[Anonymous]

Help with AUD question in Becker CPA Review – For which of the following events would an auditor issue a report that omits any reference to consistency?

a.

Management’s lack of reasonable justification for a change in accounting principle.

b.

A change in the useful life used to calculate the provision for depreciation expense.

c.

A change in the method of accounting for inventories.

d.

A change from an accounting principle that is not generally accepted to one that is generally accepted.

Does anyone know why the answer is B? I saw the explanation from Becker and it does not make sense. The wording of the question is also VERY tricky and confusing. Please help!

 

 

[Anonymous]

Consistency is implied, so the only time you would mention consistency in the report is when there is a lack of consistency. With options A & C, the company is changing accounting principles or methods, so the auditor would note a lack of consistency in the report. With option D, the company is changing from non-GAAP to GAAP, which is considered correction of an error, so the auditor would note a lack of consistency in the report. With option B, only the useful life in the depreciation calculation is changing, which is considered a change in estimate. It receives only PROspective treatment, rather than RETROspective, so there need not be any mention of consistency between periods.

[Anonymous]

So do you only mention consistency for retrospective treatment?

[Anonymous]

For the most part, yes. I can think of one exception … a change in depreciation METHOD (e.g. from straight-line to double declining balance) is a change in accounting estimate that is also technically a change in accounting principle. It is handled prospectively in financial reporting, but it does require an emphasis of matter paragraph in the audit report to note the change in methods. But changes in useful lives or salvage values of assets for calculating book depreciation are changes in estimates only. They are reported prospectively and are not mentioned in the audit report.

I don't imagine the exam will get super nitpicky on this issue, so basically, I would just try to remember that if there's a change in accounting principle that results in a material restatement, a change from non-GAAP methods to GAAP methods, a change in entity, or correction of a material misstatement, there would be an emphasis of matter paragraph in the audit report to note the lack of consistency. And the best way to keep all that straight is to think of changes that would require retrospective restatement of the financials.

[Author]

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