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Gaap Rules Essay

2176 words - 9 pages

Running Head: GAAP RULES

GAAP Rules

Jeffrey A. Baker

Strayer University

ACC-499 Undergraduate Accounting Capstone

Professor Calvin Thomas

December 9, 2012

GAAP Rules

Introduction

Management and accountants of an organization have liability to perform their duties with utmost good faith and apply due care and diligence. Any inconsistency or breach of the set standards by these parties will attract disciplinary action either from the profession regulating body, the organization or even from a court of law depending on the impact of the fraudulent activity on the organization.

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If these values are inflated or deflated, it amounts to fraud. In the above irregularities, inflation of lease on technology seems inflated hence, it would amount to fraud if it is for a past period but if it is for a forecast it is reasonable because expenses should be recorded as the maximum expected value (Stanley, 1983).

b) Time-Period Assumption

This rule requires that expenses of a particular reporting period should match the revenue of that particular period and that actual values of expenses for a particular period should be recorded but if the expenses are average of a series of reporting periods like quarterly, they could be adjusted to reflect the approximated value representing the reporting period. In the noted red flags with understatement of e-commerce state tax payments, the accountant should record the actual amount of a single reporting period but if it is an average of a series of periods, by then the accountant is allowed to record an average of a series representing the reporting period (Stanley, 1983).

c) Sincerity Principle

This principle requires that the accountant to report the actual financial position and performance of an organization for that reporting period without exaggeration or including false information for selfish interests. In the above irregularities, fictitious employees receiving employment benefits, amounts to fraud and should appeal to severe disciplinary action (Stanley, 1983).

d) Full Disclosure Principle

This principle requires that accountants should disclose all the information about financial performance and the position of the organization without omitting any information and using additional notes when necessary to help users of the financial reports to easily elaborate and understand them. In the above irregularities hiding of cash in order to help in the future quarters amounts also to an irregularity and should attract disciplinary action (Stanley, 1983).

e) Materiality Concept

This rule requires that an entry is regarded as material in the financial statements if its omission or inclusion will affect the decision made in the organization. In the noted irregularities; concealing inventory shrinkage amounts to fraud if its inclusion or exclusion does not affect decisions made in the organization but it should be included in the additional notes section of the financial statements (Stanley, 1983).

Sufficiency and effectiveness of GAAP rules to prevent reporting irregularities

Most countries around have a national regulating board that oversees the accounting practice in the country. The board registers are all qualified accountants and administers or recommends disciplinary actions to those accountants who fail to follow the stipulated standard policies governing the practice. These regulating bodies have ensured prevention of irregularities hence, making the accounting practice trustworthy and reliable (McLanny, 2012).

In my opinion,...

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