Read the text to find out how accounting and auditing standards are interrelated.

Accounting standards are the rules for preparing financial statements. They are called generally accepted accounting principles d they specify: first, the type of information that financial statements ought to contain; and second, how that information ought to be prepared. Accounting standards define what acceptable and unacceptable financial accounting practices are.

Auditing standards are the rules governing how an audit is performed. An audit of financial statements is the technical process by an independent person (the auditor) gathers evidence to form an opinion about the conformity of financial statements to GAAP. In most countries a particular group of accountants is legally sanctioned to conduct financial statement audits. In the US, for example, it is the certified public accountants (CPA). In the United Kingdom it is the chartered accountants, in the Netherlands, the register accountant etc. Financial statements conforming to GAAP are said to be reliable. To put it differently, they provide reliable information which is an important ingredient in goods decision making.

Accounting standards and auditing standards are interrelated. Accounting standards presumably define what useful financial information is. Auditing standards guide an auditor in determining whether it is also reliable. Useful and reliable financial information puts investors, creditors and others in a position to make better decisions.

Accounting has been called the language of business. That analogy is accurate, since accounting is a form of communication. As with all types of communication, though, misunderstandings can arise unless meanings are reasonably clear.

It should be remembered that accounting reflects the environment in which it operates. And since environments differ around the world it follows that accounting will also be different around the world.

Unfortunately, this diversity of accounting practices results in a general lack of comparability in financial reports from one country to the next. As a result, there is a risk of misunderstanding when financial statements are communicated transnationally. Problems may arise for both users and preparers there.

The problem of different auditing standards is more subtle. Fundamentally, an audit assures users that they can trust the information communicated by the financial statements. However, if auditors around the world are not comparably trained or if they do not observe comparable standards, then their work varies in quality. As a result the inherent reliability of financial statements also varies.

The existence of different accounting and auditing standards affects the decisions of resource providers to the extent that they fail to understand or trust the messages communicated by financial statements. A number of international and regional organizations recognize this problem and are trying to harmonize accounting and auditing standards to the greatest extent possible.

Date: 2015-12-24; view: 859