Fundamental Accounting Concepts

• Author: Vern Krishna
• Pages: 68-86

68

Chapter 3: Fundamental Accounting

Concepts

References

See generally: CPA Canada Handbook — Accounting, Chartered Pro-

fessional Accountants of Canada () [Handbook] at Chapter ,

Part II, Section , Financial Statement Concepts.

A. OVERVIEW

e objective of nancial statements is to communicate accounting

information that is useful to investors, creditors, and other users

in allocating resources and/or assessing management stewardship.

Accounting comprises a spectrum of nancial concepts, conventions,

postulates, and axioms that, collectively, provide the reference points

that accounting bodies, regulatory agencies, and auditors use to for-

mulate their decisions and opinions. Hence, we need to understand

these fundamental concepts, their limitations, and their parameters.

We saw in Chapter  that the auditor’s opinion on the nancials

will comment on the audit work performed, adherence to generally

accepted accounting principles, and fair presentation of the information.

We examine these concepts in this chapter as a stepping stone to dis-

cussing the nancial statements in greater detail in following chapters.

 Handbook at para ..

Chapter 3: Fundamental Accounting Concepts69

B. BASIC CONCEPTS

e basic concepts are “silent” in that they are not formally stated as

part of the nancial statements but underlie all nancials and are an

integral part of them.

1. Judgments and Estimates

First and foremost, all nancials involve judgments, estimates, and

selection between equally acceptable alternatives. An audit report

does not guarantee the accuracy of nancial statements. Even an

“unqualied” or “clean” opinion provides only “reasonable assurance”

that the nancials “present fairly” the entity’s position and results of

operations. is means that nancial results should not be interpreted

as “absolutes.” e nal numbers can vary depending upon choices

between alternatives, which may be equally acceptable in appropriate

circumstances. is is usually stated in the formal auditor’s opinion

as follows: “As part of an audit in accordance with Canadian gener-

ally accepted auditing standards we exercise professional judgment

and maintain professional skepticism throughout the audit” (see, for

example, Chapter , Reports on Financial Statements).

2. Notes

Second, and less well known, is that the accompanying Notes are an

integral part of the nancial statements. is is often misunderstood

because the Notes use qualitative terms that expand on some of the

choices and consequences embedded in the quantitative segments

of the nancials. Unfortunately, readers often overlook the Notes as

they are long, boring, and often drafted to obfuscate sensitive issues.

Hence, they warrant close scrutiny.