Page 43 - DCOM509_ADVANCED_AUDITING

Advanced Auditing

Notes The evolvement of GAAP is based on four fundamental qualities the financial statements must
possess. The financial statements must be Relevant, Reliable, Consistent and Comparable.
Economic Entity Assumption, Going Concern Assumption, Monetary Unit Assumption, and
Periodic Reporting Assumption are the four basic assumptions for these financial statements.

3.1.4 Basic Objectives of US GAAP

As a part of US GAAP, the financial reporting should provide information as following:

1. The provided info should be apt to be presented to creditors and potential investors in
addition to other users for making cogent decisions concerning investment, credit and
similar financial activities.
2. The provided info should be helpful to the creditors and potential investors in evaluating
the amounts, timing, and uncertainty of expected cash receipts.
3. The info should be related to economic resources, the claims to those resources, as well as
the changes occurring in them.
4. The provided info should be helpful in making financial and long-term decisions.
5. The information should be helpful in perking up the business performance.

6. The information should be helpful in maintaining records.

3.1.5 Basic Assumptions of US GAAP

The US GAAP features four basic assumptions to meet its objectives. These are:
1. Accounting Entity: This assumes the business to be a separate entity from its owners as
well as other businesses. Moreover, it also stresses on keeping revenue and expense
separate from personal expenses.
2. Going Concern: This assumption presumes that the business will be indefinitely in
operation. This assumption authenticates the methods of amortization, depreciation, and
asset capitalization. However, this assumption is not applicable in the event of liquidation.

3. Monetary Unit Principle: This assumption presumes an unwavering currency to continue
to be the unit of record.
4. Time-period Principle: This assumption states that a business enterprise’s economic
activities can be divided into simulated time periods.
While preparing financial statements through the use of GAAP, a large number of American
corporations and other business enterprises follow the rules of how to report different business
transactions based on the assorted GAAP rules.

Notes The FASB has issued six Statements of Financial Accounting Concepts (SFACs) to
describe its conceptual framework.
3.1.6 Organizations behind GAAP

1. United States Securities and Exchange Commission (SEC) – During the Great Depression,
the SEC was created as need of structure setting accounting standards. The SEC works

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