A Case of Fixed Asset Accounting: Initial and Subsequent Measurement

This instructional case integrates multiple accounting concepts relating to fixed asset acquisition and subsequent measurement. You must apply accounting knowledge, professional judgment, and critical thinking skills to evaluate fixed assets and make recommendations. You must also analyze differences between fixed asset accounting under US generally accepted accounting principles and IFRS. As a student, you generally understand basic application of asset cost computation that simply recognizes the amount of cash paid for acquiring the asset. However, determining asset cost becomes challenging when you encounter more complex situations. You must consider initial measurement issues relating to a land purchase (demolition of existing building and a special assessment expenditure), interest capitalization for a self-constructed building, a nonmonetary asset exchange, and an asset retirement obligation. The case also considers subsequent measurement issues in terms of depreciation (straight-line and accelerated methods), replacement of an asset component, and impairment. The case structure is flexible and the teaching notes include alternatives for using scaled-down versions

Fraud Requirements in SSARS 10

With the issuance of Statement on Standards for Accounting and Review Services (SSARS) 10, Performance of Review Engagements, which is effective for review engagements for periods ending on or after Dec 15, 2004, the AICPA Accounting and Review Services Committee requires accountants performing review engagements to make inquiries regarding fraud. Furthermore, the management representation letter must address fraud. The authors reviewed the comment letters that the AICPA received in response to the exposure draft for SSARS 10 and conducted a survey of practitioners after the statement was issued. SSARS 10 amends SSARS 1, Compilation and Review of Financial Statements, primarily by expanding inquiries during review engagements to include fraud and by requiring that the management representation letter address fraud. Review engagements provide limited, not positive, assurance. While additional inquiries and disclosures in management\u27s representation letter should be relatively easy to incorporate, the authors could find no substantive reasons for these procedures to be considered necessary

Professional Skepticism: Practitioners’ Perceptions And Training Practices

While regulators criticize auditors for lacking appropriate professional skepticism (SEC, 2010, 2013; PCAOB, 2012), auditing standards lack a clear, consistent definition (Nelson, 2009; Hurtt, Brown-Liburd, Earley, & Krishnamoorthy, 2013), leaving application of professional skepticism “open to interpretation” (Glover & Prawitt, 2013, p. 2). If individual auditors view professional skepticism as open to interpretation (i.e., subjective), auditors may believe they are appropriately applying standards on professional skepticism based on their individual interpretations. However, if regulators apply a different definition of professional skepticism when reviewing auditors’ work, this may help explain ongoing criticisms from regulators stating auditors lack appropriate professional skepticism. The author reports insights of 66 auditors’ perceptions and finds the majority believe professional skepticism has a subjective (as opposed to uniform) definition. This finding is consistent across auditor rank and firm size, suggesting the potential for variations in application of professional skepticism in practice. Supplemental analyses indicate tax practitioners are more likely than auditors to view professional skepticism as subjective, particularly at the partner rank. The author presents professional skepticism training practices for 25 firms that suggest most firms recognize the importance of professional skepticism training and its regular reinforcement. However, there are concerns surrounding the fact that mentoring is listed as the most common training method, which lacks benefits of more formal training activities. Overall, this study provides relevant insights from practitioners and strengthens recent calls for developing a “common definition and shared understanding” of professional skepticism and a framework for evaluating application of professional skepticism (Glover & Prawitt, 2014, p. 5-6)

Formation and Consequences of Going Concern Opinions: A Review of the Literature

Shortly after the passage of SAS No. 59, Asare (1990) summarized the evolution of research on the going concern opinion (GCO) in order to evaluate the Auditing Standards Board\u27s assumptions regarding the signals sent to the market via the GCO. Over the past twenty years, researchers have continued to investigate the importance of GCOs. The authors objectives are to bring current the evolution of standards, regulations, and literature concerning GCOs, to synthesize a body of research that still presents inconsistent findings, and to suggest future research that could further our understanding of GCO formation and consequences. Given the large volume of research on GCOs, their review will be especially helpful to researchers interested in examining new or unresolved issues within this field of accounting research

What Is Fraud and Who Is Responsible?

Research shows that fraudulent activity affecting the financial statements is more prevalent than ever despite the increased attention devoted to the prevention and detection of fraud by companies and professional accountants. Fraud is a critical issue for preparers and users of financial statements, as well as auditors. Each group’s association and involvement with the financial statements is from a slightly different perspective. Even though all individuals in the financial reporting process share the responsibility for the integrity of the financial statements, different perspectives of fraud can and do affect each group’s interpretation of fraudulent activity and responsibility for the prevention and detection of fraud. Accordingly, two questions must be asked: What constitutes fraud, and who is responsible for the detection of fraud? This paper examines the similarities and differences in the definition of fraud, as documented by ten professional organizations, as well as who is responsible for fraud detection

Earnings Management and Its Implications

In the wake of continuing, highly publicized financial frauds and failures, the accounting profession has placed renewed emphasis on issues related to earnings management and earnings quality. Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements, which was issued in December 1999 in response to the Committee of Sponsoring Organizations of the Treadway Commission report, illustrates the importance of earnings to the SEC. The SEC and the public are demanding greater assurance about the quality of earnings. Notwithstanding the grave threat that abusive earnings-management practices pose to the reliability and accuracy of financial statements, the accounting profession may be reluctant to address this issue. While there is evidence that accounting educators are attempting to make accounting students aware of abusive earnings-management practices, further efforts are needed by state societies and public accounting firms to better equip CPAs with the tools necessary to identify earnings-management techniques. Education could help to reduce the expectations gap between auditors and financial statement users

Audit Quality Indicators: Perceptions of Junior-level Auditors

Purpose In an effort to develop an audit quality (AQ) framework specific to the US audit market, the Public Company Accounting Oversight Board (PCAOB) recently issued a concept release proposing 28 audit quality indicators (AQIs) along three dimensions: audit professionals, audit process and audit results. Using AQIs initially proposed by the PCAOB, as well as AQIs suggested by prior literature, the authors solicit perceptions from junior-level (senior and staff) auditors to investigate the current state of practice along many of the AQIs relating to audit professionals and audit process. Design/methodology/approach In the study, 78 junior-level auditors responded to the survey. Findings An analysis of the responses suggests auditors engage in activities and audit firms promote conditions that at times improve, and at other times, reduce audit quality. The authors find that individual auditors’ perceptions differ across experience level, gender and audit firm size for certain AQIs. Practical implications The study is useful to the PCAOB because it provides insights to help assess the value of potential AQIs in differentiating AQ. The study is also useful to other regulators because it describes audit staff and seniors’ perceptions of apparent firm and auditor compliance with accounting and auditing standards. Practitioners should find this information useful in helping to identify possible root causes of audit deficiencies, a challenge put forth to firms by the PCAOB. Originality/value This study provides academia with evidence on AQ from practicing auditors, which informs existing and future research along. The study complements existing work by showing how individual auditor characteristics (experience and gender) at the junior levels may impact AQ in practic

Weighing the Public Interest

In 1981, the AICPA addressed the issue of going concern status through SAS 34, The Auditor\u27s Considerations When a Question Arises About an Entity\u27s Continued Existence. In 1988, the AICPA issued SAS 59, The Auditor\u27s Consideration of an Entity\u27s Ability to Continue as a Going Concern, which remains the authoritative guidance. To determine if additional guidance on the topic of going concern is provided by accounting organizations, the authors contacted the AICPA and the state CPA societies. The authors found that none of these organizations provide additional literature or guidance in this area. Several individuals have criticized the current literature and called for additional guidance in the area of going concern. The authors believe that the Commission on Auditors\u27 Responsibilities\u27 recommendations for improving and specifying the responsibilities of independent auditors should be revisited and the going concern opinion should be eliminated. Considering that litigation is not a serious threat, one can see that eliminating the going concern opinion is the favorable option

Earnings Quality: It\u27s Time to Measure and Report

Earning\u27s quality is an important aspect of evaluating an entity\u27s financial health, yet investors, creditors, and other financial statement users often overlook it. Earnings quality refers to the ability of reported earnings to reflect the company\u27s true earnings, as well as the usefulness of reported earnings to predict future earnings. The SEC and the investing public are demanding greater assurance about the quality of earnings. There is significant need for the development of a uniform definition and a consistent model to measure earnings quality. An Earnings Quality Assessment (EQA) is a proposed model that is consistent with this definition. The EQA recognizes many of the fragilities of GAAP, and takes into account factors that are expected to affect future earnings but that are not explicitly disclosed in the financial statements. Auditors\u27 EQA reports will provide higher-quality information to financial statement users and meet the SEC\u27s demand for greater assurance about the reliability of earnings figures

A Review of Bankruptcy Prediction Studies: 1930-Present

One of the most well-known bankruptcy prediction models was developed by Altman [1968] using multivariate discriminant analysis. Since Altman\u27s model, a multitude of bankruptcy prediction models have flooded the literature. The primary goal of this paper is to summarize and analyze existing research on bankruptcy prediction studies in order to facilitate more productive future research in this area. This paper traces the literature on bankruptcy prediction from the 1930\u27s, when studies focused on the use of simple ratio analysis to predict future bankruptcy, to present. The authors discuss how bankruptcy prediction studies have evolved, highlighting the different methods, number and variety of factors, and specific uses of models. Analysis of 165 bankruptcy prediction studies published from 1965 to present reveals trends in model development. For example, discriminant analysis was the primary method used to develop models in the 1960\u27s and 1970\u27s. Investigation of model type by decade shows that the primary method began to shift to logit analysis and neural networks in the 1980\u27s and 1990\u27s. The number of factors utilized in models is also analyzed by decade, showing that the average has varied over time but remains around 10 overall. Analysis of accuracy of the models suggests that multivariate discriminant analysis and neural networks are the most promising methods for bankruptcy prediction models. The findings also suggest that higher model accuracy is not guaranteed with a greater number of factors. Some models with two factors are just as capable of accurate prediction as models with 21 factors