Case 1-4 Generally Accepted Accounting Principles
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Case 1-4 Generally Accepted Accounting Principles

Course Number: ACCT 497, Fall 2010

College/University: University of Phoenix

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1. Case 1-4 Generally Accepted Accounting Principles 2. 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 managements financial statements. He observes that the meaning of the phrase must include more than what he thinks of as principles. Required: a....

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Case 1. 1-4 Generally Accepted Accounting Principles 2. 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 managements 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.) Accounting principles establish guidelines for the accounting profession to follow when preparing the financial statements, which guide an accountant in the correct way to record and depreciate assets, record revenue and expenses and when to record these transactions. Accounting principles follow the objectives of accounting so the financial statements are prepared accurately and show a true statement of the financial position of a company and its performance to interested parties. 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. Numerous organizations participated in the development of financial accounting standards (GAAP) in the U.S., which were AICPA, the SEC, FASB, and GASB. The definition of GAAP can be defined by Statement on Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles in the Independent Auditors Report. This standard generally accepted accounting principles falls under Rule 203 and is interpreted to be APB Opinions, AICPA Accounting Research Bulletins, and FASB Standards and Interpretations. 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. Although FASB and the IASB have formed a joint effort to standardized accounting practices globally, barriers still exist. The largest group affected by any changes in accounting standards would be the accounting professionals due to the retraining that would be necessary, which explains why accounts from different backgrounds are very firm on what standard to adopt. Other issues that could be barriers pertain to the lack of strong professional accountancy bodies in some countries, nationalism, and the differences in political and economic systems. Accounting diversity is currently a barrier for international comparability of financial statements due to the differences in the situation of companies. This diversity could cause differences in solvency, indebtedness, liquidity, and profitability.

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