• Case 1-4 Generally Accepted Accounting Principles
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:
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.”)
"Generally accepted accounting principles" is a guideline of accounting practices and processes which define how accounting professionals are to report the daily activity of the business performance relating to the revenue and expenses, in/outflows of cash and any other material activity relating to the value of the business. 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.
Accounting guidelines are just that, guidelines. The entity is obligated to choose a guideline that is appropriate handling for the transactions. The accounting principle must be consistent and pronounced in FASB, AICPA and their respective Technical Bulletins and Accounting Guidelines and Statements of Position. If the accounting treatment for a transaction or event is not clearly stated then the entity, not the auditor, shall follow the accounting principle from another category with similar transactions or events. ("Statement of financial," 2008)
The ultimate responsibility for the decision on the appropriate application of accounting principles generally accepted for an actual transaction rests with the preparers of financial statements, who should consult