Auditing Assignment Exploring Different Provisions Of Accounting Standards
Auditing Assignment Task:
The fundamental qualitative characteristics that financial information must possess to be useful to the primary users of general-purpose financial reports—identified in the Conceptual Framework are ‘relevance’ and ‘faithful representation’.
a) Provide one example where information is relevant but not faithfully represented.
b) Provide one example where information is not relevant but is faithfully represented.
c) Provide one example where information is relevant and faithfully represented.
a) What is a social contract and how does it relate to organisational legitimacy?
b) Explain two ways organisations can use corporate disclosure policy to maintain or regain organisational legitimacy?
As per the research on auditing assignment, faithful representation happens when the reporting aligns with the processes that are appropriate and define the estimates (Kim 2016). A piece of information may be of major use however, the same is not reflected in the books. An apt example is that of accounts receivables amounting to $1,200,000 that is required to receive at the end of June, however, a certain amount might not be received in the due course of time and hence, subjected to the extension of time. The users need to know this however the same being relevant information is not projected in the statement.
Some information is not relevant, however, projected in the financial statements. An example is that of the decision to replace the machine that has been utilized for the last seven years. In this scenario, the original cost of the machine does not hold any relevance and is irrelevant in the decision to replace the equipment. The relevant information is the future amount and the present equipment cost. However, the businesses tend to report the original cost of the equipment. Hence, the original cost is irrelevant but is represented faithfully by the business organization.
An example where the business provides relevant and faithful information is the segregation of current and non-current liabilities. The segregation of current and non-current liabilities helps the users to understand the contribution of both these assets. This is relevant and faithful because it helps the users in the process of planning. It is imperative to understand the segregation as it helps in computing various ratios and deriving at the business status. Hence, the business financial report that is the balance sheet provides a complete differentiation between the current and the non-current assets. Both these assets help in the short-term liquidity followed by the long-term solvency. Thereby having a proper figure for both of them helps in easy computation and interpretation. Both are crucial in understanding the business and commenting on the asset base of the company.
The social contract is a theory that enables people to live together in society adhering to the agreement that is established concerning moral, as well as the political function of the behavior. The presence of a social contract theory helps in defining civic duty in individuals that help in the welfare of the overall society (Danese 2017). Through this theory, a sense of civic duty is attained among the individuals that in turn helps the society as a whole. It brings forward a set of defined rules and objectives whereby the functioning is according to a set of defined patterns and rules. In short, this theory helps in bringing ethical and moral code of conduct which cannot be possible in the absence of the theory.
Organizational legitimacy attempts to connect the social values of the activities with the behavioral norms. The social contract relates to organizational legitimacy as the theory attempts to bring the best out of the individuals that are useful to society as a whole. This can be connected to the theory of organizational legitimacy because through this principle the business attempts to function in a manner that is ethical and helps the society at large. In both theories, the major point of similarity is the ethical performance and bringing the best out of their action. Organizational legitimacy enhances legitimacy by connecting the value system with other organizations and the wider social system (Danese 2017). Hence, the sole objective is to provide ethical benefits which are a similar instance in the case of social contract whereby the defined rules help in establishing a better viewpoint. Similarly, social contract builds and develops civic duty among the individuals that ultimately helps in the fuller development of the society as a whole.
Two ways through which the organization can maintain legitimacy are: • Striving to educate, as well as information society regarding the actual changes in the organizational performance and activities. In this manner, the organization can articulate the news about its activities and inform the society about the happenings (Danese 2017). It is a vital step in maintaining legitimacy because it helps in providing a relevant source of information to society and helps in building a strong bond. Moreover, this principle goes forward in providing a sense of high disclosure. Disclosures are essential because, through it, the society can understand the performance of the organization
• Strive to change the expectations related to the performance. Disclosure can be utilized in this scenario because disclosures help to bring the real scenario of the company to the forefront. Disclosures further draw the attention of the related parties and tend to lessen the negative impacts (Danese 2017). Thereby when the company provides relevant disclosure it is ultimately communicating with the public regarding its functions that can be positive and negative. The negative results are not accepted by the public and they have a perception of a good result. Hence, the company will strive to attain better results to gain momentum and bring a better result.
Kim, S.H. (2016). On the optimal social contract: agency costs of self-government. Auditing assignment Journal of Comparative Economics, 44(4), 982–1001. https://doi.org/10.1016/j.jce.2016.01.002
Danese, G. (2017). A social contract approach to sustainability. International Review of Economics : Journal of Civil Economy, 64(4), 327–339. https://doi.org/10.1007/s12232-017-0275-6