May 29, 2022

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ACCOUNTING CONCEPT- OBJECTIVITY

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ACCOUNTING CONCEPT- OBJECTIVITY


MEANING:
This concept states that financial statement must be prepared based on verifiable evidence and preparers of these statements should do so without bias.

Objectivity has some closeness with fairness with the use of the word bias. Without the objectivity and fairness principles there will be favouritism in the preparation of financial statement. A third party evidence on the financial statement gives proof of objectivity and where such financial statement can be trailed back to source document it shows compliance of this principle.

Objectivity is the opposite of subjectivity. Therefore, if objectivity is looked from this angle, it means comparing two or more things before deciding on one. This can be explained with this illustration. A student wanted to buy a textbook. To show he/she is subjective, he went to one bookshop and agreed with the price quoted for the textbook. To show he is objective, after knowing the price of the textbook in one bookshop, he went to other bookshop to compare prices before deciding on which bookshop to buy from.

For a profit-making entity, objectivity comparing prices of goods before deciding the one to buy. It also mean to so many other things.

The management of an entity, on preparation of the financial statement decided to window dress the financial statement to enable them get loan from bank. By doing so, objectivity principle has been compromise.

A manager of Micro Limited resigned and join an audit firm, 3 months letter he was made the senior auditor for the audit of Micro Limited. This also goes against the objectivity principles.

IMPORTANCE OF OBJECTIVITY

1. It allows the preparation and presentation of financial statement to comply with accounting standards and laws.

2. Its prevent management of an entity to be bias to a particular user of financial statement.

3. It backs preparers of financial statements from fraudulent actions of top influencers of an entity.

4. Objectivity makes financial statement to be backed by concrete evidence.

5. Objectivity allows external auditors to perform audit trail while examining the financial statement of a company.

6. As a result of this principles, investors can rely to a large extent on the financial statement.

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