In this case where the FASB is considering it a standard to include the social costs of pollution in the income statement, the concepts of relevance and faithful representation definitely come into play. Predictive value and/or confirmatory value are both necessary for the information to be relevant. In this case, if the pollution costs on society were to be included in the income statement, the product would sell for more than it would if the costs were not included. The predictability of the company’s future earnings would thus change accordingly.
As far as faithful representation goes, it exists when there is agreement between a measure of description and the phenomenon it purports to represent, including neutrality and error-free. It must be free from bias and should not influence decision making to achieve a predetermined result. In this case, a predetermined result would occur, the product would sell for more if social pollution costs were included in the income statement, which would affect the balance sheet. We can clearly see that this case is not the easiest to judge and pulls us in two different directions. 1-8
An auditor’s ethics might be challenged while preforming an audit in various ways. For one thing, as the case states, the auditor is getting paid by the company to perform an audit. This alone may interfere with an auditor’s ethics in the sense that if he or she does not feel that they are getting paid enough, they might overlook some aspects of the financial statement in regards to the GAAP. Likewise, if an auditor is getting paid a large sum of money to do an audit, he or she may be more inclined to be more in favor of the company’s wants and not be a fair/unbiased auditor.
Other factors which may affect and auditor’s ethics are having relations with someone in company management or being in contact or having relations with an investor of the company. 1-13 a. The phrase “matched with revenues” means that expenses are recognized in the same period as the related revenues. There is a cause and effect relationship between revenue and expense recognition. This means that all expenses incurred in generating that same revenue also be recognized. b. 4 approached used to implement the matching principle: 1. Based on an exact cause and effect relationship between a revenue and expense event . By associating an expense with the revenue recognized in a specific time period 3. By a systematic and rational allocation to specific time periods 4. In the period incurred, without regard to related revenues c. 1. Exact cause and effect relationship approach 2. In the period incurred, without regard to related revenues 3. Systematic and rational allocation to specific time periods 4. Association of an expense with the revenues recognized in a specific time period 5. Systematic and rational allocation to specific time periods