CPA Exam — AUDForming Conclusions and ReportingHard
An auditor is performing an audit for a client that has changed its accounting method for valuing inventory from FIFO to LIFO. This change was appropriately justified, applied retrospectively, and adequately disclosed in the financial statements. The auditor concurs with the change and its presentation. What effect will this have on the auditor's report?
- AThe auditor should include an Other-Matter paragraph to describe the change.
- BThe auditor should issue a qualified opinion due to the change in accounting principle.
- CThe auditor should issue an unmodified opinion without any additional paragraphs.
- DThe auditor should issue an unmodified opinion and include an Emphasis-of-Matter paragraph.
Show answer & explanationAnswer & explanation
Correct answer: D. The auditor should issue an unmodified opinion and include an Emphasis-of-Matter paragraph.
A change in accounting principle that is appropriately justified, applied, and disclosed does not result in a modified opinion. However, because such a change is fundamental to users' understanding of the financial statements, the auditor should include an Emphasis-of-Matter paragraph to draw attention to it, while still issuing an unmodified opinion.
Why the other options are wrong
- A. An Other-Matter paragraph is for matters *other than* those presented or disclosed in the financial statements that are relevant to the audit or report itself, not for a change in accounting principle.
- B. A qualified opinion is issued for misstatements or scope limitations, not for a justified, disclosed accounting change.
- C. Omitting an EOM paragraph would be inappropriate for a fundamental change in accounting principle, even if properly handled.
Accounting Principle Change Reporting
A justified and disclosed change in accounting principle results in an unmodified audit opinion, but requires an Emphasis-of-Matter paragraph to highlight its fundamental nature.
- Unmodified opinion is issued
- Change must be justified and disclosed
- Emphasis-of-Matter paragraph is required
Memory trick: Good changes are Unmodified, but get Emphasized.