Question 1 –7
GAAP (generally accepted accounting principles) are a dynamic set of both
broad and specific guidelines that a company sh ould follow in measuring and
reporting the information in their financial statements and related notes. It is
important that all companies follow GAAP so that investors can compare financial
information across companies to make their resource allocation d ecisions.
Question 1 –8
In 1934, Congress created the SEC and gave it the job of setting accounting and
reporting standards for companies whose securities are publicly traded. The SEC has
retained the power, but has relied on private sector bodies to creat e the standards. The
current private sector body responsible for setting accounting standards is the FASB.
Question 1 –9
Auditors are independent, professional accountants who examine financial
statements to express an opinion. The opinion reflects the au ditors‘ assessment of the
statements' fairness, which is determined by the extent to which they are prepared in
compliance with GAAP. The auditor adds credibility to the financial statements,
which increases the confidence of capital market participants r elying on that
information.
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Question 1 –10
Key provisions included in the text are:
Creation of the Public Company Accounting Oversight Board
Regulate types of non -audit audit services
Require lead a udit partne r rotation every 5 year
Corporate executive accountability
Addresses c onflicts of interest for security analysts
Internal control reporting and auditor opinion about controls
Question 1 –11
New accounting standards, or changes in standards, can have significant
diffe rential effects on companies, investors and creditors, and other interest groups by
causing redistribution of wealth. There also is the possibility that standards could
harm the economy as a whole by causing companies to change their behavior.
Question 1 –12
The FASB undertakes a series of elaborate information gathering steps before
issuing an accounting standard to determine consensus as to the preferred method of
accounting, as well as to anticipate adverse economic consequences.
Question 1 –13
The purpose of the conceptual framework is to guide the Board in developing
accounting standards by providing an underlying foundation and basic reasoning on
which to consider merits of alternatives. The framework does not prescribe GAAP.
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