Chapter 1 - Accounting and Ethical Principles

Question 1

Who are the primary users of financial statements, and why do they require their use?

Answer 1

Investors - to find out if they will receive return on capital introduced to the business

Lenders - to ensure the business is well-financed and can afford any loan repayments

Creditors - will they be paid for the goods supplied to the business?

Question 2

What are the key accounting principles?

Answer 2

• Going Concern
• Accruals Principle
• Business Entity Principle
• Materiality
• Consistency
• Prudence
• Money Measurement

Question 3

What is Going-Concern?

Answer 3

The assumption that the entity will continue to operate for the foreseeable future.

Question 4

What is the Accruals Principle?

Answer 4

This ensures that transactions are recognised when they occur, not when the cash is received or paid.

Question 5

What is the Business Entity Principle?

Answer 5

A business is a separate entity from its owners, and the transactions of a business must be recorded separately from the transactions of its owners.

Question 6

What is the Materiality Principle?

Answer 6

Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions made by the primary users.

Question 7

What is the Consistency Principle?

Answer 7

The use of the same methods for the same items, either from period to period within a reporting entity or in a single period across entities.

Question 8

What is the Prudence Principle?

Answer 8

The exercise of caution when making judgements.

Question 9

What is the Money Measurement Principle?

Answer 9

A transaction should only be included in the final accounts if it can be measured in monetary terms.

Question 10

What are the fundamental qualitative characteristics of useful financial information?

Answer 10

Relevance and Faithful Representation

Question 11

What is Relevance?

Answer 11

Information is relevant if it is capable of making a difference in decisions.

Question 12

What is Faithful Representation?

Answer 12

Information faithfully represents if it is complete, neutral, and free from error.

Question 13

What are the Enhancing Qualitative Characteristics?

Answer 13

• Comparability
• Timeliness
• Verifiability
• Understandability

Question 13

What are the five fundamental ethical principles?

Answer 13

• Integrity
• Objectivity
• Professional Competence and Due Care
• Confidentiality
• Professional Behaviour

Question 13

What is Integrity?

Answer 13

Straightforward, honest, implies fair dealing and truthfulness.

Question 13

What is Objectivity?

Answer 13

Uncompromised by bias, conflict of interest or the undue influence of others.

Question 14

What is Professional Competence and Due Care?

Answer 14

Maintain professional knowledge and skill and act diligently.

Question 15

What is Confidentiality?

Answer 15

Refrain from disclosure of confidential information, and from using such information for personal (or third party) advantage.

Question 15

What is Professional Behaviour?

Answer 15

Comply with relevant laws and regulations, and avoid any action that may bring the profession into disrepute.

Question 15

What are the threats to the fundamental ethical principles?

Answer 15

• Self Interest
• Self-Review
• Advocacy
• Familiarity
• Intimidation

Question 15

What is the Self-Interest threat?

Answer 15

If the accountant has personal financial interest, incentive compensation arrangements or undue dependence on fees.

Question 15

What is the Self-Review threat?

Answer 15

Data being reviewed by the same person responsible for preparing it.

Question 15

What is the Advocacy threat?

Answer 15

Represent an assurance client in litigation or disputes with third parties.

Question 16

What is the Familiarity threat?

Answer 16

Former partner of the firm being a director or officer of the client.

Question 16

What is the Intimidation threat?

Answer 16

Threat of dismissal or replacement, being pressured to reduce inappropriately the extent of work performed in order to reduce fees.