CPA Exam — AUDForming Conclusions and ReportingMedium
An auditor is performing an audit for a client that has changed its accounting method for inventory valuation from FIFO to LIFO. The auditor agrees that the new method is preferable and the change is properly accounted for and disclosed. How should the auditor's report address this change?
- AThe auditor should issue a qualified opinion.
- BThe auditor should make no modification to the unmodified opinion.
- CThe auditor should include an emphasis-of-matter paragraph.
- DThe auditor should issue an adverse opinion.
Show answer & explanationAnswer & explanation
Correct answer: C. The auditor should include an emphasis-of-matter paragraph.
A change in accounting principle that is properly justified, accounted for, and adequately disclosed generally warrants an unmodified opinion with an emphasis-of-matter paragraph to draw users' attention to the change, as it is fundamental to their understanding of the financial statements.
Why the other options are wrong
- A. A qualified opinion is issued for material misstatements or scope limitations, not for appropriately handled accounting changes.
- B. While the opinion is unmodified, drawing attention to a significant change in accounting principle is important for users, making an EOM paragraph necessary.
- D. An adverse opinion is issued for material and pervasive misstatements, which is not the case here.
Emphasis-of-Matter (Accounting Principle Change)
An Emphasis-of-Matter paragraph is included in an unmodified audit report to highlight a properly accounted for and disclosed change in accounting principle that is fundamental to users' understanding of the financial statements.
- Used for appropriately justified and disclosed accounting changes.
- Does not modify the auditor's opinion.
- Draws users' attention to the relevant disclosure in the financial statements.
Memory trick: Changes: If good, EOM paragraph; if bad, Modify Opinion.