Solution Manual for Intermediate Accounting 3rd Edition by Wahlen
ANSWERS TO CASES
C1-1 [AICPA Adapted]
1.
The term “accounting principles” in the auditor’s report includes not only accounting
principles but also concepts, practices, and the methods of applying them. The auditor's
report typically refers to “accounting principles” being applied by the firm being audited.
The independent auditor's attestation as to the fairness of a company's financial
statements relative to U.S. GAAP or IFRS is an essential element for the reliability of
financial statements.
2. Generally accepted accounting principles are those principles that have substantial
authoritative support. The SEC has deemed the FASB’s Accounting Standards
Codification as GAAP for U.S. companies. In addition, the SEC has deemed IFRS as
generally accepted accounting principles for non-U.S. companies that are listed in the
United States. The FASB and the IASB follow extensive, due processes to deliberate
and develop new accounting standards that, if adopted, become “generally
accepted.”
C1-2 [CMA Adapted]
Financial accounting standards inspire or encourage political action and social involvement
during the standard-setting process because the effects and economic consequences of
accounting standards are wide-ranging and impact many varying groups. The setting of
accounting standards is a social decision and the user groups play a significant role and have
considerable influence.
The economic consequences of financial accounting standards inspire companies,
stakeholders, and special interest groups to become vocal and critical when standards are
being formulated. The reporting of financial information impacts companies’ financial
statements and the wealth and decision-making of stakeholders in differing ways. Companies
and stakeholders may want particular economic events accounted for in particular ways and
are willing to fight for what they want.
The formulation of accounting standards has political roots in the Securities and Exchange Acts
of 1933 and 1934. Although the SEC was vested with complete authority to define and formulate
accounting standards, it has, for the most part, delegated this authority to the private sector.
The SEC supports the FASB in this endeavor and encourages its “due process” system of
standard setting. Financial accounting standards issued are considered to be “generally
accepted accounting principles” and, as such, they must be followed in the preparation of
financial statements. Therefore, the formulation of standards is of vital interest to companies
responsible for preparing the financial statements, stakeholders that use the statements, and
auditors.