At the completion of the Darby Department Store audit, the president asks about the meaning of the phrase “in conformity with generally accepted accounting principles” that appears in your audit report on the management’s financial statements. He observes that the meaning of the phrase must include more than what he thinks of as “principles.”
Required:
1. Explain the meaning of the term “accounting principles” as used in the audit report. (Do not discuss in this part the significance of “generally accepted.”)
2. The president wants to know how an accounting principle becomes “generally accepted.” Prepare a brief memo that provides an answer to the president’s question.