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a) The criteria implied by the definitions of the elements of financial statements appear to have been met:
- the presence at the trade fair has created an economic benefit (in the form of creating an awareness in the minds of potential customers)
- this is controlled by the company
- this arises as a result of a past transaction or event (the attendance at the trade fair).
It is however, debatable whether the cost should be recognized as an asset:
- the amount to be capitalized can be measured reliably, but
- there is very little evidence to date that an asset has actually been created
The auditor’s interpretation of events is probably the correct one. The finance director’s assertion that sales will arise in the future sounds rather optimistic. Ideally, there should be something rather more substantive. This would not have to take the form of actual orders received, but could include ongoing correspondence with potential customers who had been followed up after the event, the dispatch of trade samples to prospective buyers, or a significant level of inquiries.
b) The Framework for the Preparation and Presentation of Financial Statements provides a conceptual underpinning for the International Financial Reporting Standards (IFRS). IFRS are based on the framework and its aim is to provide a framework for the formulation of accounting standards. If accounting issues arise which are not covered by accounting standards then the ‘framework’ can provide a basis for the resolution of such issues. The framework deals with several areas:
(i) the objective of financial statements.
(ii) the underlying assumptions
(iii) the qualitative characteristics of financial statements
(iv) recognition in financial statements.
(v) recognition in financial statements.
(vi) measurement in financial statements
(vii) concepts of capital and capital maintenance.
The framework adopts an approach which builds corporate reporting around the definitions of assets and liabilities and the criteria of recognizing and measuring them in the statement of financial position. This approach views accounting in a different way to most companies. The notion that the measurement and recognition of assets and liabilities is the starting point for the determination of the profit of the business does not sit easily with most practicing accountants who see the transactions of the company as the basis for accounting.
The framework provides a useful basis for discussion and is an aid to academic thought. However, it seems to ignore the many legal and business roles that financial statements play. In many jurisdictions, the financial statements form the basis of dividend payments, the starting point for the assessment of taxation, and often the basis of executive remuneration. A balance sheet, fair fair value system which the IASB seems to favour would have a major impact on the above elements, and would not currently fit the practice of accounting. Very few companies take into account the principles embodied in the Framework unless those principles themselves are embodied in an accounting standard. Some International Accounting Standards are inconsistent
with the framework primarily because they were issued earlier than the framework. The Framework is useful basis for financial reporting but a fundamental change in the current basis of financial reporting will be required for it to have any practical application. The IASB seems intent on ensuring that this change will take place.
The ‘Improvements project’ (IAS 8 Accounting policies, changes in accounting estimates and errors) makes reference to the use of the framework where is no IFRS or IFRIC in use.
c) The external auditors’ primary duty is to express an opinion on whether the financial statements ‘present fairly’. One of the biggest problems faced by the auditor is in defining the quality of fair presentation and deciding whether any particular set of financial statements gives such a view.
External auditors frequently face criticism from aggrieved users of financial statements who complain that they have been misled by the adoption of inappropriate and unacceptable accounting policies. The auditor often finds it difficult to refute such claims because:
- accounting standards are not always sufficiently prescriptive to enable the auditor to defend such complaints on the basis that all applicable standards have been complied with-there is often room for some disagreement over whether a standard’s requirements have been met.
- accounting standards do not cover every single eventuality-indeed many past accounting scandals have involved accounting issues that were not the subject of standards (e.g. the special purpose entities’ that were used in the Enron affair to keep assets and liabilities out of the consolidated statement of financial position).
Ideally, the Framework would enable the auditor to fill in some of the gaps in existing regulations and legislation. The framework provides a number of qualitative benchmarks that might be used to measure the quality of the information provided in a set of financial statements. The auditor can use those criteria in negotiating finalized versions of those statements with the directors in order to ensure that any subsequent complaints or concerns can be addressed in terms of formal set of benchmarks for financial reporting.
marto answered the question on February 13, 2019 at 08:16