Comparative reporting requires separate conclusions about consistency, presentation and responsibility for each period. The auditor evaluates accounting changes and identifies the statements covered by each opinion.
The auditor must identify the factors (change in accounting principle, the correction of a material misstatement, or a material change in classification) that affect the comparability or consistency of financial statements. Comparability rests on the same principles applied the same way, and the report speaks only when that condition breaks.
The evaluation runs across two comparisons:
- The current period against the preceding period, whether or not the preceding period is presented.
- Every period presented in comparative statements against every other period presented.
KEY: A standard report ordinarily contains no explicit consistency statement. A consistency paragraph identifies a qualifying material change that has been properly accounted for and disclosed.
A change in accounting principle is a change from one generally accepted principle to another, or a change in the method of applying one.
The four acceptability tests:
Common mistakes
- A failed acceptability test identifies a departure; materiality and pervasiveness determine opinion modification. An acceptable principle change or estimate effected by a principle change requires a consistency paragraph only when material. A genuine estimate revision or reclassification does not.
- Ordinary reissuance retains the original date after required procedures; revised statements require separate dating analysis. Naming a predecessor is permitted only when its practice was acquired by or merged with the successor.
- The audit opinion does not cover the unaudited prior-period statements. The auditor still evaluates consistent application between the current and preceding periods and obtains sufficient appropriate evidence about opening balances.
Bottom line
- The factors that affect the consistency of financial statements are a change in accounting principle, the correction of a material misstatement, a change in reporting entity not caused by a transaction, and a change in estimate effected by a change...
- A change in principle is acceptable only when the new principle is generally accepted, the accounting for the change conforms to the framework, the disclosures are adequate, and the entity justified preferability; a failed test identifies a departure requiring qualification...
- An acceptable, material change earns an unmodified (nonissuer) or unqualified (issuer) opinion plus an emphasis-of-matter paragraph or issuer explanatory paragraph that describes the change, refers to the note, and states the opinion is not modified.
- The principle-change paragraph runs from the year of change until the new principle covers every period presented, and only the year of change if applied retrospectively; the restatement paragraph appears once, in the year of correction.
Exam shortcut
Identify the accounting mechanism, apply its criteria and test materiality. A material principle-change paragraph runs until the new principle applies to every period presented; a material error-correction paragraph appears in the correction year's report. Establish presentation adequacy before expanding opinion scope. For an unreissued predecessor report, identify the service, opinion and date, naming the firm only if its practice was acquired by or merged with the successor.
The full lesson (about 6,604 words, 44 min read) adds 2 worked examples, a self-check, free in the app.
Learning objectives
- IV.E1
Browse all free CPA AUD lessons or jump into free CPA AUD practice questions.