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.”)
Answer: Before I dissect the term “accounting principle,” I first want to provide a brief definition of (1) accounting and (2) a principle. Accounting is the systematic recording, reporting, and analysis of financial transactions of a business and a principle is a rule or ethical standard. The definition of an accounting principle is a principle that governs current accounting practice and that is used as a reference to determine the appropriate treatment of complex transactions (InvestorWords.com).
In the audit report, the term accounting principle is referred to the rules and ethical standards that are used to provide reasonable and reliable assurance that the maintenance of records are accurately reflecting the transparency of any transactions and dispositions that occurred in the current year, that company operations were authorized and approved by management and directors of the respective company, and there is assurance that any unauthorized occurrences that may have a material effect on the financial statements have been prevented.
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. Do not merely list the titles of publications.
Answer: In determining whether or not an accounting principle is generally accepted, there are four different sources of evidence for the determination of substantial authoritative support: (1) AICPA Accounting Research Bulletins and Accounting Principles Board Opinions not superseded by action of the FASB, FASB Statements of Financial Accounting Standards and Interpretations, FASB Statement 133 Implementation Issues, and FASB Staff Positions, (2)