IFRS tends to be more principles-based compared with GAAP,which is viewed as more rules-based.Which of the following is a true statement about a principles-based system?
A)A principles-based system eliminates the need for internal controls.
B)A principles-based system is significantly weaker than a rules-based system.
C)A principles-based system will eliminate all fraud.
D)A principles-based system is a way to calculate interest receivable or payable.
E)A principles-based system depends heavily on control procedures to reduce the potential for fraud or misconduct.

Question

Quizplus · Accepted Answer

A principles-based system provides general guidelines for financial reporting, giving companies more flexibility in how they apply accounting standards. However, such flexibility can create the potential for fraud or misconduct in financial reporting. Therefore, a principles-based system depends heavily on control procedures to reduce such potential risks. Internal controls play a crucial role in ensuring that companies adhere to the principles provided by the standard-setters. Hence, option E is the correct answer. 
Option A is incorrect because internal controls are necessary even in a principles-based system. Option B is incorrect because a principles-based system is not weaker when compared to a rules-based system. Option C is incorrect because a principles-based system cannot eliminate all fraud. Option D is incorrect because calculating interest receivable or payable is an application of accounting principles, it does not relate to the principles-based system.

IFRS Tends to Be More Principles-Based Compared with GAAP,which Is