Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

What type of events may justify a departure from GAAP?

1. New legislation and conflicting practices

2. Evolution of a new business transaction and new legislation

3. Materiality and conflicting industry practices

4. No events justify a departure from GAAP

The correct answer is: Evolution of a new business transaction and new legislation

A departure from Generally Accepted Accounting Principles (GAAP) is typically justified only under specific extraordinary circumstances. The correct choice relates to the evolution of new business transactions and the introduction of new legislation. When a new type of transaction arises that is not adequately covered by existing GAAP, accountants may find themselves faced with the need to report on these transactions in a way that fairly represents the financial position of the entity. For instance, innovations like digital currencies or new forms of revenue generation may not be directly addressed in current accounting standards. In such cases, it is essential for the financial statements to accurately reflect the entity's activities and comply with the underlying principles of financial reporting, which may lead to a departure from GAAP if no appropriate guidance exists. New legislation can also warrant a departure from GAAP as it may introduce requirements that differ from existing standards. For example, if legislation mandates a specific recognition or measurement approach that deviates from GAAP, accountants may need to adjust their practices to comply with the law while ensuring they disclose the nature of the departure from GAAP. The other choices do not encapsulate the complexity involved in justifying a departure from GAAP. Conflicting industry practices alone or materiality considerations might influence accounting choices, but they do not