Isl ami c Accounti ng Theory

A Conceptual
Framework
Asfa Asfia 18102002
Evania Herindar 18102012
 Learning Objectives
1. The role of a conceptual framework
2. The objective of a conceptual framework
3. Developing a conceptual framework
4. A critique of conceptual framework project
5. A conceptual framework for auditing standards
The role of conceptual framework
A conceptual framework of accounting ams to provide a structured theory of
accounting

• For the highest level : It states the scope and objective of financial
reporting
• For next Fundamental conceptual level: it identifies and defines the
qualitative characteristic of financial, and basic elements of
accounting
• For the lower operational level: it deals with principles the rule of
recognition and measurement of the basic elements and the type of
information to be display in financial report.
The benefit of a conceptual
framework
By Australian Standards Setters

• Reporting requirement will be more consistent and logical

• Avoidance of reporting requirements will be much more
difficult
• The boards that establish the requirement will be more
accountable for their actions
• Minimising the risk of over regulation.
• Prepareres and auditors will be able to better understand the
financial reporting requirements they face.
• The setting of requirements willl be more economical

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 Objectives of conceptual
frameworks
FASB statements of Financial The objective of financial Qualiative characteristics of
Accounting Concept (SFAC) no.1 reporting accordin to the IASB and Accounting Information
paragraph 34 FASB

Financial reporting should provide

information that is useful to present
• Useful in making economic See the picture
decision
and potential investors and
• Useful in assessing cash flow behind 
creditors and other users in making
prospect
rational investment, credit, and
• About enterprise resources,
similar decisions
claims to those resources and
changes in them.
Qualiative characteristics of Accounting
Information
 The development of conceptual frameworks is influenced by
the following key issues.
• Principle versus rules –based approches to standard setting
• Information for decision making and the decision theory approach

Developing a
Conceptual Principle based and rule based standard setting, should have
following characteristics:
Framework • Be based on an improved and consistently applied conceptual
framework
• Clearly state the objective of the standard
• Provide sufficient detail and structure that the standard can be
operationalized and applied on a consistent basis.
• Minimize the use of exceptions from the standards.
• Avoid use of percentage tests (bright lines) that allow financial
engineers to achieve technical compliance with the standards while
evading the intent of the standard.
 Information for decision making and the decision theory
approach
• The decision theory approach to accounting is helpful to test whether
accounting achieves its purposes.
• The theory should serve as a standard by which accounting practices
are judged.
Developing a • It should be the blueprint for the constructions of the many individual
system in practice.
Conceptual • If the individual system provide useful information, then the theory on
which the systems are based can be considered effective or valid.
Framework • The decision theory process

Overall theory of
accounting

Individual accounting Prediction model of Decision model of

system user user
 International Developments : The IASB and FASB
Conceptual Framework
The FASB states that the project will do the following
1. Focus on changes in the environment since the original frameworks
were issued, as well as omission in the original frameworks
Developing a 2. Give priority to addressing and deliberating those issues within each
pahases
Conceptual 3. Initially consider concept applicabe to private sector business entities.

Framework Several key issues for stakeholders on the phase A exposure

draft (ED)
1. Entitiy vs proprietorship
2. Primary user group
3. Decision usefulness and stewardship
4. Qualitative Characteristic
A critique of conceptual
framework project
Significant criticsm of previous conceptual
statements include :
• Measurement is based on unspecified rules
• The logic is circular
• There is no prior agreement on objectives
• The definition of the elements are unworkable
• Provide no guidence to practising accountants
 Early auditing theory emphasised the role of logic and
key concept

By the 1990s the formalised auditing processes and

structures were under pressure from clients

There was a shift away from substantive testing towards a

A conceptual greater emphasized on consideration of audit risk, in particular

the role of client business risk.

Framwork fot auditing

standards Business risk auditing emphasized the impact of threats to
the client’s business model

Critics believe that business risk auditing was an attempt to justify

less audit work and greater consulting.

Legislative changes since the early 2000s have restricted the

opportunity for consulting to audit clients but also increased the
focus on auditing client’s internal control
Any question ?
Don't hesitate to ask.