Due to lax internal accounting procedures, a material sale entry is being missed in the example situation. The client's decision not to charge the customer is not workable. Despite the fact that the sale was legitimate, it is nevertheless crucial to record it in accordance with GAAP guidelines. The four GAAP disclosure standards are objectivity, materiality, consistency, and caution. The disclosure of each and every transaction that is significant to the corporation is required by the principle of materiality in this situation. The auditing standard 320-Materiality in preparing and carrying out an audit in accordance with ASB is the specific standard applicable to the case.
<h3>What is GAAP?</h3>
The U.S. Securities and Exchange Commission adopted the accounting standard known as generally accepted accounting principles (GAAP or U.S. GAAP, pronounced similarly to "gap") (SEC). Although the SEC previously said that it intended to switch from U.S. GAAP to the International Financial Reporting Standards (IFRS), this has been a difficult and unclear process because IFRS differs greatly from GAAP. The two sets of standards will "continue to coexist" for the foreseeable future, the SEC stated more recently, as there is no longer a push to convert more U.S. corporations to IFRS.
Extensible Business Reporting Language (XBRL) publications of U.S. GAAP were made available by the Financial Accounting Standards Board (FASB) starting in 2008.
Step 1 The auditor needs to recognize the situation's ethical dilemma is it ethical to not disclose the transaction since it was not fraudulent or should there be a disclosure made since it involves a substantial amount.
Step 2: Determine who will be affected by the decision and their rights. In this situation, all the stakeholders will be affected by the decision since the omission of recording sales affects the profit, balance sheet, cash flows, and in turn, accounts receivables and payables.
Step 3: The most important right is to be judged. The user's right of having all information properly disclosed, the client expects that confidential information is protected and there are no adverse observations.
Step 4: Put across the alternative courses of action. Possible alternatives include sharing confidential information with other clients of the firm or not sharing the information without issuing the audit opinion on the financial statements. The auditor must disclose the appropriate effect of the sale and the subsequent profit on the financial statements with a retrospective effect so that the users can perceive the effect of the omission.
Step 5: Determine the consequences of each alternative course of action prior to issuing the report and also must not share any confidential information till the report is issued.
Step 6: The possible consequences must be assessed and the estimation of the greatest good for the greatest number. Sharing information with clients may cause some of the accounting staff to lose jobs, and may have a negative impact due to unauthorized disclosure of information. It is best to wait till the audit opinion is formulated.
Step 7: Appropriate course of action has to be taken. Confidentiality is of utmost importance to protect the client's rights and must not share any information prior to issuing the report.
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