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Area IV: Forming Conclusions and ReportingAUDReportingConsistency

CPA · Question 20 · Area IV: Forming Conclusions and Reporting

An auditor is reviewing the financial statements of a nonissuer and notes that the entity has changed its method of accounting for inventory from LIFO to FIFO. Management has justified the change as preferable. The auditor agrees with the change and the change is properly accounted for and disclosed. How should this be reflected in the auditor's report?

Answer options:

A.

Issue a qualified opinion due to the lack of consistency.

B.

Issue an unmodified opinion with no additional paragraphs.

C.

Issue an unmodified opinion and include an emphasis-of-matter paragraph following the opinion paragraph.

D.

Issue an unmodified opinion and include an other-matter paragraph.

How to approach this question

Change in Principle (LIFO to FIFO) = Consistency Issue. If justified + material = Emphasis-of-Matter paragraph.

Full Answer

C.Issue an unmodified opinion and include an emphasis-of-matter paragraph following the opinion paragraph.✓ Correct
C
When there is a change in accounting principle that has a material effect on the financial statements, and the auditor agrees with the change, the auditor should issue an unmodified opinion but include an emphasis-of-matter paragraph describing the change and referring to the note disclosure.

Common mistakes

Confusing Emphasis-of-Matter (for disclosed items) with Other-Matter (for undisclosed items).
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