Wiley CIAexcel Exam Review 2014 Focus Notes: Part 3, Internal Audit Knowledge Elements

Domain 7

Focus on: Financial Management (13–23%)

FINANCIAL ACCOUNTING AND FINANCE: BASIC CONCEPTS OF FINANCIAL ACCOUNTING

Financial accounting is the language of business. All business transactions will eventually end up in financial statements. Accounting principles are used to classify, record, post, summarize, and report the business transactions between various parties involved. Accountants apply their professional standards to analyze business transactions, prepare estimations, and report business events. The business transactions data accumulated in the chart of accounts are used to prepare the financial statements of an organization.

Accounting Principles and Qualities of Accounting Information

Accounting Principles

If the management of a company could record and report financial data as it saw fit, comparisons among companies would be difficult, if not impossible. Thus, financial accountants follow generally accepted accounting principles (GAAP) in preparing reports. These reports allow investors and other stakeholders to compare one company to another.

Business Entity Concept

The individual business unit is the business entity for which economic data are needed. This entity could be an automobile dealer, a department store, or a grocery store. The business entity must be identified, so that the accountant can determine which economic data should be analyzed, recorded, and summarized in reports.

Cost Concept

The historical cost concept is the basis for entering the exchange ...