Professional Judgment: A Model for Accounting and Auditing Decisions

By Schmutte, James; Duncan, James R. | The CPA Journal, September 2009 | Go to article overview

Professional Judgment: A Model for Accounting and Auditing Decisions


Schmutte, James, Duncan, James R., The CPA Journal


The transition of U.S. companies from U.S. GAAP to IFRS, along with the related discussion of rules-based versus principles-based standards, is a hot topic in accounting circles. Both sets of standards derive from conceptual frameworks of accounting principles. The differences exist in the extent to which authoritative standards provide guidance in implementing those principles. The common element - regardless of the standards used - is the need to exercise professional judgment in deterrnining and applying an appropriate approach to account for and report a transaction or event.

Similarly, professional judgment is an increasingly important aspect of the independent audit function. Recently issued audit risk standards reflect this emphasis; they describe a broad process and the general types of information the auditor should acquire. The auditor must employ judgment in using that information to identify the risks of material misstatements and develop an appropriate audit response. Professional judgment synthesizes the collection of information and the resulting conclusions.

This article presents a framework for making accounting and auditing judgments as recommended in the recently issued report by the SEC's Advisory Committee on Improvements to Financial Reporting (CIFiR). The report's recommendations focus on accountants and auditors of public companies; however, the suggested judgment process, factors to consider, and trail of documentation equally apply to all practitioners for both nonpublic and publicly traded companies. Public Company Accounting Oversight Board (PCAOB) inspections and the AICPA's peer reviews reveal that documentation deficiencies are common audit findings. This article also provides an example for preparers and auditors of the professional judgment model to illustrate how it can be applied to accounting and auditing issues.

Background

In July 2007, the SEC chartered the 17-member CIFiR, whose mandate was to examine the U.S. financial reporting system; make recommendations to improve the usefulness of financial information; and reduce the complexity of the financial reporting system for investors, preparers, and auditors. The final report, issued in August 2008, included recommendations in five areas:

* Increasing the usefulness of information in SEC reports,

* Enhancing the accounting standards-setting process,

* Improving the substantive design of new accounting standards,

* Delineating authoritative interpretive guidance, and

* Clarifying guidance on financial restatements and accounting judgments.

Regarding accounting judgments, the report specifically recommended that the SEC and PCAOB issue statements of policy articulating how they would evaluate the reasonableness of accounting judgments, including factors they would consider in making their evaluations. The AICPA subsequently encouraged the SEC to implement the professional judgment recommendations as an initial step in the move to IFRS. In addition, the SEC's study on mark-to-market accounting issued in late 2008 echoed the CIFiR's recommendations.

Areas of Professional Judgment

The CIFiR report cites several categories of accounting and auditing judgments. Judgment is often necessitated not only in the selection of an accounting standard but also in its implementation. For example, determining whether SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, is the applicable standard to address a potential asset impairment is only the first step. Complying with the standard requires a series of judgments as to the amount, timing, and uncertainty of the projected cash flows that are critical to its application.

All transactions and events, however, do not neatly fall within the scope of existing standards. In such situations, practitioners need to apply judgment to identify the applicable underlying accounting principle or, by analogy, extrapolate an existing standard to address the reporting situation. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Professional Judgment: A Model for Accounting and Auditing Decisions
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.