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JCopyright © 2000 byAmerican Institute ofCertified Public Accountants, Inc.,

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. - "^ n n n nQM7R543210

The Meaning of "Present Fairly in Conformity With GAAP" 391

AU Section 411

The Meaning of Present Fairly in ConformityWith Generally Accepted AccountingPrinciples in to Independent Auditor's Report(supeedes SAS No. 5)

Source: SAS No. 69.

See section 9411 for interpretations of this section.

Effective for audits of financial statements for periods ending after March 15, 1992.

.01 An independent auditor's unqualified opinion usually reads as fol-lows:In our opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of X Company as of (at) December 31,19XX, and the results of its operations and its cash flows for the year thenended, in conformity with generally accepted accounting principles.

The purpose of this section is to explain the meaning of the phrase "presentfairly ... in conformity with generally accepted accounting principles" in theindependent auditor's report..02 The first standard of reporting requires an auditor who has audited

financial statements in accordance with generally accepted auditingstandardsto state in the auditor's report whether the statements are presented inaccordance with generally accepted accounting principles. The phrase "gener-ally accepted accounting principles" is a technical accounting term that encom-passes the conventions, rules, and procedures necessary to define acceptedaccounting practice at a particular time. It includes not only broad guidelinesof general application, but also detailed practices and procedures. Those con-ventions, rules, and procedures provide a standard by which to measurefinancial presentations. [Revised, June 1993, to reflect conforming changesnecessary due to the issuance of Statement ofPosition 93 -3.]

.03 The independent auditor's judgment concerning the "fairness" of theoverall presentation of financial statements should be applied within theframework of generally accepted accounting principles. Without that frame-work, the auditor would have no uniform standard for judging the presentationof financial position, results of operations, and cash flows in financial state-ments.

.04 The auditor's opinion that financial statements present fairly anentity's financial position, results of operations, and cash flows in conformitywith generally accepted accounting principles should be based on his or herjudgment as to whether (a) the accounting principles selected and applied havegeneral acceptance; (b) the accounting principles are appropriate in the circum-stances; (c) the financial statements, including the related notes, are informa-tive of matters that may affect their use, understanding, and interpretation(see section 431); (d) the information presented in the financial statements isclassified and summarized in a reasonable manner, that is, neither too detailed

AU §411.04.

Pr'l--

The Mat, tecesul,and Thin!Standards of Reporting

nor too condensed (see section 431);and (e) the financialstatements reflect ,-;'A

the underlying transactions and events in a manner that presents the

financial position,results of operations,

and cash flows stated ivithin

range of acceptablelimits, that is, limitsthat aretreasonable

and practical :-

ble to attn*'

,iciarstatespents.!'

, -

.05 bide t anditcirs agree on the existence eta body of generally

acceptedaecaturthigPritteiples,and they areknowledgeable-about

these prim,

ciples and,inheriaterminationof their general acceptance.

Nevertheless, the

detentainathmthat accountingprinciple isgenerallyaccepted may

be difficultbecause no aingle reference source exists forallsuch principles.

Tie -

sources ofestablishetkaccosltiugprinciple?

that are generally accepted intrba;:

United State e are-cc. Accounting principles

promulgated by a body deli by -the

A1CPA Council to establish such principles,pursuant torule 203 [ET

section 203.011 of the .AICRACode ofProfessionalConduct. Rule203

'

INT section 203.011 providesthat an auditor should not empress an

nannalland*Won ifthe dal statements contain a material

departurefrom suchprenouncements

unless, dueto unusualcircum,

eteneetiLigdherangito tbe laanonnoeMents

weuld malty the etate,

ments misleading.Rule 2A3 (ET section 203.01) implies thet

app liof officially establinhald m4;012048'

Principles

reaps * the fair presentationöffiaIoaUon, xeults

of oPeraYfna,and cash flews,in oinformitywith generallyaccepted'

acco principles.Nevertheless,

rule go3 IETsection go.tny-h.

provides ?? the' possibilitythat literal application

of such a pr

nouiLsementmight, inunusual circumstances,

result in misleading,

- finimmial etatements.(See section 508, Reportsondudited Finon:Ciat

Statements paragraphs .14and .15.)- <

b. Pronew3cleinentsof bodies, composed pf expert accountenti; that:

deliberateaccountingissues in public

thrums for , the purpose4:

estplalMhingaccounting principles ordescribing existing accounting.

" practices that are generally accepted, provided those pronounce: 1.

- meritshive been'exprisedgr public comment andhave beet

by-a bodyreferred to in ry (a).2

PronniuMements ofbodira, organisedby a body

referred to in at*

Fog'(ta) wad composedofexpertaccountants,that deliberatearrobete ,

mg issues in public forums for the purpose of interpreting.#' establishing accounting

Principles or describing existing accounting

practicesthat are generallyaccepted, or pronouncements

referred to

in category (b) that have been cleared by a bodyreferred to in

categoryGO but have not beenexposed

for publiccomment.-

d. Practices or pronouncementsthat are widely reco as being

generally acceptedbecause they represent prevalent

practice in a

particularindustry, or the knowledgeable application

to s

circumstances ofpronomicementsthat are generally accepted.

.06 Generallyaccepted accounting principlesrecognize the importanceof

reporting transactions and events in.' accordance with their substance. The

auditor shouldconsider whether*substanceof transaction or events&Teri,.

materially from their form.: -,.

i The concept of materialityis inherent in the auditor's judgments That concept Involve;,

qualitativeaeon:11asquantitativojudgmads(see sections 150.04, 312.10.

and 508.36).. . -4-

s For purposesof this section, the worickared means thetabody referred to in salmaragrapist,,

..

` (Q) hasitudicaiodthat it does not object taihe

issuance af theproposed proncourcanumt.: ,.

M.4344)5'

The Meaning of "Present Fairly in Conformity With GAAP" 393

.07 If the accounting treatment of a transaction or event is not specifiedby a pronouncement covered by rule 203 [ET section 203.01], the auditorshould consider whether the accounting treatment is specified by another .source of established accounting principles. If an established accounting prin-ciple from one or more sources in category (b), (c), or (d) is relevant to thecircumstances, the auditor should be prepared to justify a conclusion thatanother treatment is generally accepted. If there is a conflict between account-ing principles relevant to the circumstances from one or more sources incategory (b), (c), or (d), the auditor should follow the treatment specified by thesource in the higher category-for example, follow category (b) treatment overcategory (c)-or be prepared to justify a conclusion that a treatment specifiedby a source in the lower category better presents the substance of the transac-tion in the circumstances.

.08 The auditor should be aware that the accounting requirementsadopted by regulatory agencies for reports filed with them may differ fromgenerally accepted accounting principles in certain respects.Section 544, Lackof Conformity With Generally Accepted Accounting Principles, paragraph .04and section 623, Special Reports provide guidance if the auditor is reporting onfinancial statements prepared in conformity with a comprehensive basis ofaccounting other than generally accepted accounting principles.

.09 Because of developments such as new legislation or the evolution of anew type of business transaction, there sometimes are no established account-ing principles for reporting a specific transaction or event. In those instances,it might be possible to report the event or transaction on the basis of itssubstance by selecting an accounting principle that appears appropriate whenapplied in a manner similar to the application of an established principle to ananalogous transaction or event.

Application to Nongovernmental Entities.10 For financial statements of entities other than governmental enti-

ties-3a. Category (a), officially established accounting principles, consists of

Financial Accounting Standards Board (FASB) Statements of Finan-cial Accounting Standards and Interpretations, Accounting Princi-ples Board (APB) Opinions, and AICPA Accounting Research.Bulletins.

b. Category (b) consists of FASB Technical Bulletins and, ifcleared' bythe FASB, AICPA Industry Audit and Accounting Guides and AICPAStatements of Position.

c. Category (c) consists of AICPA Accounting Standards ExecutiveCommittee (AcSEC) Practice Bulletins that have been cleared4 bythe FASB and consensus positions of the FASB Emerging IssuesTask Force.

3 Rules and interpretive releases of the Securities and Exchange Commission (SEC) have anauthority similar to category (a) pronouncements for SEC registrants. In addition, the SEC staffissues Staff Accounting Bulletins that represent practices followed by theataff in administering SECdisclosure requirements. Also, the Introduction to the FASB's EITFAbstracts states that the Securi-ties and Exchange Commission's Chief Accountant has said that the SEC staff would challenge anyaccounting that differs from a consensus of the FASB Emerging Issues Task Force, because theconsensus position represents the best thinking on areas for which there are no specific standards.

4 The auditor should assume that such pronouncements have been cleared by the FASB unlessthe pronouncement indicates otherwise.

AU §411.10

The Meaning of "Present Fairly in Conformity With GAAP" 395d imple-i3 In the absence of a pronouncement covered by rule 203 [ET section

ail; and203.011 or another source of established accountingprinciples, the auditor of

3nerallyfinancial statements of state and local governmental

entities may considerother accounting literature, depending on its relevance in the circumstance §.section ` Other accounting literature includes, for example, GASB Concepts State-ditor of meats; the pronouncements referred to in categories (a) through (d) of para-°Haider graph 10 when not specifically made applicable to state and localti} K governmental entities either by the GASH or by the organizationissuing them;FASB Concepts Statements; AICPA Issues Papers, International Accountingpunting r: Standards of the International

Accounting Standards Committee; pronounce -rnmen_ ¢` /Bents of other professional associations or regulatory agencies; Technicalu), and Information Service Inquiries and Replies included in AICPA Technical Prac-ions or .: lice Aids; and accounting textbooks, handbooks, and articles. The appropriate-has in nos of other accounting literature

depends on its relevance to particularces, the specificity of the guidance, and the general recognition, circumstances, ty gat gen gnition ofthe issuer or author as an authority. Forexample, GASB Concepts Statementsthethe would normally be more influential than other sources in this cats

of h :

g°ry' [Re-hority. visa', June 1993, to reflect conforming changes necessary due to the issuanceId nor- : +' of Statement of Position 93 -3.1, Juneement Effective Date:,

3e6lets ofFASBlgoviASBn therting

'sallyr theand

acifi-andip ofsen-:coal

shedized

!ties:can

and

.14 This section is effective for audits of financial statements for periodsending after March 15, 1992.

Transition.1b Most of the pronouncements or practices in categories (b), (c), and (d)of paragraphs .10 and .12 had equal authoritative standing prior to theissuance of this section. An entity following an accounting treatment in cate-gory (c) or (d) as of March 15, 1992, neednot change to an accounting treatmentin a category (b) or category (c) pronouncement whose effective date is beforeMarch 15, 1992. For example, a nongovernmental entity that followed aprevalent industry practice (category (á)) as of March 15, 1992, need notchange to an accounting treatment included in a pronouncement in category(b) or (c) (for example, an accounting principle in a cleared AICPA Statementof Position or AcSEC Practice Bulletin) whose effective date is before March15, 1992. For pronouncements whose effective date is subsequent to March 15,1992, and for entities initially ay ?lying

anaccounting principle after March 15,1992 (except for FASB Emergir ;Issues Task Force consensus positions issuedbefore March 16, 1992, whica become effective in the hierarchy for initialapplication of anaccounting principle after March 15, 1993), the auditor shouldfollow the applicable hierarchy established by paragraphs .10 and .12 indetermining whether an entity's financial statements are fairly presented inconformity with generally accepted accounting principles.

AU §411.15

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