3BE - Intermediate Accounting (Kieso)

Question

Discuss whether the changes described in each of the cases below require recognition in the CPA’s audit report as to consistency. (Assume that the amounts are material). 

1. The company changed its inventory method to FIFO from weighted-average, which had been used in prior years.
2. The company disposed of one of the two subsidiaries that had been included in its consolidated statements for prior years.
3. The estimated remaining useful life of plant property was reduced because of obsolescence.

Step-by-Step Solution

Answer

1. Yes

2. No

3. No

Step 1: Meaning of audit report

The auditor’s report is a document comprising the viewpoint of the auditor on in case a firm’s accounting statements are in accordance with the Generally Accepted Accounting Principles (GAAP) and are exempted from material misrepresentation.

Step 2: Explanation for statement ‘a’

If the firm altered its process of valuing inventory, the consistency as well as the comparability, of the accounting statements have been affected by a variation in the process of applying the principles of accounting. The variation would need statement in the report of auditor in a descriptive paragraph.

Step 3: Explanation for statement ‘b’

If the firm ended one of its two subsidiaries that was involved in its consolidated statements for previous years, no statement in relation to the requirements of consistency is required to be made in the CPA’s audit report. The comparability of the accounting statements has been affected by the business events, but there has been no alteration made in the principle or the process used. The transaction would possibly need informative exposure in the accounting statements. 

Step 4: Explanation for statement ‘c’

If the firm decreases the estimated residual life of plant property due to obsolescence, the comparability of the accounting statements has been afflicted. The variation is not a subject of consistency; it is an alteration in the accounting evaluate needed by changed conditions and includes no variation in principles of accounting used. The variation would reasonably be stated by an accounting statement note. If judged on in the CPA’s report, it would be a result of disclosure as opposed to consistency.