This is an area of the financial statements where knowledge is largely confined to management, and the auditors often have little choice but to rely on full disclosure by management in order to identify related parties. This is especially the case for a close family member of those in control or having influence over the entity, whose identity can only be revealed by management. Identification of material related party transactions-Difficulties • Related party transactions may not be easy to identify from the accounting systems. Where accounting systems are not capable of separately identifying related party transactions, management need to carry out additional analysis, which if not done makes the transactions extremely difficult for auditors to find. For example sales made to a related party will not necessarily be differentiated from ‘normal’ sales in the accounting systems.
Accounting fraud can be described as some sort of earnings management but not all earnings management can be considered fraudulent. The distinguishing criteria of ethical accounting practices from unethical ones are use of accounting standards, transparency, and intent. If the intention is to misrepresent and mislead users of financial reports, it is most likely that accounting practices employed do not conform to accounting standards and unfavorable information vital to investors are withheld. On the other hand, ethical earnings management is done in a transparent manner and vital information are disclosed accordingly. 3.
Effect of Unethical Behavior Article Analysis Effect of Unethical Behavior Article Analysis Creative accounting is not a new accounting practice, but it can be detrimental to the companies that use it. “Businesses feel the pressure to appear profitable in order to attract investors and resources, but deceptive or fraudulent accounting practices often lead to drastic consequences” (Krantz, 2002, para. 1). Internal unethical accounting practices include under and overstatement of revenue, expenses, liabilities, and misuse of capital. External unethical practices include manipulation of financial market regulations, investment and trade fraud, and kickbacks.
If without the planning of a budget, the company may easily over spending on the cost. In addition, it helps to understand whether the business is in a healthy finance position by comparing with the actual figures with the projected figures. (John Tennent page179) mentioned that for a business planning on budgeting is a process used by management to create the blueprint for achieving that success. Financial planning is the most fundamental task for a business to determining on it strategic goals, objectives and achievement. The Financial plan needs to include the timeframes as well in order to achieve the goal within the budget set.
Although there are some argument for and against for each theory, in my point of view, both theories are contributing to the accounting theory development. For the positive theory views, it has been discussing some areas in term of accounting choices and disclosure decisions. There were two theories which are positive accounting theory (PAT) and institutional theory (IT) explained accounting choices (Collin et al., 2009). First, PAT as a theory that seeks to explain why managers within the organization will select to adopt particular accounting method in preference to other. A set of firm-specific characteristics (earning-based bonus plans, debt and political process) linked to Costly Contracting Theory that explains management’s choice of accounting policies.
While the traditional accounting methods are good to measure past performance and financial stature, it does not allow for managers to see the impact or value that marketing has on the bottom line. For a manager to evaluate the impact of marketing they will need view the current marketing expenditures, sales, and profits to make a conscious decision on what methods are working. While I think placing marketing as an investment is a good concept, determining the value is too biased without a common measurement between all companies in a similar industry. Without understanding the current value of marketing, the marketing budget will be one of the first items cut when the business is in a downturn. Technology in all industries has increased dramatically over the past 10 years so being able to understand the current value of marketing methods should not be as strenuous as it has been in the past.
Likewise, in the case of bad or doubtful debts, an estimate for provision is usually done to know as to how much of the trade receivables the company might not be receiving. This provision is created to safeguard the company from the losses from debts. Given these points, estimation appears to be beneficial. However, “estimates are inherently subjective and therefore lack precision as they involve the use of management's foresight in determining values included in the financial statements” (Accounting-simplified.com, 2013). They can sometimes downsize the dependability on the
This method I believe is more accurate in maintaining financial records at the end of the year and providing a better financial look into how a company is managing. Cash accounting is when companies record revenue only when cash has been received. Cash accounting even if the service was rendered if no cash was received the company will not record the expense. By only recording expenses when bills are paid, the company may be able to shift expenses into other periods in order to make the company look more profitable simply by manipulating when payments are made. This can make the financial statements misleading.
Before attempting to utilize ratios to analyze financial statements, managers must clearly understand the purpose of each financial statement and its content. The income statement is a statement that depicts movement of cash over a period of time and provides information of the revenues and expenses in order to determine liquidity. Liquidity is the ability to turn assets into cash quickly. Two of the most frequently used ratios which draw from the income statement are the current ratio and
For the CPA, it is essential that the client and external financial statement users have confidence in the quality of audits and other services. If users of services do not have confidence in physicians, judges, or CPAs, the ability of those professionals to serve clients and the public effectively is diminished. 2. Explain why the ethical requirements of the CPA profession differ from those of other professions. Because CPA firms have a different relationship with users of financial statements than most other professionals have with their customers.