Concept of True and Fair View in Auditing and Accounting Practice - Coursework Example

True and Fair” Requirement xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecturer xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date True and Fair Requirement “True and fair” expression is one of the most common used expressions in accounting and financial world. Accountants use it to describe the right standard in reporting financial statements as well as to justify the decisions (professional judgment) that require an amount of arbitrary judgment. A wide range of standards including the financial standards and auditing standards use this principle as a guideline in preparation and presentation of the financial statements. The objective of the financial statements is to report to shareholders on the financial status or position of the organization after a fiscal period. This includes the company performance, tax computations and decision making by management as well as financial institutions. As such, objectivity and independence are paramount in the financial statements. This asserts the importance of certain kind of measure. This is a major concern for accountants in determining and assuredly of a true and fair of the statements even when there is not precise definition. Wiley (2010) explains that accountants attribute three very important aspects that must be present in the financial statements for them to reflect true and fair view. These are; Completeness: no missing documents or dockets in the accounting system of the organization Authority: all transactions are above board and are official Accuracy: all information available is accurate and gives full details Sunder (2010) underpins that for financial statements to be “true and fair”; they must reflect and hold the above qualities. However, accountants expect some inherent risk to be present in the financial statements even with the application of the qualities. A true and fair view is the value of an audit. Unbiased and independent auditors confirm that the claims of an organization of its financial position, and the whole process behind the claim, are true and fair are very important for various reasons. Shareholders, investors, regulators, financial analyst and other users of the financial statement need to know if the financial position of an organization reflects the true occurrences of the operations of the organization as well as if the financial position are fair to all material respect. For all intents and purposes, “true and fair” means that, in the opinion of the auditor, the financial statement of an organization offer and reflect the actual financial position of the organization. In essence, true and fair means that the financial statements are not in any way accidentally or deliberately misleading and assumptions made are reasonable. The accounting and auditing environment keeps on changing and therefore a prescriptive approach to this concept may mean a preconceived understanding of the changing circumstances. This concept of true and fair view has been part of auditing and accounting practice in many countries and organisations around the world for many years. The accounting standards keep on changing and therefore affecting and or changing the meaning of this concept. This raises concerns as to whether the opinions and views that the auditors and accountants express remain applicable. The financial reporting council (FRC) advice users, auditors and preparers of financial statements to ensure that they ascertain their approach to true and fair they take. The centrality of this concept is paramount to the preparation and reporting of financial statements irrespective of the accounting standards in us. True and fair concept has become an art; persons in the accounting profession understand it to mean presentation of accounts, prepared according to accepted accounting practices and principles by use of the correct figures as well as reasonable estimates (Dean & Clarke 2005). In short, accountants take it to mean observing the spirit and letter of the accounting law as Wallison (2008) indicates in “importance of true and fair view” report. In this element, there is acceptance of reasonable limitation on precision that an accountant can achieve and express as well. Another element in this meaning is requirements of substance over form implications. This relates to concealment of material facts as well as observation of spirit and letter of the law embraces true and fair concept. It is very important for accountants to prepare the financial statements of an organization in accordance to the accepted accounting standards and principles. This may not relate to the true and fair concept but it dictates if the financial statements will be true and fair. The standards and principles have persuasive power that greatly enhances the process of producing and preparing the financial statements. They therefore present a consensus on the concept in the accounting profession. The true and fair requirement is useful and necessary as well. It remains fundamental to accounting and auditing standards. The directors of a company cannot approve or endorse the financial statements if they are not satisfied that they give a true and fair view of the financial position of the company. It helps the accountants to make prudent judgment when considering the accounts especially in cases where there are uncertainties. True and fair concept is not separate from the accounting standards. The purpose of the concept is to provide measurement, recognition, disclosure and presentation of the different aspects of the financial statements (Alexander & Jermakowicz 2006). This helps an organization to prepare and report the financial statements in a manner that reflects the economic reality of the organization and therefore provides true and fair financial statements. This indicates the importance of the true and fair view, not only to report the correctness of the financial statements but also to reflect the economic reality of the organization. There are instances w here the directors of an organization and the auditors believe that following a particular standard may not present a true and fair view of the financial statements. In such aspects, the international accounting standards one (IAS 1) states that they cannot rectify the inappropriate policy or standard by disclosing it in the financial statements. Instead, the accountants are supposed to review and rectify the financial statements to reflect the reality of the aspect in which the policy or standard apply. Such circumstances and cases occur where an organization have areas that are not covered by an important and relevant accounting standard. This indicates that to provide and reflect a true and fair view of the financial statements, the accountants must apply the relevant accounting policies and standards in preparation and presentation of the same. As such, the concept is core in the financial statements. The directors of an organization must consider whether the financial statements they endorse are appropriate. The true and fair view ensures that the considerations given to the matters in the financial statements are clear in documentation and deliberations. This is especially necessary to the directors of an organization in authorizing the financial statements in to their correctness and fairness. According to Martin Moore report about the meaning and importance of true and fair requirement, he notes, “it follows that accountants can reduce the preparation of the financial statements in to a mechanistic process”. This process is for following the relevant standards and policies. This avoids the application of objectivity of professional judgment in ensuring that the financial statements achieve fair preparation and presentation or in general give a true and fair view. The accountants cannot underplay the important of professional judgment applying in all stages in preparation and presentation of financial statements. For instance, the choice of accounting principles and policies allowed under accounting standards ensures that the selected policies are the most appropriate while taking account the situations and circumstances of the organization. In addition, establishment of accounting policies in respect of the items in the financial statements that are not covered by any accounting standard or items that is ambiguous. In such instances, the IAS 8 provides and requires that the appropriateness of the standards dealing with similar items. However, relying on an approved accounting treatment in treatment of such ambiguous items may not necessarily provide a true and fair view. This explains the importance of the professional judgment that accountants make in preparation and presentation of the financial statements. The appropriateness of the professional judgment is crucial in determining the true and fair view of the financial statements. “True and fair” concept is fundamental and crucial in the completely financial reporting system. It also signifies the eventual analysis of the financial statements. What constitutes “true and fair” is open to interpretation in any given situation. There is no agreement agreed as to the meaning and nature or even how to achieve it in practice (Soderstrom & Sun 2007). This concept seems to relate to how the users and accountants can value the actual substance of the circumstances and circumstances. As its nature indicates, user knowledge is diverse and therefore to strike a precise balance is very hard. Even with full interpretation, changing situations and circumstances suggest that information included in the financial statements particularly the balance sheet date may be out of date. Conclusively, “true and fair” there is no accepted or standard meaning of the “true and fair” concept in accounting profession. In my opinion, the true and fair requirement is very useful and necessary in the financial statements. References Alexander, D., & Jermakowicz, E. 2006. A true and fair view of the principles/rules debate. Abacus, 42(2), 132-164. Dean, G., & Clarke, F. 2005. ‘True and Fair’and ‘Fair Value’—Accounting and Legal Will‐o’‐the‐Wisps. Abacus, 41(2), i-viii. Soderstrom, N. S., & Sun, K. J. 2007. IFRS adoption and accounting quality: a review. European Accounting Review, 16(4), 675-702. Sunder, S. 2010. “True and fair” as the moral compass of financial reporting.Research on Professional Responsibility and Ethics in Accounting, 14, 3-11. Wallison, P. J. 2008. Fair value accounting: A critique. Financial Services Outlook. Wiley, I. F. R. S. 2010. found a “true and fair view” requirement that captured this objective. Under revised IAS, 1. Read More