In your accounting career you will be required to analyse current accounting issues and communicate your theoretical understanding to your professional colleagues and your clients. For this assignment assume that you are the senior accountant working for a major firm.
Question 1 – 9 marks
The CEO has forwarded to you an interesting article and requires you to provide her with a deeper theoretical understanding of the issues discussed so that she can fully engage in the lively discourse at an upcoming conference.
You are required to find a newspaper article or web page report of an item of accounting news, i.e. it refers to a current event, consideration, comment or decision that has been published after the 1st of June 2017. Your article could also come from one of the professional journals. The article should not come from an academic journal. Academic journals generally do not contain news articles or articles of less than one page and are usually only published 2 or 4 times a year. If you are having a problem ensuring that your article is from an appropriate source contact your subject coordinator.
You then need to explain the article that you have found in your own words and clearly relate the concepts, ideas and facts within the article to one or more of the theories or topics that you have studied this session. Support your analysis of the assumptions and implications of the topic or theory as appropriate with reference to sources in APA 6 style. For example, this article from the Sydney Morning Herald in April 2016 could be linked to the topics of accounting regulation and measurement (and perhaps others). You must provide a copy of the article or web page, with details of the source, date and page number with your answer.
Question 2 – 10 marks
The Senior Partner of the firm you work for has appointed you to a new role. It is now your responsibility to review upcoming accounting standards and provide a report to the partners on the proposed standard and the opinions of other industry players on the changes.
Firstly, you are required to find a current exposure draft or proposal for a new accounting standard which has been opened for public comments. (These can be found on the websites of most standard-setting organisations, such as the IASB, AASB and FASB. Hint: These websites can be quite difficult to navigate, so as a first step try typing “IASB exposure draft and comment letters”/”FASB exposure draft and comment letters” into Google or other search engine of your choice). Read a sample of the comments from a range of respondents. Select four respondents, ideally from different types of organisations for example, from accounting bodies, industry, companies or corporate bodies. If you are having a problem finding suitable comments letters then contact your subject coordinator.
In your own words, supporting your evaluation with appropriate citations, appropriately referenced in APA 6 style, you are required to include the following information in the report.
- An outline of the major issues covered in the exposure draft (what is the exposure draft introducing or changing?).
- An assessment as to whether (or not) the behaviour of the regulator in introducing the exposure draft can be explained by public interest theory.
- An outline of the views presented in the comments letters which highlights the areas of agreement and disagreement with the exposure draft.
- An assessment as to whether the comments letters can be interpreted as being ‘for’ or ‘against’ which provides relevant examples.
- An application of each of the theories of regulation (public interest, private interest and capture) to the comments letters and a justification as to which theory best explains the comments.
Please note: you need to attach the comment letters you selected for your report (there is no need to attach the exposure draft)
Academic Writing and Referencing – 6 marks
Content assessed: Accounting regulation, current financial reporting issues and topics(s) that your research is related to.
Key generic skills: Research, critical thinking and written communication.
This assessment is designed to test your ability to:
- communicate your understanding of the topic areas; and
- be able to critically evaluate selected current financial reporting and management accounting issues (SLO4).
In the given assessment the CEO of the company has asked to select any article that is related to the field of auditing and accounting and make recommendations for the same. The article selected for the same is “The importance of audit planning “that is written by Daniel J. Gartland who is a CPA. The article has been posted by the Journal of Accountancy and was published on September 1, 2017 (Gartland, 2017). The article can be read on the internet and it is in relation to the field of accounting and auditing. In this article the author have highlighted the relevance of the importance of audit planning in the field of auditing and how useful it is for the auditors. A different aspect of planning and how it will be useful to the auditors, and how the auditors can go forward with the same is explained in detail in this article. The author has also tried to explain the same by citing example from a real life scenario where the problems that the auditor was facing the audit were solved with the help of the audit planning. The example highlights the issues and the solution to the same is provided with the help of audit planning.
The purpose of audit planning is that it will help the auditors in defining the overall objectives that are related to the audit and will help them in forming a proper trail while conducting the process of auditing. Audit plans may not be useful but the audit planning is effective. The overall gain of the audit planning is derived from the overall process itself. Once when the auditor starts planning he gets an insight into the matter and that helps him I understanding every minute details about the entity he will be auditing (Fay & Negangard, 2017).
In this article the author has highlighted the importance of audit planning with respect to the overall risk management. It is stated that the audit planning is a complex process that requires the auditor to consider a large amount of aspects that may be related to the client industry, the industry regulatory factors, the availability of the resources of the firms, the engagement terms of the audit, the overall operations of the client and the administrations etc. With the help of the overall audit planning, the auditors will get a detail photo about the different aspects that they might need to consider and that will also help them in the long run also with the overall risk assessment and mitigation (Goldmann, 2016). The hard work that goes in proper audit planning helps in effective execution of the overall audit related work. When the auditors keeps a proper note and make sure that they effectively comply with the different standards of auditing and the standards that have been set by legal authorities, that will help them in making sure that they are able to deliver an error free report. The various lessons that are related to the overall planning concepts can be explained in relation to these sections of the AICPA Statements on Auditing Standards:
Timing – Planning should not be considered as a part of the auditing that is scheduled to take place before the beginning of the audit. It must be considered as a continuous process that must take place throughout the process of auditing. It must start at the beginning of the audit and must end with the achievement of the desired objectives that are related to the current engagements. This is a process that will be helpful to the auditors, the insights that they will gain with the audit planning will be helpful in the long run to the auditors (Kohtamäki, 2017).
Risk Assessment – When the auditors have desired knowledge about the entity and the functions of the management, it will help the auditor in analyzing the current financial statements from a different perspective that is different from debit or credit. This will help the auditors in the overall risk assessment that will help in reducing the overall risk that might be related to the audit process. Risk identification and mitigation is an integral part of audit, and audit planning effectively helps in the same. A proper overview of the various regulatory, legal, ethical and other factors that are affecting the company or the overall audit process will help the auditor in reducing the risk that might be associated with the same (Mahapatra, Levental, & Narasimhan, 2017). If the risk prone areas are identified earlier in the process f auditing, it will help the auditor in tackling the same effectively by making proper audit related assumptions and carrying out further tests to reduce the same. It helps in avoiding further professional liability claim and thus will also be helpful for the entity and the management that is related to the same.
Team Composition- making the proper assignment to the engagement teams and proper allocation of the resources will be helpful in the process of audit. Selecting the proper team, allocating the work, deciding who will review what accounts and then taking decisions accordingly will be helpful to the auditors of the company. A great team is always an asset and to manage the same is an important aspect of any given kind of work. And also not only the engagement team, but other professionals must be given proper comfort so that they can give their opinion on the same. Colleagues, peers, professional authorities and other team members all should give their opinion in the matter. By making proper use of all the available resources the audit can be conducted more effectively without many issues.
There are other considerations that the auditors might consider while planning for the audit-
Proper Time investment – It is important that the companies must invest proper time while deciding the overall objectives of the audit and defining the terms of the engagement. Proper investment in planning is very important as it will help the auditor and will bear fruits in the future. It may seem to be difficult to put such additional efforts but once done it will help in solving a lot of issues and deadline approaches that the company must take care of (J, 2016). When proper time is not invested it will lead to a lot of errors due to the compressed time. With planning even in the busiest season the companies will be able to meet some demands and reduce some errors then investing some time in auditing will be helpful to the auditors in the long run. Thus before initiating the audit procedures the auditors must spend sufficient time on auditing and should take effective decisions on the basis of the same.
Flexibility is the key – Planning is not a step by step manual, it is just a way that the auditor trails for doing their work effectively. If in any case they feel that due to the changes in the present conditions or scenarios they need to make certain changes in the plan, then they must go for it. The companies must see that there is enough room for allocating any last minute changes that might be affecting the current engagements. The auditor must always be opened to new suggestions and should make the required up-dation in the overall audit plan (Goldmann, 2016). Flexibility is very important because the situation is always changing and it is important to deal with that accordingly. Sometimes when there is any emergency the companies might require to act different from their normal schedule or might need to deviate from the audit plan. It is thus necessary to open for changes and also make the updates accordingly. This will help in improving the overall audit plan and will also better the quality of auditing and its various objectives that are related to it.
Thus we see that in the given article the author has tried to state how important is planning in the overall audit process and there are various advantages that are associated with the same. Every auditor should keep this point in mind and then carry on with the audit procedures that might help them in achieving the desired audit objectives and will also help them in reducing a lot of errors that might be there in the system (Buchanan, Cao, Liljeblom, & Weihrich, 2017). The author has also given example and has tried to justify all the points with the help of this scenario where the problems that the auditor was facing were solved with the help of effective planning. Planning has also helped in reducing the overall errors from the system and has made the process more effective and efficient (kabir, Rahman, & Su, 2017).
The new exposure draft ED 8 has been launched for changes in the definition of the accounting estimates and accounting policy. Both these terms are very important part of the overall accounting scenarios. Companies around the world often have difficulty in classifying transactions as accounting policies or transaction. To deal with the same the new ED 8 was launched to solve this issue and provide proper basis to the companies and also clear their concepts about the accounting scenarios (Drew, 2017). The main requirements in ED 8 are how the companies must classify the various changes or the various assumptions that they undertake in their financial statements and how should they classify the same (Tysiac, 2017). As per the standards provision it is said that all the changes in the accounting policies must be applied on a retrospective basis and the changes in the accounting estimates must be applied on a prospective basis. Thus it is important for the companies to understand whether certain events are accounting estimates or accounting policies and should make the necessary changes accordingly. The new Ed is there to solve these problems of the professionals and companies and provide them a proper basis for making the requisite changes. The main highlights of the given exposure draft are –
- Establishment of the relationship between the accounting policy and the accounting estimates.
This Ed states the definite relationship between the accounting estimates and the accounting policies. The board has given a proposal for making the definition of the given terms more clear and price. The board has stated that the words ‘rules’ and ‘conventions’ must be removed from the definition of the word ‘accounting policies’ These terms are not used anywhere else in the IFRSs and hence they have no given relevance. The board has also stated that instead of the word ‘ base’ the word measurement base must be used in the given definition, to make it clear for the companies to understand what base they must be considering. The board has also stated the need of the definition of the word ‘accounting estimate’ and also given one (Meroño-Cerdán, Lopez-Nicolas, & Molina-Castillo, 2017). The word accounting estimate has been defined as the changes or the inputs that the professionals put in achieving the objectives that has been defined by the accounting policies. Both are connected to each other but are not same. The companies need to make a clear distinction between the accounting policies and estimates before making the requisite changes. It is important for the companies to present the true state of affairs of the company through their financial statements.
- Selection of proper techniques for making necessary estimates
It is stated clearly that if the companies are making certain changes while choosing the many of the valuation techniques that are available, then that shall be considered as accounting estimate and not an accounting policy. Policies are defined standard, choosing the policy is an accounting estimate. When the company makes changes in the accounting estimates than that must be considered as an accounting estimate and not a change in the accounting policy. This has been stated very clearly in the given exposure draft and all the companies must try to follow the same (Dowding, 2017).
- IAS 2 valuation of inventories
There are many methods that are available for valuation of the inventories. While choosing the correct method of valuation for calculating the amount of the inventory will be considered as an accounting estimate and not an accounting policy. These formulas are already stated and the companies are only making the estimate and not framing any policy. Hence it will be considered as an accounting assumption (Fay & Negangard, 2017). This will be applied retrospectively, and hence will be followed by the company accordingly. The companies often face problems because of the same and hence in the proposed standard and the exposure draft the authorities have tried to clear the confusion in regard with the same (Mayntz, 2017).
These are few of the changes that the exposure draft has proposed and these are few of the changes that the companies must follow. It will be very helpful to the companies and help them in solving a large amount of issues. A lot of difficulty is faced by the companies while preparation of these statements. The clarification that is given in this exposure draft will help in solving a lot of issues related to the companies and its accounts. The companies faced difficulty when they would fault in applying this changes and estimates prospectively and retrospectively and when the authorities made them aware of the same they had to change the entire statements (Kohtamäki, 2017). So all these issues that the companies faced was solved by applying such changes and made the accounts clear and free of errors. Thus even though the companies do not want to falsify the accounts, it leads to unintended mistakes in the statements. Thus it is important that the companies need to understand the accounting terms, and apply them accordingly so that there are no major issues involved (Anginer & Kunt, 2014).
The public demand theory and the private interest theory and its relevance
As per the public demand theory the companies or the institutions needs to make the respective changes in the present unethical issues and the inconsistency that the public faces. In the given exposure draft the authorities have made the necessary recommendations that will help the public in solving many problems. Beforehand there was no proper definition of these terms hence the companies were not able to make the proper definition. The given exposure draft have tried to satisfy the needs of the public and have tried to made the system more clear and definite. Hence it can be said that the proposed exposure draft in sync with the proposed definition of public demand theory. This draft will help in solving the problems of the public and will also make the statements free of all kind of errors. There are many other theories that can be considered while in validation of the proposed theory. The private demand theory states that the authorities take certain decision that is for their own benefits and satisfaction. They do not consider the demand of the public but all the demands are based on their own satisfaction and there own selfish motives are involved in the same. The given exposure draft can be said that there is no selfish motives involved of the authorities who are proposing these standards and hence it is not in sync with the private interest theory. The proposed theory is not in line with the said theory and hence it is for the betterment of the public and the companies. It is important that the public must have knowledge about these terms as it is directly affecting their financial statements. In cases there negligence has led to a lot of issues in the past and has raised a lot of complications. It is thus important that the professionals must read these statements and this definition properly and also take decision accordingly.
There are many comments on these exposure drafts, some are in agreement with the proposal and some have opposed the same. The main two comments are from professionals who are from different institutions. An accounting professional Mr. Christopher states that the paragraph 32A and 32B are inconsistent. The main highlight of the comment is that any method of valuation that the company considers and any change that it will make in the same will be considered as an accounting estimate and not an accounting policy. Thus as per the comment the professional is not in agreement with the proposed changes in the standard that the method of valuation must be considered as an accounting estimate and not an accounting policy. Another comment is from Segun Adebiyi that states that the accounting method of valuation will be considered as an accounting estimation and not a policy. Hence both the comments are different from each other. It depends entirely on the users on how they are making their own perceptions and considering the same for their accounts and financial statements.
On the basis of the overall analysis and considering all the various comments on the ED it can be said that the best theory that is suiting the theory is the Public demand theory. It states that the changes must be as per the demand of the public and must satisfy their various needs. Hence it can be said that the proposed exposure draft has been successful in providing an insight into one of the most effective matters that will be useful for the professionals. The comment of the professional is also in sync with the proposed theory (Das, 2017).
It can be thus said that the proposed exposure draft is very helpful for the users and if the users have any issues they can give their opinion with the help of the comments section. The authorities must consider the various comments and then make a judgment on the same.
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Das, P. (2017). Financing Pattern and Utilization of Fixed Assets – A Study. Asian Journal of Social Science Studies, 2(2), 10-17.
Dowding, K. (2017). Australian exceptionalism reconsidered. Australian journal of Political Science, 52(2), 165-182.
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Fay, R., & Negangard, E. (2017). Manual journal entry testing : Data analytics and the risk of fraud. Journal of Accounting Education, 38, 37-49.
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Mayntz, R. (2017). Networked Governance. Springer.
Meroño-Cerdán, A., Lopez-Nicolas, C., & Molina-Castillo, F. (2017). Risk aversion, innovation and performance in family firms. Economics of Innovation and new technology, 1-15.
Tysiac, K. (2017). Rulemaking gives auditors a chance to provide more insight. Journal of Accountancy.