What is True and Fair View?§
“True and Fair View” is a fundamental audit concept in the United Kingdom, requiring auditors to form an opinion on whether the financial statements of a company provide a true and fair view of its financial condition and operations. This principle may necessitate a departure from strict legal requirements when such a departure is needed to present the company’s financial information accurately and fairly. The term has evolved over time, adapting to new accounting standards and issues as they arise.
Examples§
- Fair Valuation of Assets: A company’s financial statements should reflect the fair market value of its assets, even if historical cost accounting would report a different value. Auditors assess whether using fair value gives a true and fair view.
- Revenue Recognition: A firm might need to recognize revenue in a manner that best reflects its economic reality, potentially differing from strict legal stipulations, to provide a true and fair view of its performance.
- Provision for Doubtful Debts: When a company estimates doubtful debts, auditors ensure that the provision accurately reflects the potential loss, even if it means deviating from standardized percentages.
Frequently Asked Questions§
1. Why is there no legal definition of ’true and fair view’? Given the broad and evolving nature of financial reporting and the need for judgment, a precise legal definition is impractical.
2. How do auditors determine if financial statements are ’true and fair’? Auditors assess several factors, including compliance with accounting standards, the appropriateness of judgments and estimates made by management, and the overall consistency and clarity of the financial information presented.
3. Can ’true and fair view’ override specific accounting standards? Yes, in the UK, auditors can depart from specific legal or accounting standards if such a departure is necessary to achieve a true and fair presentation of the financial statements.
4. Is ’true and fair view’ equivalent to ‘fair presentation’ in International Accounting Standards? Yes, the concept of ’true and fair view’ in the UK is analogous to ‘fair presentation’ in International Accounting Standards (IAS) and Generally Accepted Accounting Principles (GAAP) in the US.
5. How do auditors document their assessment of ’true and fair view’? Auditors provide detailed documentation in their audit files, demonstrating their work and judgments made regarding the ’true and fair view’ of financial statements.
Related Terms§
- Fair Presentation: The principle in IAS that financial statements should present a fair, complete, and unbiased view of an entity’s financial condition.
- Auditing: The process of examining an entity’s financial records to ensure accuracy and compliance with accounting standards and regulations.
- GAAP (Generally Accepted Accounting Principles): A standard framework of guidelines for financial accounting used in the US, ensuring consistency and transparency in financial reporting.
- IFRS (International Financial Reporting Standards): A globally accepted set of accounting standards promulgated by the International Accounting Standards Board (IASB).
Online Resources§
- Investopedia: True and Fair View
- Association of Chartered Certified Accountants: True and Fair View
- International Financial Reporting Standards (IFRS)
Suggested Books for Further Studies§
- “Principles of Auditing” by Rick Hayes, Roger Dassen, Arnold Schilder, and Philip Wallage
- “Wiley CPA Exam Review 2023 Study Guide: Auditing and Attestation” by Divinci A. Hayes
- “International Financial Reporting Standards (IFRS): A Practical Guide” by Hennie van Greuning and Darrel Scott
- “Auditing and Assurance Services: An Integrated Approach” by Alvin A. Arens, Randal J. Elder, and Mark S. Beasley
Accounting Basics: “True and Fair View” Fundamentals Quiz§
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