The Accruals and Going Concern Concepts Are Regarded as Fundamental in the Preparation of Financial Statements. Discuss the Advantages and Disadvantages of These Concepts, Explaining Why They May Be Difficult to Apply.

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The auditor’s decision can be influenced, for example by the threat of the company switching auditors, thus the auditor losing their customer, therefore losing revenue. Research suggested that “the non-aggressive auditor would be better off expressing a clean rather than a going-concern opinion [..] because this provides the greater expected return.” (Tucker, et al., 2003). This shows how auditors could distort results (portray that an entity is a going concern, even if there is a risk of it not), if it is in their best financial interest. This implies that the going concern concept raises disadvantages when being applied to auditing.

In conclusion, both of the aforementioned concepts can be deemed as fundamental, whilst both having their advantages and disadvantages, including difficulty of application. The accruals concept advantages include being senior to the cash accounting method, as it is a clearer method, which can avoid deceit via the inability to delay repayments to appear more profitable in an accounting period, as transactions are recorded when they occur. However, accruals accounting is more difficult to apply, requiring sufficient financial skill, thus the need to employ and pay someone with the relevant capabilities.

The going concern possesses advantages such as reducing investment risk, as firms have to disclose whether they are a going concern or not, thus investors can make judgements whether it is too risky to invest or not. However, this advantage can potentially be invalidated, as an unethical auditor could display a firm as being a going concern, in search for greater financial return, as their customer may wish to switch auditors if they receive an unfavourable conclusion; potential business closure.

Word count: 1098

Word count without quotes: 995

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