Professional Judgment in Making Accounting Estimates For Inventory For Reporting Purposes

COLLEGE OF BUSINESS AND ENTREPRENEURIAL TECHNOLOGY
ACCOUNTANCY DEPARTMENT PAGE i
PROFESSIONAL JUDGMENT IN MAKING ACCOUNTING

ESTIMATES FOR INVENTORY FOR
REPORTING PURPOSES
A Thesis Presented to the Faculty of the Graduate School
Rizal Technological University
City of Mandaluyong
In Partial Fulfillment of the Requirements for the Degree
Of Bachelor of Science in Accounting Technology
BY
LEW REN G. AYSON
MARK ANTHONY L. GALLEGO
CHARLENE T. GOMEZ
JANE PAULA R. MORANTE
NOEL G. TUBICE
ii
May, 2019
ACCOUNTANCY DEPARTMENT PAGE ii
APPROVAL SHEET
This thesis entitled PROFESSIONAL JUDGMENT IN MAKING ACCOUNTING

ESTIMATES FOR INVENTORY FOR REPORTING PURPOSES, prepared and submitted by
Rowell c. Marasigan in partial fulfillment of the requirements for the degree of Master
in Business administration, has been examined and is hereby recommended for Oral
Examination.
RENILDA A. MAGSINO
Adviser
PANEL OF EXAMINERS
Approved by the Committee on Oral Examination with a grade of ________.
PROF. MACRINA VIOLETA V. MUTUC

Chairman
PROF. EUGENIA G. SAMARISTA PROF. FAUSTINO OGUAN

Member Member
Accepted as partial fulfillment of the requirements for the degree of Master in

Business Administration.
____________ DR. EDNA C. AQUINO

Date Dean, Graduate School
ACCOUNTANCY DEPARTMENT PAGE iii
ACKNOWLEDGEMENTS
The researchers would like to thank the All Mighty God for
blessing us throughout our journey. Also to our dear families, professors,
friends, blockmates and respondentsfor their warm support.
To the administrators of Kaban ng Hiyas Learning Center and
staffs of Chachago Mandaluyong branch, thank you for providing a
comfortable learning environment.

ACCOUNTANCY DEPARTMENT PAGE iv
ABSTRACT
In 2001, the corporate scandal of Enron was revealed when it
was discovered that well planned crimes had occurred against some
business regulation, such as accounting frauds and corruptions. The
main issue of the Enron scandal was how the financial manipulations
could have occurred under control of Enron‘s auditing firm. When the
company was declared bankrupt it turned out that the management
including the board of chairmen had had large bonuses based upon
future stock values. Mainly, the scandals in the USA, such as Enron,
have indicated the lack of ethics at the executive level. It did not only fail
because of improper accounting practices, it was also due to that Enron
had a corporate culture that pushed executives into unethical behavior.
Enron Scandal has led to increased demands for ethics within the
auditing profession. This scandal implied among other things that the
largest auditing firms lost many clients. To be able to keep their clients,
The major failure of Enron has made ethics an important concern
to persons working in business and accounting.

ACCOUNTANCY DEPARTMENT PAGE v
TABLE OF CONTENTS Page
TITLE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
APPROVAL SHEET . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
ACKNOWLEDGMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
ABSTRACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
TABLE OF CONTENTS . . . . . . . . . . . . . . . . . . . . . . . . . . vii
LIST OF TABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi
LIST OF FIGURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xii
CHAPTER
I. THE PROBLEM AND ITS BACKGROUND
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background of The Study . . . . . . . . . . . . . . . . 5
Theoretical Framework . . . . . . . . . . . . . . . . . 7
Paradigm . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Statement of the Problem . . . . . . . . . . . . . . 10
Hypothesis . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Scope and Delimitation . . . . . . . . . . . . . . . . 11
Significance of the Study . . . . . . . . . . . . . 12
Definition of Terms . . . . . . . . . . . . . . . . . 14
ACCOUNTANCY DEPARTMENT PAGE vi
Page
II. REVIEW OF RELATED LITERATURE
A. Professional Judgment . . . . . . . . . . . . . . . . . . . . . . . . 20
B. Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
C. Accounting Estimates . . . . . . . . . . . . . . . . . . . . . . . . . 27
D. Inventory And Inventory System . . . . . . . . . . . . . . . . . 29
E. The Inventory Management . . . . . . . . . . . . . . . . . . . . 32
F. Inventory Inaccuracy . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
G. Professional Judgment In Accounting . . . . . . . . . . . . . 33
H. The Need For Computerized System . . . . . . . . . . . . . . 34
I. The Consistency Principle . . . . . . . . . . . . . . . . . . . . . . 36
J. The Code of Ethics for Professional
Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
III. RESEARCH METHODOLOGY
Research Method Used . . . . . . . . . . . . . . . . . . . . . . . . 50
Population Frame and Sampling Scheme . . . . . . . . . . . . 51
Description of the Respondents . . . . . . . . . . . . . . . . . . . . 51
Research Instrument Used . . . . . . . . . . . . . . . . . . . . . . . 52
Data Gathering Procedure . . . . . . . . . . . . . . . . . . . . . . 52

ACCOUNTANCY DEPARTMENT PAGE vii
Page
IV. PRESENTATION, ANALYSIS, AND
INTERPRETATION OF DATA . . . . . . . . . . . . . . . . . . 54
V. SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS
Summary of the Findings . . . . . . . . . . . . . .. 77
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . 78
Recommendations . . . . . . . . . . . . . . . . . . . .. 79
REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
ACCOUNTANCY DEPARTMENT PAGE 1
CHAPTER I
THE PROBLEM AND ITS BACKGROUND
Introduction
The accounting practice has always been in conformity with
objectivity. There are accounting governing organizations all over the
world that set standards, rules, regulations, concepts, and principles for
the uniformity of all accounting practice in the society. Since the purpose
of accounting in the society is to enable just and fair declaration of
amount of income which will be the basis of the tax that an organization
has to pay, uniformity to all accounting practice is vital in the world of
business and taxation. Uniformity is the practice of requiring
organizations to record accounting information and prepares financial
statements in accordance with a relevant accounting framework
(Uniformity, 2017).
The Philippine Financial Reporting Standards (PFRS) and the
Philippine Accounting Standards (PAS) and Philippine Standards on
Auditing (PSA) are the current set of Generally Accepted Accounting
Principles (GAAP) and issued by the Accounting Standards Council
(ASC), an organization that governs the preparation of financial
statements in the Philippines, established by the Professional Regulatory

Commission (PRC) under the Implementing Rules and Regulations of
the Philippines Accountancy Act of 2004 assisting Board of Accountancy
in continuing its authority and purpose to promote uniform accounting
standards in the Philippines. (―About FRSC and PIC‖, n.d.)
With the rapid sprint on the race of modern technology, affecting
the present worldwide business practices, having well founded financial
data is very critical. Professional accountants are expected to exercise
professional judgment in their work field. It is essential for an accountant
to be able to apply effective and efficient professional judgment but
arriving at a correct professional judgment can be really challenging.
―Professional judgment is a required skill for principles-based accounting
strategies, including auditors, preparers and regulators of financial
statements. That said, making professional judgment calls can be
difficult, and there isn‘t necessarily one right answer in most cases.
There is a learning curve, but it‘s possible to recognize and take the
logical steps necessary to better navigate through judgment calls,
including asking common sense ―what and why‖ questions.‖ (DLB
Consulting, 2015)
Although accounting works are made in line with these standards,
part of the job of an accountant is to provide an intelligent estimate on
some accounts if need. These intelligent estimates are called
professional judgment. It is the product of decision making made or done

by someone with expertise on a particular profession (Tysiac, 2014). This
essential skill is gained through various training and experiences related
to the field. A judgment is called professional if it is accustomed to the
situation to be acted upon.
Auditing uses both professional judgment and professional
skepticism in almost every part of their jobs to ensure a more accurate
decision. Although both valuable in the field, the two skills are not
considered one, but is believed to have the same meaning and
application. Auditors must be able to maintain professional skepticism to
plan and execute audit agreement, that way he shall remain alert and
cautious on such situation and information that suggests a possible
material misstatements in the financial statements. (Fazal, 2011)
In a way, auditors are responsible with a lot of decision making
while performing precision agreement. To come up at the most
appropriate decision, he shall take professional judgment to act upon the
object in consideration. Application of professional judgment is an
application of skills, trainings, knowledge and experiences of a
professional whose level of competency permits him to obtain
reasonable decision on a particular situation.
Not only auditing requires professional judgment and skepticism,
but a lot of sectors in the business world must possess this skill in order
to be reaching a certain point in the field. Professional judgment is also a

must skill in accounting. A lot may think that all accountants‘ works have
to be accomplished by-the-book and follows everything that is written but
the limits of objective accounting are accomplished with the aide of
professional judgments.
Net realizable values of inventories, accounts receivable, property
and casualty insurance loss reserves, and pension and warranty
expenses are examples of accounting estimates in historical financial
statements that measures the effect of past business transactions or
events, or the status of the assets of liabilities.
Since accounting estimates are, from the word itself, estimates, it
is not clear to many how an accounting personnel treat these certain
accounts. The risks of material facts being misstated depends upon the
complexity and subjectivity applied in the accounting or auditing process,
the reliability of available related data, the number of significant
assumptions made and the degree of the associated uncertainty to it.
The management has to be in charge on making policies related to
accounting estimates. The decisions and judgments of the management
pertaining to the measurement of the accounting estimates in the
company normally, comes from the events that occurred in the past, how
they acted upon the events and how the events turned out after the
actions made.
The study will focus on the level of subjectivity in making
accounting estimates, specifically; ending inventory, for reporting
purposes in the private companies in Makati, Mandaluyong and Taguig
for the year 2017-2018.
Background of the Study
Professional accountants have an important role in society,
moreover that they can be distinguished from other professions by
assuming responsibility to the public. Professional judgment and the
experience of those issuing accounting information have priority over
accounting standardization, conduct rules of professional accountant and
basic elements of accounting. The quality of accounting information
depends essentially on the exercise method of professional judgment, in
which it allows the reduction of uncertainty and complexity of actions.
Accounting estimates require the call for professional judgment to identify
the moment its change, of broad implications and transmission of
induced effects on user (Cenar and Leusten, 2012).
Professional judgment is an application of relevant knowledge
and experience, within the context provided by auditing, accounting and
ethical standards, in making informed decisions about the courses of
action that are appropriate in the circumstances of the audit engagement.
Given that concerns regarding the use of professional judgment in

accounting estimates, a qualitative approach was considered appropriate
to help identify the main issue (Cenar, 2012).
Accounting estimates are typically derived from an initial
measurement, re-measurement, or recognition of transaction or event in
the financial statements and may be easily determinable; others are
inherently subject or complex. Financial statements and disclosures of
most companies include accounting estimates which require an auditors
evaluation, whether the accounting estimates in the financial statements
are either reasonable in the context of the applicable financial reporting
framework or are misstated.
Accounting estimates are related to professional accountant‘s
perception in which judgments are involve based on latest available
information and are an important element of financial statements. Valuing
professional judgment in accounting, including the use of more realistic
estimates becomes a tool quality that provides information function
achievement and decision-making process assistance. A judgment
having a high degree of competence and professional value is a good
source of reliable information for reporting purposes. (Albu, 2012)
The research will basically focus on professional judgment in
using accounting estimates, specifically estimation of ending inventory,
for reporting purposes. In summary, researches suggested that

professional judgment can overcome some of the known issues with
estimates.
Theoretical Framework
The accounting profession has always been in conformity with the
concept of integrity. Since accounting practices are executed in
accordance with the law, the processes should always be done ethically.
Aside from the established principles and rules and regulations which
govern accountants with their works, the Code of Ethics for Accountants
issued by the PRC Board of Accountancy reminds the accountants the
value of ethics in their work.
Jeremy Bentham, a philosopher in the mid- 18th centuries
developed the theory of utilitarianism. A theory that believes that morally
suitable action does not harm another person, but increase satisfaction
or ‗utility.‘ (Driver, 2014). Utilitarianism stays on the idea that the
consequences or results of the action that determines whether a person
is good or bad and whether the action is right or wrong. It does not
concern itself with the morality of the action, but the morality of the
outcome of an action. It means that, in every outcome, there are various
options to be executed, and one option will stand out and give the best
result. In utilitarianism, they mean to 'maximize the utility' to 'maximize
the result'.
Utilitarian have distinguished two types of satisfaction and
pleasure; a higher pleasure, related to intellect and a lower pleasure
related to senses. It focuses not only to the amount of benefit a person
receives but also the quality of it. Some put it in a way that ―the action
that you do that gives the most amount of people happiness is the best
action you can do.‖ which also means, a person sacrifices his own
happiness in order to make other people happy. (Thought Monkey, 2017)
This is the belief that the purpose of morality is to lessen pain and
unhappiness and to boost joy and happiness in the society, or simply,
make the world a better place. It is to reject commands, permissions,
legalities, taboos and prohibitions from moral codes based on customs
and traditions given by leaders, elders, and other powerful and influential
beings. It moves away from the things that sets boundaries and
promotes whatever way there is that will produce a good result in the
end.
As a vital theory of this study, utilitarianism proposes actions with
consequences that will do most good for the most people. (Thought
Monkey, 2017) Any other action that will produce less happiness than the
action that provides the most number of happiness is considered morally
wrong. (Markovits, 2014)
In any aspect of evaluated factors, the theory will choose the
option in which there are a lot of benefactors rather than those with less.
In application, the theory of utilitarianism would help researchers identify
the risks and other issues of formulation of accounting estimates by CPA
of the company. It will also be beneficial to the study in terms of
subjective risk determination, if proven. Lastly, this will lead the group to
the accepting or rejecting the hypothesis.
Paradigm
The researchers will be conducting surveys and interviews to the
selected accountants and auditors of different demographic profile, from
their age, gender and year of accounting practice from privately owned
corporations with different reasons why their accountants use subjectivity
in making accounting estimates, in Makati, Mandaluyong and Taguig.
The data gathered will be treated and the results will be analyzed to
interpret the use of professional judgment in making accounting
estimates and validate that the demographic profile of the respondents
will have no significant relationship tov professional judgment.

Input Process Output
Demographic Administering To determine
profile of the Survey professional judgment
respondents Questionnaires in making accounting
estimates
How Treatment of
accountants make data
professional
judgment in Interpretation
accounting ending and analysis of data
inventories
Statement of the Problem
This study aims to discuss the level of subjectivity in making
accounting estimates.
Specifically, it aims to answer the following questions:
1. What is the demographic profile of the respondents in terms
of:
1.1. Age
1.2. Gender
1.3. Years of accounting practice
1.4. Years of being with the current company

2. What are the factors affecting the professional judgment of an
accountant?
3. What are the factors to be considered in formulating an
accounting estimate for the ending inventory?
4. Is there a significant relationship on the demographic profile of
the respondents towards the subjectivity in making accounting
estimates?
Hypothesis
There is no significant relationship on the demographic profile of
the respondents towards the professional judgment in using accounting
estimates.
Scope and Delimitation
The group will limit the study on how the accountants use
professional judgment in formulating accounting estimates for ending
inventories. The researches will focus only to the accountants of private
companies in the selected cities of NCR, namely, Makati, Mandaluyong
and Taguig in 2018-2019.

Significance of the Study
The study of the level of subjectivity in accounting estimates will
give benefits to the following:
Students
This study will provide further knowledge about accounting
without the presence of rules and regulations. This will give them a
background about how other accountants use their own professional
judgments in deciding on whether or not to account a particular business
transaction, immediately or eventually. This study will supply additional
knowledge for students about accounting being objective with the hint of
professional judgment.
Accountants
This study will let other accountants beware of their fellow CPAs
go beyond the established rules and standards that don‘t necessarily
mean to violate the principles. They might or might not find it useful to
their own accounting procedures but there is a huge possibility that the
readers of this research will find it useful.

Auditors
This study will let other external auditors beware on how
accountants go beyond the established rules and standards that don‘t
necessarily mean to violate the law but have certain distinction from the
conventional objective accounting. They might or might not find it useful
to their auditing techniques but there is a huge possibility that the readers
of this research will find it useful.
Government
This study will serve as a warning to the Government how
accountants perform their works differently from what is established by
the rules and standards. This will hopefully make them be more careful in
inspecting the financial positions reported by the companies which will be
the basis of the taxes each company will be paying.
Creditors
This research will give a warning to money lending institutions
and insurance providers that they have to be extra careful on choosing
which clients and customers they will be serving and accommodating.

Definition of Terms
Accounting – Accounting is defined as a service activity whose
function is to prepare financial reports that will provide relevant
information about the business. It is the process of recording, classifying
and summarizing transactions and events which are financial in nature
and interpreting the results thereof (Cruz-Manuel, 2015).
Accounting estimates – According to International Standards on
Auditing, ―accounting estimates‖ means an approximation of the value of
an element in the absence of precise means of assessment. There are
mentioned as examples: ―deferred taxes; provisions for loss from a
lawsuit; losses on construction contracts in progress; provisions for
guarantees satisfaction‖ (Cenar, 2012).
Cost of Goods Sold – Cost of goods sold (COGS) is the direct
costs attributable to the production of the goods sold in a company. This
amount includes the cost of the materials used in creating the good along
with the direct labor costs used to produce the good. It excludes indirect
expenses such as distribution costs and sales force costs. (―Cost of
Goods Sold-COGS‖, 2018)
Current Assets – Current assets include cash or those assets
expected to be converted into cash, used or consumed within one year
or one operating cycle whichever is longer (Cabrera, 2017)

Ending Inventory - At its most basic level, ending inventory can
be calculated by adding new purchases to beginning inventory, then
subtracting costs of goods sold. This makes ending inventory the value
of goods available for sale at the end of an accounting period. Although
the number of units in ending inventory won‘t be affected at the end of an
accounting period, the dollar value of ending inventory is affected by the
inventory valuation method chosen by management. (―Ending Inventory‖,
2018)
Expenditures – An expense consists of the economic costs a
business incurs through its operations to earn revenue. Businesses are
allowed to write off tax-deductible expenses on their income tax returns
to lower their taxable income and thus their tax liability. Common
business expenses include payments to suppliers, employee wages,
factory leases and equipment depreciation, but the Internal Revenue
Service has strict rules on which expenses business are allowed to claim
as a deduction (―Expense‖, 2018).
Financial Statements – Financial statements are written records
that convey the financial activities and conditions of a business or entity
and consist of four major components. Financial statements are meant to
present the financial information of the entity in question as clearly and
concisely as possible for both the entity and for readers. Financial
statements for businesses usually include income statements, balance

sheets, statements of retained earnings and cash flows but may also
require additional detailed disclosures depending on the relevant
accounting framework. Financial statements are often audited by
government agencies, accountants, firms, etc. to ensure accuracy and
for tax, financing or investing purposes (―Financial Statement‖, 2018).
―Financial Statements are the means by which the information
accumulated financial accounting is periodically communicated to the
users. Its objective is to provide information about the financial position,
financial performance, and cash flows of an entity that is useful to a wide
range of users in making economic decisions‖ (Valix, Peralta & Valix,
2016).
Generally Accepted Accounting Principles – Generally accepted
accounting principles (GAAP) refer to a common set of accounting
principles, standards and procedures that companies must follow when
they compile their financial statements. GAAP is a combination of
authoritative standards (set by policy boards) and the commonly
accepted ways of recording and reporting accounting information. GAAP
improves the clarity of the communication of financial information
(―Generally Accepted Accounting Principles – GAAP‖, 2018). Generally
Accepted Accounting Principles represent the rules, procedures, practice
and standards followed in the preparation and presentation of financial
statements. It involves a social process incorporating political actions of

various interested user groups as well as professional judgment, logic
and research (Valix, Peralta & Valix, 2016)
Income Statement – An income statement is a financial statement
that reports a company's financial performance over a specific
accounting period. Financial performance is assessed by giving a
summary of how the business incurs its revenues and expenses through
both operating and non-operating activities. It also shows the net profit or
loss incurred over a specific accounting period (―Income Statement‖,
2018).
Philippine Financial Reposting Standards - The Philippine
Financial Reporting Standards (PFRS)/Philippine Accounting Standards
(PAS) are the new set of Generally Accepted Accounting Principles
(GAAP) issued by the Accounting Standards Council (ASC) to govern the
preparation of financial statements. These standards are patterned after
the revised International Financial Reporting Standards (IFRS) and
International Accounting Standards (IAS) issued by the International
Accounting Standards Board (IASB). The Bangko Sentral ng Pilipinas
(BSP) pronounced its adoption of the PFRS/PAS effective the annual
financial statements beginning 1 January 2005 in its Memorandum to All
Banks and Other BSP Supervised Financial Institutions dated 11 January
2005. The adoption of the new set of standards is aimed at promoting

fairness, transparency and accuracy in financial reporting. (―Compliance
with PFRS‖, 2015).
Professional Judgment - Professional judgment is the process of
drawing a conclusion or arriving at a decision when there are several
possible alternatives to choose from. It is a process that is unbiased,
logical, consistent and objective (DLB Consulting, 2015).
Objectivity – According to the Internet Encyclopedia of
Philosophy, the terms ―objectivity‖ and ―subjectivity,‖ in their modern
usage, generally relate to a perceiving subject (normally a person) and a
perceived or unperceived object. The object is something that
presumably exists independent of the subject‘s perception of it. In other
words, the object would be there, as it is, even if no subject perceived it.
Hence, objectivity is typically associated with ideas such as reality, truth
and reliability. The perceiving subject can either perceive accurately or
seem to perceive features of the object that are not in the object (Mulder,
2002).
Revenue – Revenue is the amount of money that a company
actually receives during a specific period, including discounts and
deductions for returned merchandise. It is the top line or gross income
figure from which costs are subtracted to determine net income
(―Revenue‖, 2018).
Statement of Financial Position – The statement of financial
position is another term for the balance sheet. The statement lists the
assets, liabilities, and equity of an organization as of the report date. The
information on the statement of financial position can be used for a
number of financial analyses, such as comparing debt to equity or
comparing current assets to current liabilities. It is one of the financial
statements, and so is commonly presented alongside the income
statement and statement of cash flows. (Mulder, n.d.)
Utilitarianism - Utilitarianism is the idea that the moral worth of an
action is solely determined by its contribution to overall utility in
maximizing happiness or pleasure as summed among all people. It is,
then, the total utility of individuals which is important here, the greatest
happiness for the greatest number of people. Utility, after which the
doctrine is named, is a measure in economics of the relative satisfaction
from, or desirability of, the consumption of goods. Utilitarianism can thus
be described as a quantitative and reductionist approach to Ethics
(Nathanson, n.d.).
CHAPTER II
REVIEW RELATED LITERATURE
Foreign Literature
Professional Judgment
Paragraph 13 of HKSA 200 explains professional judgment as the
application of relevant training, knowledge and experience, within the
context provided by auditing, accounting and ethical standards, in
making informed decisions about the courses of action that are
appropriate. Accountants must possess the ethics of integrity and serves
as the core value of the accounting profession. Competence and being
Independent are another requirement in the field. Accountants must
strictly follow the standards and principles provided by IASB and IFRS
but problems arise. Principles written at too high a level result in issues
with comparability and other challenges but excessive rules result in
unnecessary complexity and invite structuring. Just like today‘s modern
technology, which is obsolete tomorrow, the same is true of detailed
accounting rules as new transaction types, creative terms and conditions
and complex structures emerge almost daily. Application of judgment,
guided by and within standards-level or conceptual boundaries, is the
only plausible solution (Gary Kabureck).

Professional judgments made by accountants are affected by
different factors that may be inherent or developed within the
environment. According to IAASB, professional skepticism is influences
the professional judgment made by the management. Furthermore, this
also enables them to have the same decision. Professional Skepticism is
the ability of the auditor/manager to arrive at the decision based on facts,
rules and regulations, and experiences. IAASB also notes that individual
traits affect the application of professional judgment. In organizations
which have a manager with strong mind, confrontations are dealt in a
manner that courage and competence is the basis for the righteousness.
In the same manner, long-term relationships may impact the behavior of
the manager. For example, auditor and management personal
relationship may create biases and therefore the more misleading the
financial statement. In the research entitled Accounting Judgments on
Terms of Likelihood in IFRS: Korea and Australia, probable and unlikely
was interpreted inconsistently because of jurisdictions and among
professionals within thsse jurisdiction. In short, cultural diversities may be
another factor.
The Institute‘s Standard Setting Director, Christina Ng, said that
―Just like in our personal lives, a sound professional judgment cannot be
rushed. Also, don‘t be afraid to probe into details of a transaction or a
company or client‘s explanations and decisions (2017).‖ In her statement,

we can say that being mindful in the requirements, such as standards
and/or profile of the client; can lead into sound professional judgment. In
the same concept, Compliance Director, Linda Biek, advices that
consideration of facts and circumstances that may affect the financial
statement user‘s decision makes the auditor have a sound judgment.
Ethics
The Ethical beliefs of an individual are trained in early age and
therefore it becomes one of the most essential beliefs. Morality implies
telling each other what people should do or try to influence other
individuals‘ decision making. According to Robbins (2003), people
constantly face ethical dilemmas and due to that it has never been
clearly defined what good ethical behavior really is and as a
consequence, problems and difficulties arise.
Individual factors can account for why some individuals are more
prejudiced than others to act in an unethical way because of the
influence of the colleagues. Such factors are age and gender, national
and cultural characteristics, education and employment, psychological
factors. In relation to this, gender and age, as combined factors, can also
have an effect on ethical decision making (Chiu, Spindel 2010). On
contradiction, Shawver and Clements (2015) says that female

accountants are much sensitive to business situations involving earnings
management than male accountants.
Ethics is affecting decision-making and ethical dilemmas are
more common in smaller auditing firms than big ones. The reason behind
the statement was smaller firms are more dependent on keeping their
clients while bigger firms depends on having a good reputation and
therefore they do not accept clients who are doubtful.
On the study of McCabe, et al. (2006), males are more likely
to break rules than females.
Individual influences on ethical decision-making relate to the
features of the person who is actually going through the decision-making
process. Individual factors can account why some individuals are more
prejudiced than others to act in an unethical way because of the
influence of colleagues. Such factors are age and gender, national and
cultural characteristics, education and employment, and psychological
factors.
Code of Ethics could provide a suggestion to encourage an
environment in which ethical concerns may be dealt with in an open
genius way. In practice, company code of ethics have been developed
and enforced by top-management of business and codes tend to be
restricted to shareholders but it is profession‘s interest to have common
ethical rules. One limitation of company code of ethics is that they tend to
focus attention upon the misconduct of isolated individuals. Ethical codes
cannot confine the complexities involved in modern business life. Ethical
codes of conduct are the most important characteristics of profession
and among the ethical rules; the interdependence is seen as the most
important rule.
Ethical Standards are often presented in code of professional
ethics that are meant to self-regulation and also the profession‘s
commitment to public. A code of ethics is not a choice for professional;
rather it is required by the profession. Code of ethics is a vital element in
forming a profession and truly ethical professionals will keep their
behavior well above minimum requirement. Moreover, no code will be
effective if members of a profession are of low character and lack
integrity.
According to Baron (2000), a decision is defined as a choice of
action what to do or not to do. These decisions are made to be able to
achieve goals and they are based upon beliefs about what actions will
achieve goals. Ethical reasoning is important for decision-making since
most of the decisions involve ethical dilemmas.
Studying ethics does not tell you what to do but instead presents
a framework that can be used to study the ethical dimensions of various
issues. Different approaches are commonly applied in the area of
business decision making. Instead of focusing only on shareholders and

maximizing shareholder wealth, management is encouraged to consider
both the moral and social implications of their decisions in terms of how
the decisions affect the company, its people, and its environment. Some
ethical issues involve one right answer. Other ethical issues involve more
than one right answer; these require an evaluation of each and a
selection of the best or most ethical alternative.
Robert Sack, a commentator on the subject of accounting ethics,
noted that, "Based on my experience, new graduates tend to be
idealistic…thank goodness for that! Still it is very dangerous to think that
your armor is all in place and say to yourself, ‗I would have never given in
to that.‘ The pressures don‘t explode on us; they build, and we often
don‘t recognize them until they have us." How does the very act of
measuring performance misrepresent performance? People engage in
measure management when they focus on improving measures of their
performance, rather than improving the true performance those
measures are proposed to represent (Bloomfield, 2013).
These statements above are particularly appropriate for anyone
entering the business world. In accounting, as in other areas of business,
ethical dilemmas are encountered frequently. Some of these dilemmas
are simple and easy to resolve. Many, however, are complex, and
solutions are not obvious. The pressure of competition makes an
accountant fall into ethical dilemmas. The process of ethical sensitivity

and selection among alternatives can be worsen by pressures that may
take the form of time pressures, job pressures, client pressures, personal
pressures, and peer pressures.
Consider the audit committee‘s process for evaluating significant
judgments and estimates. Given the difficulty of many financial reporting
issues, including judgments and estimates, many audit committees
periodically take a deep dive into a particular area most dangerous to
their company. Benchmark the company‘s disclosures regarding critical
accounting estimates against peers. The SEC has repeatedly stressed
the importance of explanations regarding the company‘s most critical
judgments and estimates, and the possibility that materially different
amounts would be reported under different conditions or using different
assumptions.
KPMG said that, ―The message from regulators is clear: Quality
financial reporting requires a disciplined, robust, and unbiased process to
develop accounting judgments and estimates.‖ In auditor‘s part, he must
understand management‘s processes for establishing significant
judgments and estimates. A disciplined, robust, and unbiased process for
establishing key judgments and estimates is an essential component of
the company‘s financial reporting process. Thus, consistency must be
followed. He must also consider the audit committee‘s process for
evaluating significant judgments and estimates. The very nature of

complexity of many financial reporting issues, including judgments and
estimates, many audit committees periodically take a deep dive into a
particular area most critical to their company. Lastly, audit committees‘
routine of evaluating the range of significant judgments and estimates
that impact the company‘s current financial statements must take into
account by challenging the assumptions that underlie the judgments and
estimates.
Finally, given the difficult challenges of making sound judgments
in a business environment that is increasingly complex and uncertain,
audit committees need to be sensitive to management biases and other
common judgment traps. Indeed, many audit committee members
continue to cite brainstorming and the rush to solve as significant
concerns, and express the need to hear more unorthodox views.
Accounting Estimates
Accounting Estimate is a financial statement element, item,
account or appropriation. Historical financial statement often include
accounting estimate because some amounts or valuation measurements
of some accounts are uncertain and relevant data regarding the past
events cannot accumulates on a timely cost-effective basis. However, in
the event where a change in facts, circumstances and entity procedures,
the past significant factors to the accounting estimates may vary. Many
items in financial statements cannot be measured in precision but must
be estimated. These involve judgment based on latest available
information. Example where this would be applied includes bad debts,
inventory valuation and obsolescence, useful lives, and warranty
obligation. The use of reasonable estimates is an essential part of the
preparation of financial statements and does not undermine their
reliability.
Change in accounting estimate is an adjustment to the carrying
amount of an asset/liability or the amount of periodic consumption of an
asset, which results from the assessment of present status of, and
expected future benefits and obligations associated with, assets and
liabilities. They result from new information or new developments and are
not correction of errors.
The involvement of management on making accounting estimates
is a great issue. Judgments made are based on knowledge and
experience about the past and current event assumptions about the
expected conditions from certain course of expected actions. Since the
determination of proper estimates has no guidelines, some of the
estimates used are becoming subjective. For example, to lower the
income tax to be paid by the company, they will use the double declining
balance of depreciation. This was supported by a case study in Vietnam

that founds out accounting measures to be biased reflection and
performance (Luu et al 2008)
The concept of application of estimates is opposed by some
authors. Jusoh and Parnell encountered difficulties in applying western
accounting measures in the emerging Malaysian environment but found
that measures of organizational effectiveness, such as customer and
employee satisfaction were more robust. Hence, it is significant that the
accounting system rules are not always based on consistent underlying
theoretical logic of organizational performance.
Inventory and Inventory System
According to the U.S. Small Business Administration, ―Inventory
refers to stocks of anything necessary to do business‖ (U.S. Small
Business Administration, 2010) Wal-Mart uses perpetual inventory
system that records the quantity of items sold as items are purchased.
According to Wal-Mart‘s Gail Lavielle, a leaner inventory will help clear
out store clutter and help Wal-Mart focus on specific brands and products
that consumers want (The Associated Press, 2006). The computer
system at Wal-Mart constantly keeps up with additions or deductions
from inventory and tells management what items are on hand. A
computer start with an inventory counts in memory. The quantity only
decreased when a requisition is made and increased when order is

placed. Retail stores have carried this system quite far, each item has a
magnetic code, and as on item is checked out, and it passes over an
electronic reader, which then adjusts the computers inventory balance, at
the same time the price is fed to cash register tape. When the balance
drops to the recorder point, an order is place (Holt and Winston).
According to Kj Henderson, using Inventory System yields
different advantages in the organization which helps organizations to
increase their sales.
 Time Savings
The amount of time that can be saved by a business is, perhaps,
the biggest value of using a computerized inventory system. A great
example of this benefit is the retail industry. In cases where a shop
maintains all data manually, its manager must reconcile each sales
receipt with every piece of physical inventory. Depending on the size of
the establishment and how many different products are sold, this can be
a discouraging and time consuming task. If that same store, however,
used a computerized point of sale, POS, system, the master inventory
list would be updated electronically each time a sale is made. The only
thing a manager would have to do each day is print out the report
highlighting the inventory to be restocked.

 Accuracy
An additional benefit of using a computerized inventory system is
the accuracy it certifies. Eighteenth century English poet Alexander Pope
is often quoted as having said, ―To error is human.‖ When an inventory
list is maintained physically, the margin of error widens with each update.
If one mathematical calculation is wrong or one typographical error is
made, disaster may occur. For instance, if a clerk accidentally adds a
zero to the end of a purchase order, a business could potentially end up
paying for 10,000 units of merchandise as opposed to the 1,000 that is
actually needed.
 Consistency
A small business operates most efficiently when its processes are
executed in a consistent manner. By using a computerized inventory
system, a business owner can ensures that all orders, reports and other
documents relating to inventory are uniform in their presentation,
regardless of who has created them. This will allow ease of reading. In
addition, uniformity creates a professional appearance, which can go a
long way to impress associates, such as potential investors.

The Inventory Management
According to Dr Geoff Relph, Witek Brzeski and Gail Bradbear;
Inventory can be call as Professional Inventory Management if they meet
the terms; Good Inventory, Extending Stock Classification for Greater
Control, A worked example showing the impact of moving from 3 to 6
classes, Buffer Stock Methodology, Simple buffer stock, Stochastic buffer
stock, A worked example showing the impact of simple safety stock and
stochastic safety stock. The said qualifications apply in the concept of
operations management in controlling inventories. For companies
producing homogenous kind of products and at the same line of industry,
they attempted to achieve success through economies of scope. The
managers now needed information on the effect of product-mix decisions
on overall profits and therefore needed accurate product-cost
information. A variety of attempts to achieve this were unsuccessful due
to the huge overhead of the information processing of the time. In
particular, it was the need for audited accounts that sealed the fate of
managerial cost accounting. The dominance of financial reporting
accounting over management accounting remains to this day with few
exceptions, and the financial reporting definitions of 'cost' have distorted
effective management cost accounting since that time. This is particularly
true of inventory.
Inventory Inaccuracy
Based on the study conducted for Grocery Manufacturers of
America, 65% of inventory records did not match the physical inventory
at the store. Furthermore, 20% of the said records did not match the
physical stocks. Inventory inaccuracies are due to theft, misplacements,
transaction type errors, and supplier unreliability (A.T. Kearney).
Inherently, the said factors arise from either management internal
controls or employee‘s intention and agreed by Kearney as he said that
the sources of inaccuracies are problems from system structure,
discipline, process variability, measurement, and quality.
Local Sources
Professional Judgment in Accounting
Professional Judgment is defined as the application of the
accumulated knowledge and experience gained through a relevant
accounting or auditing training, by making use of the ethical standards,
resulting in making informed decisions about the courses of action that
are appropriate in specific circumstances, such as an audit mission
and/or the accounting of economic transactions, by observing accounting
principles (Ivan, 2016). It is applicable in making accounting

measurement especially in determining the value of financial assets. In
the study, he said that ―The prospect of a reality specific to the economic
entity is built on the professional judgment applied both in accounting, to
assess how the financial statements are prepared, but also during an
audit mission, because the auditor‘s professional judgment is vital,
helping him evaluate the audit evidence collected, in order to be able to
justify and support his opinion on the audited financial statements.‖ Both
professional skepticism and objectivity are essential to the process and
to reaching an appropriate conclusion. Professional judgment is not an
arbitrary decision, a substitute for professional skepticism, or a method to
rationalize a particular result. Performing the process in ―form‖ without
focusing on the substance does not constitute well-reasoned
professional judgment.
The Need for Computerized System
Computer-based system is a complex system wherein
information technology plays a major role. It makes the work easier,
faster and more accurate. Due to that fact, the automated scheme has
become essential to small and big companies for they are expected to
give the best services possible. Nevertheless, some businesses still
prefer sticking with the system that is not integrated with technology.
Probable causes are computer illiterate staff and lack of funds.

Companies, especially the big ones are recommended to switch from
manual to automated systems because this will improve the efficiency
and productivity of the business which will uplift the industry‘s reputation.
One of the most sought after automated systems of different
companies is a purchasing and inventory system which comes hand in
hand. A purchasing and inventory system is very important in every
organization because a good purchase and inventory management can
create excellent productivity. Primarily, i6nventory work consists of input,
output and restock. Input is a process of buying new products into the
inventory and replacing the old products with the new ones. Meanwhile,
output is a procedure of taking out the products from the inventory for
sales or usage and refill is a process of increasing the number of existing
products in the inventory in order to fulfill the insufficient products or
escalating demands. Most of the retailing market is using traditional way
in the inventory management system where a person is assigned to
check and record the stock by hand using pen and paper. It is where
operations with regards to all the stock will be archived.
Lewis (2002) stated that the reason for using computers vary
from person to person. Some of the computers in business are to
perform accuracy, to be as productivity, to decrease bottle necks or
hassles to alter cash flows or to simples elevate your status.

Sybex Inc stated that visual basic provide a graphical
environment in which the users usually designed the forms and control
that become the building block of tour application . Visual Basic support
many useful tools that will help the user more productivity.
The hardware of a POS system is also distinctive and important.
A typical system includes a display screen for the clerk, a customer
display, a cash drawer, a credit card swiping system, a printer, and a bar
code scanner, along with the computer loaded with the POS software.
Custom features may be added or removed, depending on the industry.
A restaurant POS system, for example, may have a feature which prints
order tickets directly in the kitchen, or a grocery store may have an
integrated scale for weighing goods.
Popular author of Accounting, Waldo T. Passion in his book
stated that, to improve their efficiency and reduce their cost of operation.
Reports are more timely and accurate. Computers have large capacity to
store data and tremendous speed to manipulate and recall data to the
format a user wishes to use which the introduction of microcomputer
computation of business is more affordable.
The Consistency Principle
The consistency principle states that an adopted accounting
principle is suggested to be followed consistently for the future

accounting periods. It promotes to only replace an adopted principle or
method if a new version or revision shows improvement in financial
reporting. (Accounting Tools, 2017) The effect of the changes made has
to be documented in the notes accompanying the financial statements.
This principle is highly recommended to make the financial reports from
period to period be comparable as it uses that same accounting policies
and procedures.
Consistency principle is most likely to be disregarded when the
management‘s goal is to report more revenue or profits. An indicator of
this event is when the entity‘s operational activity is not having any
changes but the profit generation is suddenly increasing.
The Code of Ethics for Professional Accountants
The 2013 Edition of IESBA Code of Ethics for Professional
Accountants was made to serve as a guide for the Professional
Accountants in performing for the security of the state. Ethics is a crucial
and topical area for auditors and accountants and is constantly under
scrutiny by both the industry and the press. The ethical codes of auditors
are particularly debated each time there is a significant corporate failure
and these guidelines change in response to a dynamic business
environment. For students, ethics feature as a key part of the entire
ACCA professional syllabus and are examined in many ways in many

papers. A good understanding of ethical issues is therefore required in
order to qualify as a chartered certified accountant. It is also important to
be able to apply this ethical stance and the codes by which accountants
are governed to the particular study being conducted. Theory and
practice come together at the heart of legal ethics - in the exercise of
professional judgment. Sometimes analogized to Aristotelian practical
wisdom, professional judgment is "neither a matter of simply applying
general rules to particular cases nor a matter of mere intuition" but a
process of bringing coherence to conflicting values within the framework
of general rules and with sensitivity to highly contextualized facts and
circumstances. The importance of professional judgment has been
widely recognized.
 Section 100.12 on Fundamental Principles
A professional accountant shall comply with the following
fundamental principles:
“(a) Integrity – to be straightforward and honest in all professional
and business relationships.”
The integrity of an individual can be seen through his
words and in his deeds. Both are strong indicators of a
person‘s character. ―Right is right: No amount of spin and
positioning ever changes this fact.‖ (Kerr, 2016) Consistent

conduction of affairs in a trust worthy manner will result to an
honourable business life.
“(b) Objectivity – to not allow bias, conflict of interest or undue
influence of others to override professional or business
judgments.”
As an important principle of business, an organization
that has an exact and concrete objective will have a clear view
on what they want to achieve in the future. With that, a
company will not be easily influenced by other external factors
that may lead the company‘s judgment and decision towards a
different path.
“(c) Professional Competence and Due Care – to maintain
professional knowledge and skill at the level required to
ensure that a client or employer receives competent
professional services based on current developments in
practice, legislation and techniques and act diligently and in
accordance with applicable technical and professional
standards”.
In order to achieve a certain level of professional
competence and due care, a Certified Public Accountant has

to meet a required Continuing Professional Development. This
enables a CPA to be knowledgeable enough to make reliable
and relevant judgment.
“(d) Confidentiality – to respect the confidentiality of information
acquired as a result of professional and business relationships
and, therefore, not disclose any such information to third
parties without proper and specific authority, unless there is a
legal or professional right or duty to disclose, nor use the
information for the personal advantage of the professional
accountant or third parties.”
It is the responsibility of an accountant to be
trustworthy for a client to be confident that the given
information are used properly and accordingly. A preparer
needs to know the limits of data usage to avoid unauthorized
disclosure.
“(e) Professional Behavior – to comply with relevant laws and
regulations and avoid any action that discredits the
profession.”
The act of doing a person‘s job with respect and
courtesy for others without violating the Code of Ethics for
Professional Accountants.
 Section 100.12 on Threats
“Threats may be created by a broad range of relationships and
circumstances. When a relationship or circumstance creates a threat,
such a threat could compromise, or could be perceived to compromise, a
professional accountant’s compliance with the fundamental principles. A
circumstance or relationship may create more than one threat, and a
threat may affect compliance with more than one fundamental principle.
Threats fall into one or more of the following categories:
(a) Self-interest threat – the threat that a financial or other interest
will inappropriately influence the professional accountant’s
judgment or behavior;”
A self-interest threat exists when, for example, a
preparer has only one client or one client represents a
significant proportion of their business. ―Their independence is
threatened because they‘ll be less likely to want to issue a
qualified opinion or something that they will cause an issue for
the client because they are worried about losing the client.‖
(Ghandar, 2015)
“(b) Self-review threat – the threat that a professional accountant
will not appropriately evaluate the results of a previous
judgment made or service performed by the professional
accountant, or by another individual within the professional
accountant’s firm or employing organization, on which the
accountant will rely when forming a judgment as part of
providing a current service;”
This occurs when a preparer has also prepared some
of the accounting for the fund. Ghandar says that, vast
majority of independence breaches are related to self-review
threats. In large firms, this threat can be addressed by
separating the work between two distinct teams or partners
that operate independently from each other. This often results
to carelessness on selecting and referring to the data given by
another preparer.
(c) Advocacy threat – the threat that a professional accountant will
promote a client’s or employer’s position to the point that the
professional accountant’s objectivity is compromised;”
This occurs when a preparer has also prepared some
of the accounting for the fund. Ghandar says that, vast

majority of independence breaches are related to self-review
threats. In large firms, this threat can be addressed by
separating the work between two distinct teams or partners
that operate independently from each other. This often results
to carelessness on selecting and referring to the data given by
another preparer.
“(d) Familiarity threat ─ the threat that due to a long or close
relationship with a client or employer, a professional
accountant will be too sympathetic to their interests or too
accepting of their work;”
Familiarity threat is broad and generally covers
anything that involves the preparer knowing the members on a
personal level. ―If you have a close family or business
relationship with a member, you can‘t achieve independence.‖
(Ghandar, 2015) Accountants who experience this threat
tends to give a favorable view towards the other party.
“(e) Intimidation threat – the threat that a professional accountant
will be deterred from acting objectively because of actual or
perceived pressures, including attempts to exercise undue
influence over the professional accountant.”

Threats fall into one or more categories, one of those
is intimidation threat that will be the focus of our study. An
intimidation threat exists if the preparer is intimidated by
management or its directors to the point that they are deterred
from acting objectively. For example, ABC Company is
unhappy with the conclusion of the report and threatens to
switch preparers next year. ABC Company is the biggest
client of the preparer. As a result, the preparer‘s
independence may be compromised as ABC Company is the
biggest client to the preparer and he/she may not want to lose
such a client. Therefore, the preparer may issue a report that
appeases ABC Company.
 Section 120.1-120.2 on Objectivity
“120.1 The principle of objectivity imposes an obligation on all
professional accountants not to compromise their professional or
business judgment because of bias, conflict of interest or the undue
influence of others.
120.2 A professional accountant may be exposed to situations
that may impair objectivity. It is impracticable to define and prescribe all
such situations. A professional accountant shall not perform a
professional service if a circumstance or relationship biases or unduly

influences the accountant’s professional judgment with respect to that
service.”
Seeing the situation from an external viewpoint is a technique for
an accountant to remove bias perspective, conflict of interest and undue
influences. Being objective allows a person to be neutral in all events by
looking into two sides of a situation. One has to see things as they really
are and not from a personal point of view.
 Section 130.2 on Professional Compentency
“Competent professional service requires the exercise of sound
judgment in applying professional knowledge and skill in the performance
of such service. Professional competence may be divided into two
separate phases:
(a) Attainment of professional competence; and
(b) Maintenance of professional competence.”
While attainment of professional competence is achieved
through education, in which a preparer acts to the best of his
ability and not to be negligent in the performance of his duties
and responsibilities, maintenance of professional competence
goes beyond that. It is a continuous learning process which

involves attending trainings, workshops, seminars, preparing
research reports and studying towards a certain qualification.
The quality of service of an organization serves a very
important factor in order to gain public confidence and trust in the
profession. High quality services include regular, relevant,
accessible and up-to-date CPD. ―A profession that offers an
opportunity for life-long long learning is an important element in
being able to attract top-talent.‖ (World Bank, 2016)
 Section 290.6 on Independence
The words ―independent‖ and ―independence‖ are often used in
conjunction with the services certified public accountants provide to their
clients, including insured depository institutions (banks or financial
institutions). When CPAs and their firms provide certain services that
require them to be independent, such as audits of financial statements
and audits of internal control over financial reporting, they are referred to
as independent public accountants.
“(a) Independence of Mind The state of mind that permits the
expression of a conclusion without being affected by
influences that compromise professional judgment, thereby
allowing an individual to act with integrity and exercise
objectivity and professional scepticism”

It is the state of mind that permits the performance of
an attest service without being affected by influences that
compromise professional judgment, thereby allowing an
individual to act with integrity and exercise objectivity and
professional skepticism. Few would debate that independence
in fact—that is, that the preparer is actually unbiased—is
absolutely essential to the validity of an audit. The problem is
that the lack of independence of mind sometimes is not readily
seen. Independence of mind relies on the auditor to be a
virtuous person, holding himself to the highest standards of
the profession. This type of independence has a great impact
on the quality of the audit performed. A biased preparer might
make wrong decisions on what evidence to obtain, and on
what counts as evidence, as humans inherently tend to value
evidence that they perceive as agreeing with them higher, and
may even discard evidence that is contrary to their opinion.
This might lead to the formation of a wrong opinion if the
auditor is not independent in mind.
In such a case, the information provided by the
preparer might be false, but the users of the financial
statements will perceive it as being true. It is therefore very
important for the preparer to be neutral. Since independence

of mind is a state of the mind, it cannot be observed directly
by others. So independence in appearance, which can be
directly observed, is used as a proxy for independence of
mind. There are dangers, however, in using a proxy.
Over time, people may come to consider the proxy to
be equivalent to the underlying indicator, paying increased
attention to the proxy and neglecting or even ignoring the
underlying indicator. This is what has happened to the ability
to learn or ―smartness‖, and its proxy: IQ. This is also what is
currently happening with independence of mind and in
appearance, and this development is especially visible in the
current legislation trends.
“(b) Independence in Appearance The avoidance of facts and
circumstances that are so significant that a reasonable and
informed third party would be likely to conclude, weighing all
the specific facts and circumstances, that a firm’s, or a
member of the audit team’s, integrity, objectivity or
professional skepticism has been compromised.”
It is the avoidance of circumstances that would
cause a reasonable and informed third party, having
knowledge of relevant information, including safeguards

applied, to reasonably conclude that the integrity, objectivity,
or professional skepticism of a firm or member of the attest
engagement team has been compromised. Independence in
appearance is the perception of the public that the preparer is
independent. It is achieved by following rules designed to
demonstrate formal independence of the preparer from the
client, and avoiding any facts or circumstances that may lead
a member of the public to conclude that the auditor is biased,
or lacks integrity. These rules include the code of conduct, but
also various local legislations and guidelines.

CHAPTER III
RESEARCH METHODOLOGY
A descriptive research design was used for this study. More
specifically, a survey was conducted with the CPA of selected companies
in Makati, Mandaluyong and Taguig City in order to determine how
professional judgment was used in making accounting estimates
particularly, estimates on ending inventories.
Research Method Use
This study was about how CPA of companies use professional
judgment in making accounting estimates, specifically estimation of
ending inventories. We have chosen inventory to be the focus of our
study because it tends to distort the current position of the company and,
further, presents additional problems. The descriptive design involving
survey was used to collect data from respondents.
The researchers used a descriptive method on this study. Survey
method was conducted to a selected sample from definite populations.
An "interview" is defined< According to Kumar (2014), as the ―verbal
conversation between two people with the objective of collecting relevant
information for the purpose of research‖.

This method involves interview discussion with an individual
about a specific topic. According to Richie et al. (2013) descriptive
research method helps the researcher to be able to collected data from
target population and make required conclusions about the variable. It
involves the description, recording, analysis and interpretation of the
present nature, composition or processes of phenomena which focuses
on prevailing conditions, or how a person, a group or thing behave or
functions in the present.
Population Frame and Sampling Scheme
The survey conducted in selected private company in Makati City,
Mandaluyong City and Taguig City. The researcher conducted survey to
those available respondents in selected private companies. The target
participants of this study would be CPA of the company.
The technique used in this study was Random sampling method.
It is a sampling technique where every item in the population has an even
chance and likelihood of being selected in the sample. In this study, the
researcher aimed to choose a sample in a free biased way.
Description of Respondent
The respondent in this study were specifically the CPA of private
companies in Mandaluyong, Makati and Taguig City. They will be

described according to their gender, age, civil status and educational
attainment and number of years in practice in their respective position or
role in the company.
Instrument Used
A survey questionnaire was prepared to gather data from the
respondents. The survey questionnaire served as a guide for the
interviewer regarding the flow of the survey. In data gathering from
respondent, researchers-made questionnaires was used. The said
questionnaire consists of (1) possible factors affecting professional
judgment, (2) professional judgment on accounting estimates, (3)
professional judgment on net realizable value of inventory.
Data Gathering Procedures
The researchers-made questionnaire was the primary source of
collected data from respondents in order to answer the main problem of
this study. The structure of the questionnaire was examined by the thesis
adviser with an accompanying letter of permission asking for official
consent to be given to the respondents. The process of examining the
questionnaire was vital for there should not be discrepancies on the
instruments before the distribution to the participants.

After the examination of questionnaires, it was distributed to the
respondents, interpreted and analyzed by the researchers with the use of
an accurate statistical method or a focus group discussion to come up
with the answers to the study‘s main problem..

CHAPTER IV
PRESENTATION, ANALYSES, AND INTERPRETATION OF DATA
The purpose of this study was to understand how professional
judgment is used in an organization specifically how it is applied in the
net realizable value of the ending inventory, and the factors affecting the
formulation and application of the judgment made. This purpose was
directed by the following questions:
This study aims to discuss the level of subjectivity in making
Specifically, it aims to answer the following questions:
1. What is the demographic profile of the respondents in terms of:
1.1. Age
1.2. Gender
1.3. Years of accounting practice
1.4. Years of being with the current company
2. What are the factors affecting the professional judgment of an
accountant?
3. What are the factors to be considered in formulating an
accounting estimate for the ending inventory?

4. Is there a significant relationship on the demographic profile of
the respondents towards the subjectivity in making accounting
estimates?
Table 1: Profile of the Respondents
f %
Age
25 23 70
Below
26-35 6 18
36-45 3 9
56 1 3
above
Sex
M 13 39
F 20 61
Years in Practice
1 below 11 82
1 to 5 19 12
6 to 10 2 3
16 1 3
above
The table shows the demographic profile of the respondents. On age
bracket, most of the respondents come from the age 25 below (70%);
ages from 26-35 (18%); ages from 36-45 (9%); age 56 above (3%). On
the sex, most of the respondents were female (61%) and some were
male (39%). In relation to years of experience, most of the respondents
have an experience of 1 year below (82%); experience 1year to 5 years
(12%); experience 6 to 10 years (3%); experience 16 years above (3%).

Figure 1: Existing Accounting Policies as a Factor in Affecting
The graph shows that most of the respondents considered
existing accounting policies as a factor that affects professional
judgment. Researchers believed that existing accounting policies was a
contributing factor on accountant‘s decision-making because it might
limit their judgments. Furthermore accountants were expected to follow
the policy until such time that this policy was proven to be inapplicable.
Figure 2: Changes in Accounting Policies as a Factor in Affecting
changes accounting policies as a factor that affects professional
judgment. It was said that changes in accounting estimates enhances
the relevance and reliability of financial statement and its compatibility.
Such new policies might also affect the decision-making of accountants
in such a way that if the new accounting policy would benefit the entity in
the future or it might cause burden and would be subject to changes.

Figure 3: Past Events and Occurrences as a Factor in Affecting
The graph shows that most of the respondents considered past
events and occurrences as a factor that affects professional judgment.
Researchers believed that past events and occurrences affect
accountant‘s decision-making because it would make a great impact on
present problem. Moreover, if there were same dilemmas in the past
encountered by accountant in the present, he/she would likely to do the
same decision he/she did in the past whether it would deviate codes of
ethics or it would conform with the latter.

Figure 4: Current Events and Occurrences as a Factor in Affecting
current events and occurrences as a factor that affects professional
judgment. Judgments regarding this factor were normally used by the
management. In some cases, accountants used this factor to cope up
with the dilemmas they were facing. Furthermore, if there were unethical
acts pervasive in organization, some of the accountants would most
likely adapt the culture and would contradict with integrity.

Figure 5: Current Events and Occurrences as a Factor in Affecting
forecasted future events and occurrences as a factor that affects
professional judgment. Management‘s prediction of future conditions
might result to difficulties in coping up with some issues. In some cases,
future problems that would likely to arise were being manipulated by the
management. Since most of it will affect the organization financially,
accountants would be sensible and would do unethical act or would find
a proper solution.
Figure 6: Goals set by the Top Management as a Factor in Affecting
The graph shows that most of the respondents considered goals
set by the top management as a factor that affects professional
judgment. Accountant‘s code of ethics required accountants to possess
characteristics to be professional but threats arose and would influence
the decision of an accountant to do unethical act. Sometimes,
management‘s intimidation to reach their goals would be a great factor
why accountants committed unethical acts which would result to a
favorable management‘s performance.

Figure 7: Incentives given by the Top Management as a Factor in
Affecting Professional Judgment
incentives given by the top management as a factor that affects
professional judgment. Self-interest was a concrete example of this
factor. Given that accountants shared in the bonuses given when
managers reaches a certain financial targets, they would much likely to
control figures to receive the incentives.

Figure 8: Personal Individual Traits as a Factor in Affecting Professional
Judgment
personal traits as a factor that affects professional judgment. The best
example given was the trait of being self-centered. An accountant who
was assigned to make a decision for the group must come up with the
decision that would benefit the group as a whole. In some cases,
accountants arrived to a decision that would benefit only him/her instead
for the benefit of the organization.

Figure 9: Existing Government Policies as a Factor in Affecting
existing government policies as a factor that affects professional
judgment. Researchers believed that government‘s punishments in
wrongful acts done would restrict professionals on continuing their
dishonesty. Such examples are being convicted and having their license
confiscated.
Figure 10: Changes Existing Government Policies as a Factor in
Affecting Professional Judgment
changes in government policies as a factor that affects professional
judgment. Researchers believed that changes regarding tax systems
might create dilemmas on accountants decision-making. In some cases,
they tend to manipulate figures to lower the tax imposed if the result of
changes on tax systems would be unfavorable.

Figure 11: Situation 1
Statement: A messed up professional judgment in the estimates
of the ending inventory makes a huge effect on the financial statement
of the company.
Most of the accountants agreed that a messed up professional
judgment in the estimates of the ending inventory makes a huge effect
on the financial statement of the company. The risk of misstatements
caused by irrelevant and unreliable estimates would impact much
company‘s dimension such as performance, position, and other financial
matters. Furthermore, it would also implies possibility of being biased in
such a way that the said estimate would be favorable for the
management or for the company‘s financial obligations; e.g. Taxes.

Statement: There are times when accounting principles are
violated or by-passed when professional judgment is not properly
applied to accounting estimates.
Most of the accountants agreed that there are times when
accounting principles are violated or by-passed when professional
judgment is not properly applied to accounting estimates. As per
standard, determination of accounting principles and proper disclosures
of presented accounting estimates were required when auditing
accounting estimates. Some of the violated principles include Materiality,
Revenue Recognition, and Objectivity. This violation might result
misstatements, errors, or in some extreme cases, fraud.

Statement: To reduce the risk of material misstatements, there is
no concrete assurance of the accumulated sufficient reliable data, in
terms of quantity and quality, which will be the basis of the estimates.
Respondents didn‘t believe that to reduce the risk of material
misstatements, there is no concrete assurance of the accumulated
sufficient reliable data, in terms of quantity and quality, which will be the
basis of the estimates. In auditing accounting estimates, management is
responsible for the establishment of the estimate used given that there
were sufficient reliable data which will be the basis of judgment about
the factor. As expected, management won‘t arrive to an estimate without
concrete evidence that the estimate was relevant and reliable.

Statement: According to Christina Ng "When applying
professional standards, accountants often cherry pick parts of a
standard to read and do not really understand the spirit of the standard
or principle. In this case, they often miss the big picture and, as a result,
make inappropriate judgments."
Respondents believed to Christina Ng‘s statement. It was
sometimes difficult in applying professional knowledge and skill in the
performance of auditing accounting estimates. Sometimes it was not a
matter of simply applying general rules and standards but being
coherent and sensitive in contextualize sets of varying facts and
circumstances.
Statement: According to Lynda Biek, "A preparer needs to invest
time in understanding the requirements of the standards, the company
or client background and the economic environment in order to come up
with a sound professional judgment."
All of the respondents agreed to Lyndia Biek‘s statement. As per
preparer, it is important that you had the measurement‘s objective,
recognize important details that others had made, the availability,
reliability, and relevance of information, extent of fair value‘s
applicability, and other matters such as disclosures and techniques. In
the essence, preparers must have a sufficient evidence to support them.

Figure 16: Availability of Relevant Evidences as a factor in Formulating
Accounting Estimates on Inventory Valuation
Most of the respondents believed that availability of relevant
evidences is a factor in formulating accounting estimates on inventory
valuation. It i s clear that sufficient evidences was not enough to support
the formulated estimate. Such characteristics must be relevance and
reliability. Estimates that were no longer applicable or not appropriate to
be applied could cause so much misstatements and misleading
decision.
Figure 17: Use of Valuation Method as a Factor in Formulating
Accounting Estimates.
Most of the respondents believed that the use of valuation
method is a factor in formulating accounting estimates. Considering the
type of business, the inventory valuation method differs. LIFO was not
applicable anymore which concretely suggest that relevance must be a
contributing factor. Furthermore, valuation method was a combined
estimate and future economic benefits which made it more complex than
the use of fair value.

Figure 18: Fluctuation of Prices and Costs Directly Related to Occurring
Events as a Factor in Formulating Accounting Estimates.
Most of the respondents believed that fluctuation of prices and
costs directly related to occurring events is a factor in formulating
accounting estimates. Researchers believed that it has a great impact
on tax system of the country. The higher the tax and other legal fees
imposed on the product, the higher its cost would be.

Figure 19: Future Turnover of Inventory as a factor in Formulating
Accounting Estimates on Inventory Valuation
Most of the respondents believed that future turnover of inventory
is a factor in formulating accounting estimates on inventory valuation.
Researchers believed that faster future turnovers of inventories, the
crucial accounting estimate to be implemented. Future turnovers might
affect future financial performances of the organization specifically in
computing income.
Figure 20: Damages, Obsolescence, and Other Physical Deterioration of
Inventory as a factor in Formulating Accounting Estimates on
Inventory Valuation
Most of the respondents believed that damage, obsolescence,
and other physical deterioration of inventory is a factor in formulating
accounting estimates on inventory valuation. Though the said factors
don‘t directly undermine the reliability of the estimate, but it would affect
the financial performance of the organization. Such effect would
probably affect the future economic benefits that the organization
must‘ve realized.
CHAPTER V
SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS
Summary of Findings
There is a significant influence on Demographic profile when it
comes in making professional judgments. It shows that Male was
expected to make accurate decision than Female. Moreover, as the
person got older, he/she possessed professional skepticism compared
to early ages. Likewise, as accountant got a longer service in the
profession, he/she could decide much better than those who were new
in the profession.
Factors affecting Professional Judgment includes the following:
1. Existing Accounting Policies
2. Changes on Accounting Policies
3. Past Events and Occurrences
4. Current Events and Occurrences
5. Forecasted Future Events and Occurrences
6. Goals Set by Top Management
7. Incentives Given by Top Management
8. Personal Individual Traits
9. Existing Government Policies
10. Changes in Government Policies

We had noticed that all of the factors listed in our questionnaire
provided were the actual factors why accountants were facing ethical
dilemma.
Factors in Formulating Accounting Estimates
1. Availability of Relevant and Reliable Evidences
2. Use of Valuation Method
3. Fluctuation of Prices and Costs Directly Related to Occurring
Events
4. Future Turnover of Inventory
5. Damages, Obsolescence, and Other Physical Deterioration of
Inventory
We had noticed that most of these factors are good enough to
formulate applicable accounting estimate regarding inventory valuation
but some on these do not necessarily have a great impact.
Moreover, preparers also seek complete evidences that were sufficient
and reliable, standards promulgated by law making bodies, the generally
accepted accounting principles, and other factors that will impact the
inventory valuation.
Conclusion
It is therefore concluded by the researchers that age, sex, years
of in the company, and years in the profession, has a significant

relationship with the professional judgment of the accountant in making
accounting estimates of inventory valuation.
Recommendation
The researchers suggest the following for further studies in
professional judgment on accounting estimates:
1. Aim to conduct survey to controllers of private companies instead
of Certified Public Accountants.
2. Expand the scope of accounting estimates, not limited to
inventory valuation, but also include bad debts and depreciation.
3. Aim for a larger number of population, not limited to Makati,
Mandaluyong and Taguig City.
4. Conduct personal interview to gather more information to
strengthen the study.
5. Perform stratified method of sampling to have equal distribution of
responses per category.

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APPENDIX
Survey Questionnaires
Part I – Respondent’s Profile

Name: _________________________ Position: ____________
Company: ______________________ Industry: ____________
Instruction: Place a check mark (✓) on the following item you are
most associated with:
Age:
25 and below 46-55
26-35 56 and above
36-45
Sex:
Male Female
Years in Accounting Service:
5 and below 16-20
6-10 21 and above
11-15
Years working with the Company:
1 and below 11-15
1-5 15 and above
6-10
Part II – Factors affecting Professional Judgment

Instruction: The following are possible factors affecting
Professional Judgment. Please select the option that corresponds
to your answer. [5-Strongly Agree; 4-Agree; 2-Disagree; 1-Strongly

Disagree]
1 2 3 4
1. Existing accounting policies
2. Changes in accounting policies
3. Past events and occurrences
4. Currents events and occurrences
5. Future events and occurrences
6. Goals set by top management
7. Incentives given by top management
8. Personal individual trait
9. Existing government policies
10. Changes in government policies
Part III – Professional Judgment on Accounting Estimates

Instruction: Please select the option that corresponds to your
answer.
Agree Disagree
1. A messed up professional
judgment in the estimates of the
ending inventory makes a huge
effect on the financial statement of
the company.
2. There are times when accounting
principles are violated or by-
passed when professional
judgment is not properly applied to
3. To reduce the risk of material

misstatements, there is no
concrete assurance of the
accumulated sufficient reliable
data, in terms of quantity and
quality, which will be the basis of
the estimates.
4. According to Christina Ng "When
applying professional standards,
accountants often cherry pick parts
of a standard to read and do not
really understand the spirit of the
standard or principle. In this case,
they often miss the big picture and,
as a result, make inappropriate
judgments."
5. According to Lynda Biek, "A
preparer needs to invest time in
understanding the requirements of
the standards, the company or
client background and the
economic environment in order to
come up with a sound professional
judgment."
Part IV – Professional Judgment on Net Realizable Value of

inventory
Instruction: The following are possible factors affecting
Professional Judgment on NRV of Inventory. Please select the

option that corresponds to your answer. [5-Strongly Agree; 4-
Agree; 2-Disagree; 1-Strongly Disagree]
1 2 3 4
1. Availability of relevant and reliable
evidences
2. Use of valuation method
3. Fluctuation of prices and costs
directly related to occurring events
4. Future turnover of inventory
5. Damages, obsolescences and other
physical deterioration of inventory

Professional Judgment in Making Accounting Estimates For Inventory For Reporting Purposes

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COLLEGE OF BUSINESS AND ENTREPRENEURIAL TECHNOLOGY

ACCOUNTANCY DEPARTMENT PAGE i

PROFESSIONAL JUDGMENT IN MAKING ACCOUNTING

A Thesis Presented to the Faculty of the Graduate School

Rizal Technological University

In Partial Fulfillment of the Requirements for the Degree

Of Bachelor of Science in Accounting Technology

LEW REN G. AYSON

MARK ANTHONY L. GALLEGO

JANE PAULA R. MORANTE

This thesis entitled PROFESSIONAL JUDGMENT IN MAKING ACCOUNTING

Approved by the Committee on Oral Examination with a grade of ________.

PROF. MACRINA VIOLETA V. MUTUC

PROF. EUGENIA G. SAMARISTA PROF. FAUSTINO OGUAN

Accepted as partial fulfillment of the requirements for the degree of Master in

____________ DR. EDNA C. AQUINO

blessing us throughout our journey. Also to our dear families, professors,

friends, blockmates and respondentsfor their warm support.

To the administrators of Kaban ng Hiyas Learning Center and

staffs of Chachago Mandaluyong branch, thank you for providing a

comfortable learning environment.

In 2001, the corporate scandal of Enron was revealed when it

business regulation, such as accounting frauds and corruptions. The

company was declared bankrupt it turned out that the management

because of improper accounting practices, it was also due to that Enron

had a corporate culture that pushed executives into unethical behavior.

The major failure of Enron has made ethics an important concern

to persons working in business and accounting.

TABLE OF CONTENTS Page

TABLE OF CONTENTS . . . . . . . . . . . . . . . . . . . . . . . . . . vii

LIST OF FIGURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xii

I. THE PROBLEM AND ITS BACKGROUND

Background of The Study . . . . . . . . . . . . . . . . 5

Statement of the Problem . . . . . . . . . . . . . . 10

Scope and Delimitation . . . . . . . . . . . . . . . . 11

Significance of the Study . . . . . . . . . . . . . 12

II. REVIEW OF RELATED LITERATURE

D. Inventory And Inventory System . . . . . . . . . . . . . . . . . 29

E. The Inventory Management . . . . . . . . . . . . . . . . . . . . 32

G. Professional Judgment In Accounting . . . . . . . . . . . . . 33

H. The Need For Computerized System . . . . . . . . . . . . . . 34

I. The Consistency Principle . . . . . . . . . . . . . . . . . . . . . . 36

J. The Code of Ethics for Professional

III. RESEARCH METHODOLOGY

Research Method Used . . . . . . . . . . . . . . . . . . . . . . . . 50

Population Frame and Sampling Scheme . . . . . . . . . . . . 51

Description of the Respondents . . . . . . . . . . . . . . . . . . . . 51

Research Instrument Used . . . . . . . . . . . . . . . . . . . . . . . 52

Data Gathering Procedure . . . . . . . . . . . . . . . . . . . . . . 52

IV. PRESENTATION, ANALYSIS, AND

V. SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS

Summary of the Findings . . . . . . . . . . . . . .. 77

THE PROBLEM AND ITS BACKGROUND

The accounting practice has always been in conformity with

objectivity. There are accounting governing organizations all over the

of accounting in the society is to enable just and fair declaration of

has to pay, uniformity to all accounting practice is vital in the world of

business and taxation. Uniformity is the practice of requiring

organizations to record accounting information and prepares financial

statements in accordance with a relevant accounting framework

The Philippine Financial Reporting Standards (PFRS) and the

Philippine Accounting Standards (PAS) and Philippine Standards on

Auditing (PSA) are the current set of Generally Accepted Accounting