Internal Control

Internal Control - Is a process effected by an entity's board of directors, management, and other personnel  designed to provide reasonable assurance regarding the achievement of objectives in the following three categories.

1. Reliability of financial reporting = The objectives are publishing reliable financial reports (e.g., annual financial statements, interim financial reports) and safeguarding assets from unauthorized use (e.g.,  embezzlement, theft, damage, unauthorized purchase, or unauthorized disposal). Financial reporting controls enable a company to safeguard its assets from unauthorized disposal and prepare financial statements in conformity with GAAP. 
2. Effectiveness and efficiency of operations = In the operations category, some examples of objectives are good business reputation, return on investment, market share, new product introduction, and using assets effectively and efficiently. The operations control objectives cover business strategy and tactic.   
3. Compliance with applicable laws and regulations = The broad objective is compliance with laws and regulations that affect the company.

Internal Control - Must see to it that assets are safeguarded, appropriate accounting data is generated, management policies and procedures are followed, and that productivity and efficiency is achieved throughout the organization.

Accounting Theory

Accounting Theory is to provide a logical framework for accounting practice. The basic assumptions, definitions, principles and concepts and how we derive them. It is concerned with improving financial accounting and reporting broad perspective, it includes a conceptual framework, accounting legislation, concepts, valuation models, and hypotheses and theories that allow researchers to analyze accounting in order to explain or predict phenomena related to accounting, such as how users employ accounting data or how preparers choose accounting methods.

 The goal of accounting theory is to provide a set of principles and relationships that explains observed practices and predicts unobserved practices. That is accounting theory should be able to both explain why business organizations elect certain accounting methods over other alternatives and predict the attributes of firms that elect various accounting research.

There are various "theories of accounting"

• Including the fundamental analysis model
• The efficient markets hypothesis
• The capital asset pricing model
• The human information processing model
• Positive accounting theory
• And critical perspective model

 The three general levels of progressiveness

1. A fundamental faith in democracy, a concern for morality and justice, and a broad acceptance of the efficiency, a concern for morality and justice, and a broad acceptance of the efficiency of education as a major toll in social amelilioration
2. An increased awareness of the social obligation of all segments of society and introduction of the idea of the public accountability of business and political leaders; and
3. An acceptance of pragmatism as the most relevant operative philosophy of the day.

The Mission of the Financial Accounting Standard Board (FASB)
The mission is to establish and improve standard of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information

In attempting to accomplish this mission, the FASB seeks to:

1. Improve the usefulness of financial reporting by focusing on the primary characteristics of relevance and reliability and on the qualities of comparability and consistency.
2. Keep standards current to reflect changes in methods of doing business and changes in the economic environment.
3. Consider promptly any significant areas of deficiency in financial reporting that might be improved through the standard-setting process.
4. Promote the international comparability of accounting standards concurrent with improving the quality of financial reporting.
5. Improve the common understanding of the nature and purposes of information contained in financial reports.

Types of Pronouncements

Originally, the FASB issued two types of pronouncements, Statements and Interpretations.
Subsequently, the FASB established two new series of releases titled.

1. Statement of Financial Accounting Concepts (SFACs_ and
2. Technical Bulletins. SFACs are intended to establish the objectives and concepts that the FASB will use in developing standards of financial accounting and reporting

Technical Bulletins are strictly interpretive in nature and do not establish new standard or amend existing standards. They are intended to provide guidance on financial accounting and reporting problems on a timely basis.
In summary, the FASB now issues four types of pronouncements.

1. Statements of Financial Accounting Concepts-releases designed to establish the fundamentals on which financial accounting standards are based. They do not create GAAP and are issued to

1. Guide the FASB in setting standards,
2. Guide practicing accountants in dealing with unresolved issues, and
3. Help educate non-accountants.

2. Statements of Financial Accounting Standards-releases indicating required accounting methods and
procedure for specific accounting issues. SFASs officially create GAAP.

3. Interpretations-modifications or extensions of issues related to previously issued FASB statements, APB opinion, or Accounting Research Bulletins.
The purpose of Interpretations is to clarify, explain, or elaborate on existing SFASs, APB Opinion, or
ARBs. They require the support of a majority of the members of the FASB, and they also create GAAP.

4. Technical Bulletins- guidance on accounting and reporting problems issued by the staff of the FASB. Technical Bulletins do not officially create GAAP and are used mainly to assist in dealing with implementation problems.

Section AU of the Codification of Statements of Auditing Standards describes the following hierarchy of GAAP.

Level A   FASB Statement
               FASB Interpretations
               SEC Rules and Interpretive REleases
               Accounting Principles Board Opinions (Unless amended)
               Accounting Research Bulletins (Unless amended)

Level B  FASB Technical Bulletins
              AICPA Industry Audit Guides that have been reviewed by the FASB

Level C  ACSEC Practice Bulletins that have been reviewed by the FASB
              Consensuses reached by the EITF

Level D  AICPA Accounting Interpretations (no longer issued)
              FASB Implementations Guides
              Other widely recognized or prevalent accounting practices

Special attention is given to the pronouncements referred to in Rule 203 of the AICPA Code of Professional Ethics. The reason for this special attention is apparent: Practicing CPAs have an ethical obligation to consider such pronouncements as the primary source of generally accepted principles in their exercise of judgement as to the fairness of financial statements.

Despite the continuing effort to narrow the scope of GAAP, critics maintain that management is allowed too much leeway in the selection of the accounting procedures used in corporate financial reports.