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: s ources of accounting standards
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.”) The meaning of “accounting principles” in the phrase “in conformity with generally accepted accounting principles” that was used in the audit report refers to “accounting principle promulgated by bodies designated by Council to establish such principles that has a material effect on the statements or data taken as a whole” (AICPA, 1988).
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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. As of today, for accountants to determine whether an accounting principle is generally accepted or not, an accountant would research FASB ASC. In 2009, the main source of authoritative nongovernmental GAAP resides in the FASB codification. The codification contains up-to-date accounting authoritative literature from several difference sources such as: AICPA, APB, FASB, and SEC and is now provided in one location for accountants to research GAAP literature.
In addition, nonauthoritative sources that can provide accountants guidance are: accounting handbooks, textbooks, and articles. 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. Diversity among independent entities will constantly exist in accounting practice “because a variety of parties are interested in and affected by the development of accounting standards.
Various users of accounting information have found that the best way to influence the formulation of accounting standards is to attempt to influence the standard setters” (Schroeder, Clark, & Cathey, 2011, p. 15).
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