Assignment Chapter 1

Q1. What is meant by ‘professional judgment’? Consider the Pathways Vision Model in figure
1.1 and explain the role of professional judgment in accounting.
 Professional judgement in accounting is the process explaining how individuals reach a
reasonable conclusion which is based on the relevant facts given at that time. Those individuals
could be accountants, auditors,… who have sufficient knowledge and experience. For example, if
the accountants are preparing the financial statement, and the auditors are checking the
information whether or not it’s fully disclosed and truthful. As such, the auditors who had
sufficient knowledge and experience are making the judgment of that statement. This process of
the auditor is called “professional judgement”.
 From the Pathways Vision Model, we can see that the professional judgement (accounting
judgements) plays the central role which helps to connect between the economic activity and
the optimal decision making of users. The judgement process involves the identification of the
issues & objectives and consideration of contradictory information. This process makes sure that
all the economic activities from a company are useful information in terms of its relevance and
faithful representation. Based on the accounting judgement, the users can rely on and make the
optimal decision.

Q2. Define what is meant by ‘theory’ and explain how theory is useful. Do you think theory
needs to be considered in accounting?
 Theory could be defined as a belief or principle that guides actions or behavior. In addition,
theory is also a supposition or a set of ideas intended to explain something, especially one based
on general principles independent of the thing to be explained.
 The theory is useful because of 2 main reasons:
+) It explains what is happening: for example, based on the theory of demand (demand
decreases  price decreases), we can understand why the Covid-19’s lockdown leads to the
much lower price of gas.
+) It predicts what will happen in the future: in the same example, we can predict that the
moment when lockdown is eased by the government, the price of gas will start increasing again
as it was.
 Obviously, theory is needed to be considered in accounting because of its benefits:
+) It describes and explains the current accounting practices: “Capital market theory” explains
how the share prices react to accounting information.
+) It predicts accounting practice: “Agency theory” explains why managers may change the
accounting policies.
+) It provides principles to take into account when taking action or making decisions: “Asset
recognition theory” helps to determine when and how assets should be included and reported
in financial statements.
+) It helps to identify problems and deficiencies with current accounting practice and make
improvements: theories about investing explains which accounting measures are most useful
and suggest ways to improve the usefulness of financial statements.

This study source was downloaded by 100000834699216 from CourseHero.com on 03-11-2022 07:09:36 GMT -06:00

https://www.coursehero.com/file/66818035/Assignment-1docx/
Powered by TCPDF (www.tcpdf.org)