Business School

ACCT1501 Accounting and Financial Management 1A

Session 1 2016

TUTORIAL WEEK 10 Solutions to Tutorial Questions

Tutorial Questions:
DQ6.1, DQ6.17, P6.6, P6.24
DQ6.1
1. The fundamental qualitative characteristics of information are:
Relevance
Faithful representation.
The enhancing qualitative characteristics of information are:
Comparability
Verifiability
Timeliness
Understandability
DQ6.17
Independence is considered necessary for it not to matter to the auditors what the financial
statements say. Independence helps to ensure that the auditors will bring a detached,
professional view to their risk. If the auditors were not independent, they might want the
results to turn out a certain way so that they were better off (for example, if the audit fee was
a percentage of net profit, then the auditors might go along with methods that make profit
higher because they would benefit).
Independence is difficult to maintain for several reasons. First, the auditors would not have
the audit job the next year if the company were to fail, so they are likely to prefer that the
company continue to exist, and might be tempted to agree to accounting methods that hide
problems. Second, the auditors have to work closely with management, and may depend on
management for other business (such as tax or accounting advice) that is nice to have. Third,
though the auditors are officially appointed by the shareholders, a recommendation by
management that the auditors be reappointed (or not) is likely to be accepted by the
shareholders, who are not usually very close to the company or to the auditors. Fourth, the
auditors are human and get to know and like the people they work with, such as the company
management and employees, and usually would like such people to succeed its hard to be
detached all the time.
P6.6
1. Characteristics of useful accounting information:
a.
Relevance is one of the fundamental qualitative characteristics of useful accounting
information. Relevant information is capable of making a difference in a decision. Relevant
information helps users to make predictions about the outcomes of past, present, and future
events, or to confirm or correct prior expectations. Information must also be timely in order
to be considered relevant.
1

b.
Faithful representation is one of the two fundamental qualitative characteristics of
useful accounting information. The financial statements should report the economic
substance of events happening to the company, and the numbers should measure the events
neutrally, neither overstating nor understating their impact. Reliable information will, without
bias or undue error, faithfully represent those transactions and events that have occurred. To
have perfect faithful representation the financial information needs to be complete, neutral
and free from error.
c.
Understandability is an enhancing qualitative characteristic of information.
Information is understandable when it permits reasonably informed users to perceive its
significance. Understandability is a link between users, who vary widely in their capacity to
comprehend or utilise the information, and the decision-specific qualities of information.
Information is more useful if it is understandable to informed decision makers.
Understandability can be increased by presenting information in a clear and concise manner.
The Framework states that users are expected to have a reasonable knowledge of business,
economic activities and accounting, and a willingness to study the information with
reasonable diligence. However, there is a caveat: information about complex matters, if
relevant to users, should not be excluded on the grounds that it is too difficult for users to
understand.
d.
Comparability means that information about enterprises has been prepared and
presented in a similar manner. Comparability enhances comparisons between information
about two different enterprises at a particular point in time. Information about one
organisation is more useful when it can be compared with similar information from another
organisation and also is comparable over time within the same organisation.
e.
Timeliness is about providing information in time for the user to incorporate the
information in their decisions.
f.
Verification is an enhancing characteristic of information. The numbers in the
financial statements can be verified directly by looking at documentation (e.g. the cost price
of equipment) or through direct observation (e.g. counting cash or inventory). They can also
be verified indirectly by checking inputs to a model formula and recalculating the outputs.
2.
There are a multitude of answers possible here. The suggestions below are intended to
serve as examples.
a.
Relevance and verification: Forecasts of future operating results and projections of
future cash flows may be highly relevant to some decision-makers. However, forecasts are
more difficult to verify.
b.
Faithful representation and timeliness: Certain estimates such as write-offs of bad
debts become more accurate with time however decision makers need relevant information
now.
c.
Compatibility and relevance: There presently exists much diversity among acceptable
accounting methods and procedures. In order to facilitate comparability between enterprises,
the use of only one accepted accounting method for a particular type of transaction could be
required. However, relevance could be impaired for those firms changing to the new required
methods.

d.
Relevance and understandability: Occasionally, relevant information is exceedingly
complex. Judgment is required in determining the optimum trade-off between relevance and
understandability. Information about the impact of general and specific price changes may be
highly relevant but not understandable by all users.

P6.24
1.
2.
3.
4.

Intimidation
Self-review
Self-interest
Self-interest