A continuing auditor signs the current-year report on a calendar-year client and notices that the prior-year column has been restated for an inventory error worth $1.8 million. Last year's report from this firm said the prior period was fairly stated. This year, the prior period numbers have changed. Reissue last year's report, update it, refer to a predecessor, or add a paragraph? The exam tests exactly this fork: the answer depends on whether the auditor is continuing or predecessor and whether the prior-period information has been revised.
HIGH-FREQUENCY: Four sections of the AICPA clarified standards run the reporting machinery for comparative statements. AU-C 700 sets out the unmodified opinion and the report structure. AU-C 705 explains how to modify that opinion when there is a material misstatement or scope limitation: qualified, adverse, or disclaimer. AU-C 706 covers communicating other matters via EOM and OM paragraphs that do not modify the opinion. AU-C 708 deals specifically with consistency: how to report when comparability between periods has been affected by an accounting change or error correction.
Common mistakes
- Confusing predecessor reissuance with successor opinion. When the predecessor reissues, the predecessor signs its own report at its own date after performing its own procedures. The successor does not write the predecessor's report. A common trap shows the successor "issuing the predecessor's report", which is wrong.
- Naming the predecessor in the other-matter paragraph. When the predecessor does not reissue, the successor refers to "a predecessor auditor" without naming the firm. Naming requires the predecessor's consent and is rarely done. Answer choices that include the predecessor's name are usually wrong.
- Treating a change in accounting estimate as a consistency matter. Changes in estimate (useful life, allowance for credit losses, warranty accrual) are not consistency matters under AU-C 708 and do not require an EOM paragraph. Only changes in principle, adoption of new ASUs, and error corrections trigger AU-C 708.
Bottom line
- AU-C 700 governs the unmodified opinion, AU-C 705 covers modifications, AU-C 706 covers emphasis-of-matter (EOM) and other-matter (OM) paragraphs, and AU-C 708 covers consistency between periods.
- A continuing auditor opines on each period presented and updates the prior-year opinion at the new report date; it may differ from the original if circumstances changed.
- A predecessor who reissues the prior-year report must read the current-year statements, perform inquiries, and obtain representation letters from the successor auditor and entity management.
- When the predecessor does not reissue, the successor adds an other-matter paragraph describing the predecessor's opinion, modification reasons, and report date, without naming the predecessor.
Exam shortcut
When a question describes a continuing auditor on comparative statements, default to one report, opinion on each period, updated prior-year opinion at the current-year date. The OM paragraph appears only if the updated prior-year opinion differs from the originally issued opinion. When a question describes a predecessor and successor, ask whether the predecessor reissues.
The full lesson (about 4,745 words, 32 min read) adds 8 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- IV.E1
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