Question

A strong tone at the top about the importance of accurate financial reporting

a)discourages the under accrual of expenses and liabilities.

b)encourages the over accrual of expenses and liabilities.

c)discourages the over accrual of expenses and liabilities.

d)encourages the under accrual of expenses and liabilities.

Answer 1

Under Accrual of Expenses and Liabilities

An under accrual is a situation in which the estimated amount of an accrual journal entry is too low. This scenario can arise for an accrual of either revenue or expense. Thus, an under accrual of an expense will result in more profit in the period in which the entry is recorded, while an under accrual of revenue will result in less profit in the period in which the entry is recorded.

An accrual is typically created as a reversing entry in the accounting software, so that the opposite of the original entry is recorded at the beginning of the following accounting period; this flushes the effect of the entry from the financial statements over the course of two accounting periods. This also means that an under accrual in one period leads to the reverse effect in the next period.

"Auditors are always watching for potential under accruals of expenses, on the grounds that this creates too great a profit in the period being compiled, reviewed, or audited"

Over Accrual of Expenses and Liabilities

An over accrual is a situation where the estimate for an accrual journal entry is too high. This estimate may apply to an accrual of revenue or expense. Thus, an over accrual of revenue will result in an excessively high profit in the period in which the journal entry is recorded, while an over accrual of an expense will result in a reduced profit in the period in which the journal entry is recorded.

An accrual is usually set up as a reversing entry, which means that the exact opposite of the original entry is recorded in the accounting system at the beginning of the next accounting period. When an over accrual is recorded in one period, this means that the reversing entry causing the reverse effect applies in the next accounting period.

"An over accrual is not good from the perspective of the auditor," since it implies that a company's accounting staff is not able to properly estimate the amounts of revenues and expenses for which it is creating accruals.

A strong tone at the top about the importance of accurate financial reporting - is option C) discourages the over accrual of expenses and liabilities.- in the auditors view.

Conclusion

In general over and under accrual of expenses is not advisable as both affects the net profit of the company. Hence it also influences the decision making of the stake holders.The estimation should be done through a proper channel and accrued amount are to be near perfect where the unrecorded transactions comes into books of accounts of the company for accurate financial reporting.