Page 45 - DCOM509_ADVANCED_AUDITING

Advanced Auditing

Notes Self Assessment

State whether the following statements are True or False:
1. Theoretically, the term “GAAP” does not cover the entire accounting industry, rather than
only the US.

2. The APB operated from 1970 through 1973 and issued 31 Accounting Principles Board
Opinions (APBOs), various Interpretations, and four Statements.
3. Again, it has to be remembered that GAAP are not a rigid set of rules.

4. The evolvement of GAAP is based on four fundamental qualities the financial statements
must possess.
5. The US GAAP features four basic assumptions to meet its objectives.

3.2 Difference between IFRS and US GAAP

There are significant differences between Indian GAAP and US GAAP. US GAAP stipulate stringent
accounting treatment as well as disclosure norms, whereas their Indian GAAP in many cases has
relaxed requirements (AS 18, 17, AS 3). Similarly, there are several areas where no Accounting
Standard has been issued by ICAI. These differences lead to wide variations when Financial
Results of Indian Companies are computed under US GAAP and it is found that Profits computed
under US GAAP are generally lower.

Notes The Standards are recognized by Securities and Exchange Commission (SEC) and
the American Institute of Certified Public Accountants (AICPA).

Some of these major differences between US GAAP and Indian GAAP which give rise to differences
in profit are highlighted hereunder:

1. Underlying assumptions: Under Indian GAAP, Financial statements are prepared in
accordance with the principle of conservatism which basically means “Anticipate no profits
and provide for all possible losses”. Under US GAAP conservatism is not considered, if it
leads to deliberate and consistent understatements.
2. Prudence vs. rules: The Institute of Chartered Accountants of India (ICAI) has been
structuring Accounting Standards based on the International Accounting Standards (IAS),
which employ concepts and ‘prudence’ as the principle in contrast to the US GAAP, which
are “rule oriented”, detailed and complex. It is quite easy for the US accountants to handle
issues that fall within the rules, while the International Accounting Standards provide a
general framework of accounting standards, which emphasise “substance over form” for
accounting. These rules are less descriptive and their application is based on prudence. US
GAAP has thus issued several Industry specific GAAP, like SFAS 51 (Cable TV), SFAS 50
(Record and Music Industry), SFAS 53 (Motion Picture Industry) etc.

3. Format/Presentation of financial statements: Under Indian GAAP, financial statements
are prepared in accordance with the presentation requirements of Schedule VI to the
Companies Act, 1956. On the other hand, financial statements prepared as per US GAAP
are not required to be prepared under any specific format as long as they comply with the
disclosure requirements of US GAAP.

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