Question

Why is judgement important in the financial reporting process? What is the role of accountants assumptions and estimates and the related disclosures in the financial reporting process? What obstacles are there in the use of sound judgment in preparing financial information and how can they be overcome? Discuss the types of authoritative literature and the literature hierarchy. What are the steps in applied financial accounting research?

Answer 1

Why is judgment important in the financial reporting process?

Answer: Financial reporting process has some organizational objectives such as showing the monetary value of items of financial statements like balance sheet and income statement based on various methods of valuation mechanism and therefore it becomes imperative for accountants and internal auditors to be judgemental in the financial reporting process.

What is the role of accountants assumptions and estimates and the related disclosures in the financial reporting process?

Answer: Financial reporting process involves the preparation of final accounts viz. Balance sheet and income statement and subsidiary statements like fund flow statement, ratio analysis etc. The domestic accounting standards could differ from international accounting standards which are the valuation mechanism known as estimates for different items of financial and subsidiary statements. Also, the common practices adopted by accountants known as assumptions in bookkeeping has an impact on valuation. The above-mentioned accounting standards in the form of estimates and common practices in the form of assumptions and related disclosures make the role of accountants very much crucial in the financial reporting process.

What obstacles are there in the use of sound judgment in preparing financial information and how can they be overcome?

Answer: The major obstacles in the use of sound judgment in preparing financial information are :

1. Lack of corporate governance

2. The objective of Window dressing set by management in preparing financial information

3. Lack of sound rules and regulations and norms of compliances

Obstacles can be overcome by taking corrective measures in line with above-mentioned points.

What are the steps in applied financial accounting research?

Answer: The steps are as under:

Step 1. Standardization of accounting standards and accounting principle across the globe, across the industry and segment to bring uniformity in financial information.

Step2. Compliance of corporate governance through demutualization of owner and management

Step 3. Appointment of independent key persons like auditors, directors, compliance offices etc ensuring not to have any vested interest in the organization to make financial accounting reliable