Auditing & Assurance Services 6th Edition by Timothy Louwers

Exercise 31

Reporting on an Accounting Change. In December of the current year, Williams Company changed its method of accounting for inventory and cost of goods sold from LIFO to FIFO. The account balances shown in the trial balance have already been recalculated and adjusted retroactively as required by ASC 250. The accounting change and the financial effects are described in Note 2 in the financial statements.
Required:
a. Assume that you believe the accounting change is justified as required by ASC 250. Draft the report appropriate in the circumstances.
b. Assume that you believe the accounting change is not justified and causes the financial statements to be materially distorted. Inventories that would have been reported at $1.5 million (LIFO) are reported at $1.9 million (FIFO); operating income before tax that would have been $130,000 is reported at $530,000. As a result of this change, current assets, total assets, and shareholders' equity have increased by 17 percent, 9 percent, and 14 percent, respectively. Draft the report appropriate in the circumstances.