Question

-What are GAAP? Why do we need to ponder over the levels of GAAP to do accounting work?

-What is the mission of the Financial Accounting Standard Board (FASB)

-What are the main three financial statements? How to link them together reflect the financial position and performance of a company?

-Why do public companies need auditor' report? If the CEO and CFO of a company need to certify the financial statements and internal control system, why do we still need external auditors to give their opinions on these items?

Answer 1

Generally Accepted Accounting Principles, here in after to be referred to as GAAP in this document, are the common set of accounting principles, policies and standards that companies and organizations must follow while maintaining their books of accounts and preparing financial statements.

It is important to ponder over the level of GAAP while doing the accounting work as it is mandatory for entities and organizations to follow the relevant principles, policies and standards applicable to them as per the GAAP while compiling the financial information. Adherence to GAAP will ensure that the financial statements reflect the true and fair picture of an entity in the financial statements.     

Financial Accounting Standards Board (FASB) has the mission of developing accounting standards and improving existing accounting standards to enhance the quality of financial reporting.

The main three financial statements are as following:

1. Statement of profit and loss.
2. Balance sheet.
3. Cash flow statement.

The statement of profit and loss contains the information as to the amount of revenue earned by an organization in a period to which such statement relates. Along with the amount of revenue expenditures incurred by the entity to earn such revenue and finally the amount of profit and loss earned by the entity is showed in the statement. The Balance sheet on the other hand contains the information as to the assets and liabilities of an entity. Cash flow statement simply shows the generation and outflow of cash on different aspects of business. a combined reading of these statements will hep the users of financial statements to assess the financial performance and position of an entity.   

Auditors report is to provide an independent opinion on the financial statements of an entity as to whether such statements have been prepared in accordance with the applicable accounting standards, policies and principles. Along with that it is the responsibility of the auditors express an independent opinion on the financial statements as to whether these statements reflect the true and fair picture of the entity. Thus, it is important for the companies to have auditor to conduct independent audit on the financial statements of the entity.    

CEO and CFO are all employees of an organization thus, they have their interests associated with the organization. These personnel can be pressurized to report in a certain way thus, even if such personnel certify the financial statements and internal control systems it is still necessary to conduct audit by external auditors to give their independent opinion on the financial statements and internal controls.