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Explain the meaning of the term accounting principles as used in the audit report

Auditing Dictionary of Terms and Glossary

Armstrong, Journal of Accountancy, April, 1969. This process should be carried out in accordance with generally accepted accounting principles.

  • The issues covered by Practice Bulletins are limited to those that have not been and are not being considered by the FASB;
  • Fusing the two would ease comparisons between companies based in differed regions;
  • For the most part, in financial reporting, generally accepted implies substantial authoritative support.

Generally accepted accounting principles incorporate the consensus at a particular time as to which economic resources and obligations should be recorded as assets and liabilities by financial accounting, which changes in assets and liabilities should be recorded, when these changes should be recorded, how the assets and liabilities and changes in them should be measured, what information should be disclosed and how it should be disclosed, and which financial statements should be prepared.

Generally accepted accounting principles therefore is a technical term in accounting.

  • The goal of the IFRS is to provide good information, and the standards offer guidelines on how to achieve that goal;
  • However, the project was abandoned more than three years prior to the time that ASR 150 was issued because the conclusion was reached that the term could not be defined in a meaningful manner;
  • The auditor's standard opinion typically includes the following statements, among others;
  • Since the Commission and its staff continue to use that term to mean whatever they want it to mean, it is now particularly urgent that the term be defined or abandoned;
  • Each financial statement has a heading, which gives the name of the entity, the name of the statement, and the date or time covered by the statement.

Generally accepted accounting principles encompass the conventions, rules and procedures necessary to define accepted accounting practice at a particular time. The standard of "generally accepted accounting principles" includes not only broad guidelines of general application, but also detailed rules and procedures.

GAAP: Standards & Rules for Accountants

Generally accepted accounting principles are conventional--that is, they become generally accepted by agreement. The principles have developed on the basis of experience, reason, custom, usage, and to a significant extent, practical necessity.

  • GAAP is a term that refers to a set of rules, standards and practices used throughout the accounting industry to prepare and standardize financial statements that are issued outside the company;
  • If you believe your small business may eventually be subject to GAAP, you may wish to get in the habit of reporting to that standard early on.

The Committee on Accounting Procedure. A subcommittee of the Accounting Principles Board worked diligently on a definition of that term.

Accounting concepts

However, the project was abandoned more than three years prior to the time that ASR 150 was issued because the conclusion was reached that the term could not be defined in a meaningful manner. Since the Commission and its staff continue to use that term to mean whatever they want it to mean, it is now particularly urgent that the term be defined or abandoned.

While registrants and their auditors may follow the 700 pages of designated professional pronouncements and be reasonably confident that they will satisfy the "authoritative support test," ASR 150 also states that any standards, principles, and practices contrary to such pronouncements are considered misleading under the Securities Acts.

Any departures in unusual circumstances are to be handled on an ad hoc basis which would not have the status or protection of a rule.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

This requirement represents the most significant and sweeping rule relating to accounting principles ever issued by the Commission. There is a vast difference between a independent auditors voluntarily following professional pronouncements, and b independent auditors being required to follow such pronouncements by a rule of the Commission.

The Commission in issuing ASR 150 not only failed to follow the rule-making procedure including public exposure for comment prescribed by the Administrative Procedure Act, but also followed the highly questionable practice of adopting as part of a current rule, all future pronouncements of the FASB. As a result, ASR 150 appears to have been adopted contrary to law. Hendricksen and van Breda: Rule 203 of this code specifically prohibits a member from expressing an opinion that financial statements conform with GAAP if those statements contain a material departure from GAAP, unless the member can demonstrate that because of usual circumstances the financial statements would otherwise have been misleading.

Failure to follow rule 203 can lead to loss of a CPA's license to practice.