An auditor would express an unmodified opinion and add an emphasis‐of‐matter paragraph for

The auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. If the client refuses to revise or eliminate the material inconsistency, the auditor should
Revise the auditor’s report to include a separate other-matter paragraph describing the material inconsistency.
Consult with a party whose advice might influence the client, such as the client’s legal counsel.
Issue a qualified opinion after discussing the matter with the client’s board of directors.
Consider the matter closed since the other information is not in the audited financial statements.

Revise the auditor’s report to include a separate other-matter paragraph describing the material inconsistency.

This answer is correct because if the incorrect information is not revised to eliminate the material inconsistency, the auditor should consider actions such as revising the audit report to include an other-matter paragraph, withholding use of the audit report, and withdrawing from the engagement.

An auditor would express an unmodified opinion and add an emphasis-of-matter paragraph for
An unjustified

accounting change
A material weakness

in the internal control
Yes Yes
Yes No
No Yes
No No

No No

An unjustified accounting change will result in either a qualified or an adverse opinion and a material weakness will ordinarily result in no report modification (see AU-C 265 for information on the treatment of material weaknesses); accordingly, an unmodified opinion with an emphasis-of-matter paragraph added to the auditor's report is not appropriate in either case.

The following emphasis-of-matter paragraph was included in an auditor’s report to indicate a lack of consistency:

"As discussed in note T to the financial statements,the company changed from an accounting principle that is not generally accepted to one that is generally accepted."

How should the auditor report on this matter if the auditor concurred with the change?

Type of opinion
Location of emphasis-of-matter

paragraph
Unmodified
Before opinion paragraph
Unmodified
After opinion paragraph
Qualified
Before opinion paragraph
Qualified
After opinion paragraph

Unmodified After opinion paragraph

This answer is correct because inconsistency in the application of GAAP usually results in an unmodified report with an emphasis-of-matter paragraph following the opinion paragraph.

With respect to consistency, which of the following should be done by an independent auditor, who has not examined a company’s financial statements for the preceding year but is doing so in the current year?
Report on the financial statements of the current year without considering consistency with the preceding year.
Consider the consistent application of principles within the year under examination but not between the current and preceding year.
Adopt procedures that are practicable and reasonable in the circumstances to obtain assurance that the principles employed are consistent between the current and preceding year.
Rely on the report of the prior year’s auditors if such a report does not provide emphasis-of-matter language as to consistency.

Adopt procedures that are practicable and reasonable in the circumstances to obtain assurance that the principles employed are consistent between the current and preceding year.

This answer is correct because during the first examination, the auditor should adopt procedures that are practicable and reasonable to assure that accounting principles are applied consistently between the current and the preceding year.

When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should
Refer to the change in an emphasis-of-matter paragraph.
Explicitly concur that the change is preferred.
Not refer to consistency in the auditor’s report.
Refer to the change in the opinion paragraph.

Not refer to consistency in the auditor’s report.

This answer is correct because the professional standards state that in such circumstances a standard unmodified audit report should be issued.

Which of the following will result in an emphasis-of-matter paragraph as to consistency in the auditor’s report, when that the item is fully disclosed in the financial statements?
A change in accounting estimate.
A change from an unacceptable accounting principle to a generally accepted one.
Changing the life of an asset from 8 to 5 years.
A change in classification.

A change from an unacceptable accounting principle to a generally accepted one.

This answer is correct because a change from an unacceptable accounting principle to an acceptable one results in a consistency modification with addition of an emphasis-of-matter paragraph.

A material change in an accounting estimate
Requires a consistency modification in the auditor’s report and disclosure in the financial statements.
Requires a consistency modification in the auditor’s report but does not require disclosure in the financial statements.
Affects comparability and may require disclosure in a note to the financial statements but does not require a consistency modification in the auditor’s report.
Involves the acceptability of the generally acceptable accounting principles used.

Affects comparability and may require disclosure in a note to the financial statements but does not require a consistency modification in the auditor’s report.

This answer is correct because while a consistency modification is not necessary, footnote disclosure is required.

Which of the following requires recognition in the auditor’s opinion as to consistency?
Changing the salvage value of an asset.
Changing the presentation of prepaid insurance from inclusion in "other assets" to disclosing it as a separate line item.
Division of the consolidated subsidiary into two subsidiaries which are both consolidated.
Changing from consolidating a subsidiary to carrying it on the equity basis.

Changing from consolidating a subsidiary to carrying it on the equity basis.

This answer is correct because changing from consolidating a subsidiary to carrying on the equity basis is a change in reporting entity. Changes in reporting entities, changes in accounting principles, correction of errors, and changes in principles inseparable from changes in estimates all affect consistency and should be referred to in the auditor’s opinion.

An entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements, but is reasonably certain to have a substantial effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n)
"Except for" qualified opinion.
Emphasis-of-matter paragraph.
Unmodified opinion.
Consistency modification.

Unmodified opinion.

The auditor need not recognize the change in the audit report and may issue a standard unmodified opinion.

The objective of the auditor reporting on consistency is to provide assurance that
There are no variations in the format and presentation of financial statements.
Substantially different transactions and events are not accounted for on an identical basis.
The auditor is consulted before material changes are made in the application of accounting principles.
The comparability of financial statements between periods is not materially affected by changes in accounting principles without disclosure.

The comparability of financial statements between periods is not materially affected by changes in accounting principles without disclosure.

This answer is correct because the objective is (1) to give assurance that the comparability of financial statements between periods has not been materially affected by changes in accounting principles, or (2) if comparability has been materially affected by such changes, to require appropriate reporting by the independent auditor regarding such changes.

In the first audit of a new client, an auditor was able to extend auditing procedures to gather sufficient evidence about consistency. Under these circumstances, the auditor should
Not report on the client's income statement.
Not refer to consistency in the auditor's report.
State that the consistency standard does not apply.
State that the accounting principles have been applied consistently.

Not refer to consistency in the auditor's report.

When the auditor has obtained assurance as to the consistency of application of accounting principles between the current and preceding year, no mention of consistency is included in the audit report.

A consistency emphasis-of-matter paragraph is not added to an audit report for an accounting change that results from a change in
An accounting principle that is not generally accepted to one that is generally accepted.
An accounting estimate.
The reporting entity.
An accounting principle inseparable from a change in accounting estimate.

An accounting estimate.

This answer is correct because a change in accounting estimate does not require the addition of an emphasis-of-matter paragraph on consistency. Accordingly, this change need not be mentioned in the audit report but may require disclosure in the footnotes to the financial statements.

An entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial statements, but is reasonably certain to have a substantial effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n)
Qualified opinion.
Required "other-matter" paragraph.
Unmodified opinion.
Disclaimer of opinion.

Unmodified opinion.

A change in depreciation method applicable to existing assets would be viewed as a change in estimate, not a change in accounting principle. (In this case, the different depreciation method is only applicable to new assets, which would not even be considered a change in estimate.) In any case, since the effect on the current period's financial statements is specified to be immaterial, an unmodified opinion should be expressed.

When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should
Not refer to the change in the auditor's report.
Refer to the note in the financial statements that discusses the change.
Refer to the change in an emphasis-of-matter paragraph.
Explicitly state whether the change conforms with GAAP.

Not refer to the change in the auditor's report.

The auditor's report should not mention a change in accounting principle that has an immaterial effect on comparability. Only material matters are relevant to the auditor's report.

When there has been a change in accounting principle that materially affects the comparability of the comparative financial statements presented and the auditor concurs with the change, the auditor should
Concur explicitly with the change
Issue an "except for" qualified opinion
Refer to the change in an emphasis-of-matter paragraph
No No Yes
Yes No Yes
Yes Yes No
No Yes No

No No Yes

If a change in accounting principle has occurred and the auditor concurs with the change, the only requirement that must be met is to refer to the change in an emphasis-of-matter paragraph following an otherwise unmodified opinion.

It is not necessary for the auditor to concur explicitly with the change nor is it appropriate for the opinion to be qualified as a result of the change.

In the first audit of a new client, an auditor was able to extend auditing procedures to gather sufficient evidence about consistency.

Under these circumstances, the auditor should
Not report on the client's income statement.
Not refer to consistency in the auditor's report.
State that the consistency standard does not apply.
State that the accounting principles have been applied consistently.

Not refer to consistency in the auditor's report.

GAAS require that the auditor identify occasions in which the accounting principles have not been applied consistently. No mention is to be made in the report if the consistency requirement is met. If the auditor was able to obtain sufficient evidence about consistency, the auditor's report should not refer to consistency.