CPA Exam — AUDForming Conclusions and ReportingMedium
A CPA performing a compilation engagement for a non-public entity has identified a material departure from the applicable financial reporting framework that management refuses to correct. The departure is not intended to mislead users. What action should the CPA take?
- AInclude a paragraph in the report describing the departure.
- BIssue a qualified opinion.
- CIssue an adverse opinion.
- DWithdraw from the engagement.
Show answer & explanationAnswer & explanation
Correct answer: A. Include a paragraph in the report describing the departure.
In a compilation, if a material departure from the financial reporting framework exists and management refuses to correct it, the CPA should modify the compilation report to disclose the departure. An adverse or qualified opinion is not issued in a compilation because no assurance is provided.
Why the other options are wrong
- B. Qualified opinions are for audits and reviews, not compilations.
- C. Adverse opinions are for audits, not compilations.
- D. Withdrawal is an option if the departure is pervasive and intended to mislead, but not the primary or only action for a simple uncorrected material departure in a compilation.
Compilation Report Modification (Departure)
When a CPA identifies a material departure from the financial reporting framework in a compilation engagement and management refuses to correct it, the compilation report must be modified to disclose the departure.
- Applies to material departures in compilation engagements.
- Management's refusal to correct triggers the modification.
- The report is modified with a separate paragraph describing the departure.
Memory trick: Compilation's DEPARTURE: Describe It, Don't Opine.