PCAOB - Auditing standards: Evaluating Consistency of FS

Question 1

Two types of issues

Answer 1

(1) a change in accounting principle; and
(2) an adjustment to correct a misstatement in previously issued financial statements (i.e., “restatements”).

Add: explanatory paragraph

Question 2

Change in accounting principle 4 criteria

Answer 2

(1) the newly adopted principle is GAAP;
(2) the method of accounting for the effect of the change conforms to GAAP;
(3) the disclosures related to the change are adequate; and
(4) the company has justified that the alternative accounting principle is preferable.

Question 3

Change in accounting principle 4 criteria

• Met
• Not met

-Equity Method

Answer 3

Met: the auditor should add an explanatory paragraph to the auditor’s report to identify the inconsistency.

Not Met: the auditor should treat the matter as a GAAP departure and modify the audit report appropriately.

Equity method: When an investor uses the “equity method” and the investee has a change in accounting principle that is material to the investor’s financial statements—the auditor should add an explanatory paragraph to emphasize the matter.

Question 4

When there is a change in accounting estimate effected by a change in accounting principle

Answer 4

the auditor should evaluate and report on the matter like other changes in accounting principle.

Question 5

When there is a change in the reporting entity resulting from a transaction or event, such as the purchase or disposition of a subsidiary

Answer 5

it does not require recognition in the auditor’s report. (However, if there is a change in the reporting entity that does not result from such a transaction or event, then an explanatory paragraph would be required.)

Question 6

Correction of a Material Misstatement in Previously Issued Financial Statements

Answer 6

A. The correction of a material misstatement in previously issued financial statements should be recognized in the auditor’s report by the addition of an explanatory paragraph.
B. Restatements of previously issued financial statements require related disclosures to be made—the auditor should evaluate the adequacy of the company’s disclosures.

Question 7

Change in Classification

Answer 7

A. Changes in classification in previously issued financial statements normally do not require recognition in the auditor’s report (unless the change represents a change in accounting principle or the correction of a material misstatement).
B. Accordingly, the auditor should evaluate a material change in financial statement classification (and the related disclosure) to determine whether such a change is also a change in accounting principle or a correction of a material misstatement.