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Chapter 2: 3BE (page 63)

Discuss whether the changes described in each of the cases below require recognition in the CPA鈥檚 audit report as to consistency. (Assume that the amounts are material).

  1. The company changed its inventory method to FIFO from weighted-average, which had been used in prior years.
  2. The company disposed of one of the two subsidiaries that had been included in its consolidated statements for prior years.
  3. The estimated remaining useful life of plant property was reduced because of obsolescence.

Short Answer

Expert verified

  1. Yes

  2. No

  3. No

Step by step solution

01

Meaning of audit report

The auditor鈥檚 report is a document comprising the viewpoint of the auditor on in case a firm鈥檚 accounting statements are in accordance with the Generally Accepted Accounting Principles (GAAP) and are exempted from material misrepresentation.

02

Explanation for statement ‘a’

If the firm altered its process of valuing inventory, the consistency as well as the comparability, of the accounting statements have been affected by a variation in the process of applying the principles of accounting. The variation would need statement in the report of auditor in a descriptive paragraph.

03

Explanation for statement ‘b’

If the firm ended one of its two subsidiaries that was involved in its consolidated statements for previous years, no statement in relation to the requirements of consistency is required to be made in the CPA鈥檚 audit report. The comparability of the accounting statements has been affected by the business events, but there has been no alteration made in the principle or the process used. The transaction would possibly need informative exposure in the accounting statements.

04

Explanation for statement ‘c’

If the firm decreases the estimated residual life of plant property due to obsolescence, the comparability of the accounting statements has been afflicted. The variation is not a subject of consistency; it is an alteration in the accounting evaluate needed by changed conditions and includes no variation in principles of accounting used. The variation would reasonably be stated by an accounting statement note. If judged on in the CPA鈥檚 report, it would be a result of disclosure as opposed to consistency.

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Most popular questions from this chapter

Question: What two assumptions are central to the IASB conceptual framework?

Revenues, gains, and investments by owners are all increasing in net assets. What are the distinctions among them?

Accounting information provides useful information about business transactions and events. Those who provide and use financial reports must often select and evaluate accounting alternatives. The FASB statement on qualitative characteristics of accounting information examines the characteristics of accounting information that make it useful for decision-making. It also points out that various limitations inherent in the measurement and reporting process may necessitate trade-offs or sacrifices among the characteristics of useful information.

Instructions

a) Describe briefly the following characteristics of useful accounting information.

1. Relevance (4) Comparability

2. Faithful representation (5) Consistency

3. Understandability

b)For each of the following pairs of information characteristics, give an example of a situation in which one of the characteristics may be sacrificed in return for a gain in the other.

1. Relevance and faithful representation.

2. Relevance and consistency.

3. Comparability and consistency.

4. Relevance and understandability.

c) What criterion should be used to evaluate trade-offs between information characteristics?

E2-2 (L01,2,3) (Usefulness, Objective of Financial Reporting, Qualitative Characteristics) Indicate whether the following statements about the conceptual framework are true or false. If false, provide a brief explanation supporting your position.

  1. The fundamental qualitative characteristics that make accounting information useful are relevance and verifiability.
  2. Relevant information only has predictive value, confirmatory value, or both.
  3. (c)Information that is a faithful representation is characterized as having predictive or confirmatory value.
  4. Comparability pertains only to the reporting of information in a similar manner for different companies.
  5. Verifiability is solely an enhancing characteristic for faithful representation.
  6. In preparing financial reports, it is assumed that users of the reports have reasonable knowledge of business and economic activities.

The Financial Accounting Standards Board (FASB) has developed a conceptual framework for financial accounting and reporting. The FASB has issued eight Statements of Financial Accounting Concepts. These statements are intended to set forth the objective and fundamentals that will be the basis for developing financial accounting and reporting standards. The objective identifies the goals and purposes of financial reporting. The fundamentals are the underlying concepts of financial accounting that guide the selection of transactions, events, and circumstances to be accounted for; their recognition and measurement; and the means of summarizing and communicating them to interested parties.

The purpose of the statement on qualitative characteristics is to examine the characteristics that make accounting information useful. These characteristics or qualities of information are the ingredients that make information useful and the qualities to be sought when accounting choices are made.

Instructions

(a) Identify and discuss the benefits that can be expected to be derived from the FASB鈥檚 conceptual framework.

(b) What is the most important quality for accounting information as identified in the conceptual framework? Explain why it is the most important.

(c) Statement of Financial Accounting Concepts No.8 describes a number of key characteristics or qualities for accounting information. Briefly discuss the importance of any three of these qualities for financial reporting purposes.
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