Question

Roy Wilton is a CPA who recently made a poor investment. When researching the investment, Roy examined the financial statements of the firm, but did not read the accompanying footnotes, and therefore didn’t comprehend the broader context underlying those financial statements. Which of the following is true with respect to the enhancing qualitative characteristic of understandability in this case?

a. This demonstrates a violation of understandability, given that Roy did not comprehend all relevant information.
b. This does not demonstrate a violation of understandability, as Roy did not bother to read the footnotes but could have understood them if he did so.
c. This does not demonstrate a violation of understandability, but rather completeness, as Roy’s understanding was incomplete.
d. This demonstrates a violation of understandability, as CPAs should be able to rely on the financial statements alone.

Answer 1

Answer: This does not demonstrate a violation of understandability, as Roy did not bother to read the footnotes but could have understood them if he did so

Step-by-step explanation:

Even though Roy examined the financial statements of the firm, as stated above, he didn't read the accompanying footnotes, and hence, he did not comprehend the underlying context of the financial statements.

Therefore, in this case this doesn't demonstrate a violation of understandability, due to the fact that Roy did not bother to read the footnotes but could have understood them if he did so.

According to concept of understandability in accounting, the information that are given in financial statements must be understandable by the financial statements and users.