Relevance_of_Accounting_Standards_to_Auditing

* Significant changes in the company's accounting principles, financial reporting policies, or disclosures and the reasons for such changes; * The financial reporting competencies of personnel involved in selecting and applying significant new or complex accounting principles; * The accounts or disclosures for which judgment is used in the application of significant accounting principles, especially in determining management's estimates and assumptions; * The effect of significant accounting principles in controversial or emerging areas for which there is a lack of authoritative guidance or consensus; * The methods the company uses to account for significant and unusual transactions; and * Financial reporting standards and laws and regulations that are new to the company, including when and how the company will adopt such requirements STANDARDS * Principle of consistency: This principle states that when a business has once fixed a method for the accounting treatment of an item, it will enter all similar items that follow in exactly the same way. * Principle of regularity: Regularity can be defined as conformity to enforced rules and laws. * Principle of sincerity: According to this principle, the accounting unit should reflect in good faith the reality of the company's financial status. * Principle of the permanence of methods: This principle aims at allowing the coherence and comparison of the financial information published by the company. * Principle of non-compensation: One should show the full details of the financial information and not seek to compensate a debt with an asset, revenue with an expense, etc. (see convention of conservatism) * Principle of prudence: This principle aims at showing the reality "as is": one should not try to make things look prettier than they are. Typically, revenue should be recorded only when it is certain and a provision should be entered for an expense which is probable. * Principle of continuity: When stating financial information, one should assume that the business will not be interrupted. This principle mitigates the principle of prudence: assets do not have to be accounted at their disposable value, but it is accepted that they are at their historical value (see depreciation and going concern). * Principle of periodicity: Each accounting entry should be allocated to a given period, and split accordingly if it covers several periods. If a client pre-pays a subscription (or lease, etc.), the given revenue should be split to the entire time-span and not counted for entirely on the date of the transaction. * Principle of Full Disclosure/Materiality: All information and values pertaining to the financial position of a business must be disclosed in the records. * Principle of Utmost Good Faith: All the information regarding to the firm should be disclosed to the insurer before the insurance policy ADVANTAGES Cultural Influences * One of the chief advantages of international accounting standards is that they have input form many different cultures, so they have a more universal appeal. The U.S. GAAP standards are driven by the needs of U.S. business firms and thus reflect a certain American attitude. For example, kickbacks are a part of the business culture in certain parts of the world, while they are forbidden in the U.S. and most of Europe. Multinational Firms * An auditor has a difficult job of digging deep into a company's financial statements. It is even more difficult if it is for a multinational firm with a number of different regions with different systems of accounting. A company with one standardized international accounting system make it exponentially easier to audit the firm. Accountants can use one standard to analyze and evaluate each line item on the financial statement. Elimination of LIFO * International accounting standards do not accept last-in-first-out (LIFO) principles of inventory management. LIFO means that the most recent item of inventory that was placed into the stockpile will be used to value the entire stock. This rule is more liberal than the standards that can be used in GAAP. Those rules allow the accountant to choose between LIFO and the first-in-first-out (FIFO) standard based on which is more advantageous. Accounting Standards facilitate uniform preparation and repoting of general purpose financial statements published annually for the benefit of shareholders, creditors, employees and the public at large.The standards issued should be consistent with the provisions of law.Thus, they are very useful to the investors and other external groups in assessing the progress and prospects of alternative investments in different companies in different countries.Standards will help public accountant to deal with their clients by providing rules of authority to which the acoountants can appeal, in their task of preparing financial on a true and a fair basis.Accounting standards will rise the standards of audit itself in its task of reporting on the financial statements. Flexibility * Principles-based auditing permits professional auditors to adjust the nature of the audit to the firm under review. This means that auditors can be flexible in the interpretation of foundation principles. Each auditor must craft basic principles to the firm and its reputation. This means that auditors and the firms for which they work can be flexible in the application of the principles that make a good audit. It can be adapted to meet the specific needs of each firm under review. In a rule-based approach, the same mechanism must be followed regardless of the circumstances. Clarity * One great advantage of rule-following is its clarity. Each audit goes on a step-by-step basis without deviation. It provides a clear standard whereby a good audit is distinguished from a bad one. If an auditor is being evaluated, it is easy to understand problems when the rules are laid out -- if these have not been followed, then the auditor must explain herself. Principles are always under the suspicion of being self-interested, crafted for the interest of the auditing firm rather than the public good. Specificity * Principles, according to the Institute, should be crafted by the local group of auditors themselves. Auditors can use their experience and the specific nature of the firms under their jurisdiction to create principles that are relevant to them. Auditors of agricultural firms might have a totally different approach than auditors of banks. The auditors themselves can create principles based on their own experiences and abilities, not an abstract set of rules. DISADVTG Subjectivity * Principles are the basis of any ethical purpose. They set the standard for what makes a good, ethical audit rather than showing how the job should be done. Principles, however, remain subjective. The Institute of Chartered Accountants suggests that there is no real agreement on accounting principles, though there is on the nature of the rules in doing audits. Hence, there is a danger in principles-based auditing that the foundation principles might be subjective and, therefore, fluid. * Standards are a source of rule and order and generate consistency. In failing to plan, we plan to fail. Lack of rule and order begets chaos and destruction. The more consistently various organizations can line up their financial transactions with those of other organizations and reach the same data on the same format, the more efficiently commerce can flow and grow. If you have 7 companies and each has a different format and a different set of data to be kept, and no two keeps the same categories of data, much less the in the same format, then they will have great headaches in attempting to do business together. This is the reason for standard bookkeeping practices, standard software and standard documentation. It is why courts have a standard for their operations, and it is why every business should have a stated standard for all its transactions and should attempt to arrange it to comply with the standards of its clients, customers, rivals, suppliers, vendors and afilliates. The disadvantages are small and should be easily overcome by a competent staff. They are vastly outweighed by the advantages. If you have a standard, then new staff must be trained to that standard. It also means that your staf must follow that standard and can't 'wing it.' To some extent it may even curtail creativity and affect productivity in the short term