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Homework answers / question archive / Liability of Accountants and Other Professionals: Common Set of Facts: Amos Candy Company, Inc ("Amos") is a company that manufactures and sells candy and candy-related products

Liability of Accountants and Other Professionals: Common Set of Facts: Amos Candy Company, Inc ("Amos") is a company that manufactures and sells candy and candy-related products

Law

Liability of Accountants and Other Professionals:

Common Set of Facts:

Amos Candy Company, Inc ("Amos") is a company that manufactures and sells candy and candy-related products. Amos operates all aspects of its business from the large Amos Business Complex ("ABC") which includes a factory, warehouse, shipping yard, distribution center, offices and retail storefront.  

The founder of Amos is Yianni Amos ("Yianni"), a Greek immigrant, recently retired after successfully running the family-owned business for 50 years. Amos is now run by Yianni's grandson Johnathan Amos ("Johnny") as the CEO for the past year. Under Johnny's management and modernization of the company production, marketing and online sales, Amos has tripled its profits and doubled its stock value over the past year. Before becoming CEO, Johnny attended ELAC because it was the only Community College that offered dual 2-year transfer degrees in Business and Law. Johnny completed his transfer degrees from ELAC 5 years ago, transferred to a prestigious local 4-year university for 2 years, then and earned an MBA in 2 years. Johnny has been working under his grandpa Yianni to learn the business since he started college 7 years ago.   

Question:

Amos hires an independent accounting firm to conduct an annual audit which it makes available to all shareholders, officers and board members. Amos retains a regular business accounting firm to review its annual report to shareholders for accuracy. In regard to these accounting firms' liability for negligence:

i) What is the name of the conventions, rules and procedures developed by the financial Accounting Standards Board to define accepted accounting practices at a particular time?

ii) What is the name of the standards established by the American institute of Certified Public Accountants to define the professional qualities and judgment that should be exercised by an auditor in performing an audit?

iii) What is the name of the set of global accounting rules which are established by the London-based International Accounting Standards Board that are being phased in by U.S. companies and will be required for all financial reports filed with the SEC?

Amos decides to sell shares of one of its newly acquired wholly owned subsidiaries on a publicly traded national stock exchange, and hires another accounting firm to audit the company, prepare a certified balance sheet, prepare audited reports indicating financial condition of the company and assist in preparation of a Registration Statement. In regard to this accounting firm's potential liability to Third Parties - including investors, shareholders, creditors, corporate managers and directors and regulatory agencies:

iv) List the four rules that are applied by courts regarding accountants' liability to third parties, in order a) through d), starting with the rule that provides for least extensive exposure to liability for accountants to third parties, to the rule providing for the most extensive exposure to liability for accountants to third parties.  

a) ____________________

b) ____________________

c) ____________________

d) ____________________

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Answer:

i) What is the name of the conventions, rules and procedures developed by the financial Accounting Standards Board to define accepted accounting practices at a particular time?

Generally accepted accounting principles (GAAP)

common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB). Public companies in the United States must follow GAAP when their accountants compile their financial statements.

ii) What is the name of the standards established by the American institute of Certified Public Accountants to define the professional qualities and judgment that should be exercised by an auditor in performing an audit?

Generally accepted auditing standards (GAAS)

Set of systematic guidelines used by auditors when conducting audits on companies' financial records. GAAS helps to ensure the accuracy, consistency, and verifiability of auditors' actions and reports.

iii) What is the name of the set of global accounting rules which are established by the London-based International Accounting Standards Board that are being phased in by U.S. companies and will be required for all financial reports filed with the SEC?

Generally accepted accounting principles (GAAP)

common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB). Public companies in the United States must follow GAAP when their accountants compile their financial statements.

Amos decides to sell shares of one of its newly acquired wholly owned subsidiaries on a publicly traded national stock exchange, and hires another accounting firm to audit the company, prepare a certified balance sheet, prepare audited reports indicating financial condition of the company and assist in preparation of a Registration Statement. In regard to this accounting firm's potential liability to Third Parties - including investors, shareholders, creditors, corporate managers and directors and regulatory agencies:

iv) List the four rules that are applied by courts regarding accountants' liability to third parties, in order a) through d), starting with the rule that provides for least extensive exposure to liability, to the rule providing for the most extensive exposure to liability for accountants to third parties.

The cost principle refers to the notion that all values listed and reported are the costs to obtain or acquire the asset, and not the fair market value.

The revenue principle states that all revenue must be reported when is it realized and earned, not necessarily when the actual cash is received. This is also known as accrual accounting.

The matching principle holds that the expenses in the financial statement must be matched with the revenue. The value of the expense is included in the financial statements when the work product is sold, not necessarily when the work or invoice is issued.

The disclosure principle holds that information pertinent to make a reasonable judgment on the company's finances must be included, so long as the costs to obtain that information is reasonable.

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