating. In this case, if both companies have the same stated or
nominal rate of interest, company A bonds will be more valuable if its credit
rating is better than company B’s.
b. If both companies have the same credit rating, then company A’s shorter
bond term would make its market worth greater than company B’s bonds.
However, if the credit ratings and bond terms were both the same, then
company A’s bonds will be sold for a lrger amount than company B’s bonds
only if company A is proposing a greater specified interest rate than company
B.
FASB ASC 2‐8 Using Present Value:
325-40-35-7: If the present value of the original estimate at the initial
transaction date (or the last date previously revised) of cash flows expected
to be collected is less than the present value of the current estimate of cash
flows expected to be collected, the change is considered favorable. 325-4035-8: If the present value of the original estimate at the initial transaction
date (or the last date previously revised) of cash flows expected to be
collected is greater than the present value of the current estimate of cash
flows expected to be collected, the change is considered adverse. 958-60555-22: The present value of the future cash flows is one valuation technique
for measuring the fair value of contributions arising from unconditional
promises to give cash; other valuation techniques also are available, as
described in Topic 820.
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