Question

Professional judgement plays an important role in financial reporting. Identify four areas in which the accountant preparing financial statements must make professional judgements that will affect the content of the statements. You are required to indicate at least two affected accounts in each area you identified.             

Answer 1

Professional Judgement and its role in financial reporting

-Professional judgement is defined as the application of the accumulated knowledge and experience gained through relevant accounting, auditing or technical training for makind an informed and appropriate decision in a specific circumstances.

- The judgement made by the accounting professionals might be challenged because of the nature of therir professional capabilty, obligations and flexibility in the finacial reporting requirements. Hence professional judgement by the accounting professionals require proper documentations.

-The selection of accounting policies and the accounting estimation and fair valuation is made with the purpose of presenting the useful infoemation to the users .

- IAS and IFRS alos place particular emphasis on the need to take into account the qualitative characteristics and use of professional judgement when preparing the financial statement to achive fair presentation.

Areas of professional judgement by a accountant while preparion FS

1.Prefessional judgement regarding use of accounting policies ( Example- whether to use LIFO/FIFO/ Weighted Average) ( Affecyed accounts- inventory and profit and loss account)

2.Professional Judgement regarding Depreciation / amortisation method/ useful life (Asset value and depreciation account)

3.Accounting estimate or Fair value measurement ( Investment property account and Fair value gain(loss) account)

4.Providing provisions for assets( Debtors account and provision for bad debt account)

5.Providing Contingencies for liability