When an entity changes its method of accounting for income taxes, which has a material effect on comparability, the auditor should refer to the change in an explanatory paragraph added to the auditor's report. This paragraph should identify the nature of the change and:

Question

Quizplus · Accepted Answer

Choice "D" is correct. The paragraph should refer to the note in the financial statements that discusses the change in detail. Following is an example of an appropriate explanatory paragraph: "As discussed in Note X to the financial statements, the company changed its method of accounting for income taxes in X2." Choice "A" is incorrect. The auditor need not explain why a change from one generally accepted accounting principle to another is justified. Choice "B" is incorrect. The paragraph should not identify the cumulative effect of the change on the audited financial statements. Choice "C" is incorrect. The auditor should never explicitly state concurrence with a change. If the auditor opposes the change, a qualified or adverse opinion should be issued.

When an Entity Changes Its Method of Accounting for Income