Fundamental Accounting Concepts

AuthorVern Krishna
Chapter 3: Fundamental Accounting
See generally: CPA Canada Handbook — Accounting, Chartered Pro-
fessional Accountants of Canada () [Handbook] at Chapter ,
Part II, Section , Financial Statement Concepts.
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 Concepts 69
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.

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