Clarified Auditing Standards: Consistency of Financial Statementsby
AU-C Section 708, Consistency of Financial Statements, follows the accounting guidance in Section 250, Accounting Changes and Error Corrections, of the Financial Accounting Standards Board Accounting Standards Codification. While it has previously been understood that the principle of consistency underpins all financial reporting frameworks, this is the first auditing standard requiring the evaluation of consistency.
Objectives of the Auditor
The objectives of the auditor are to:
- Evaluate the consistency of the financial statements for the periods presented.
- Communicate appropriately in the auditor's report when the comparability of financial statements between periods has been materially affected by a change in accounting principle or by adjustments to correct a material misstatement in previously issued financial statements.
Evaluating consistency. The auditor must evaluate whether the comparability of the financial statements between periods has been materially affected by a change in accounting principle or by adjustments to correct a material misstatement in previously issued financial statements. This requirement applies to the periods covered by the auditor's opinion on the financial statements and always includes the year prior to the reporting period.
Change in accounting principle. The auditor must evaluate a change in accounting principle to determine whether the new accounting principle and the method of accounting for the change is in accordance with the applicable financial reporting framework, that the disclosures related to the accounting change are appropriate and adequate, and that the entity has justified that the alternative accounting principle is preferable.
- If the auditor concludes that the criteria above has been met, and the change in accounting principle has a material effect on the financial statements, the auditor should include an emphasis-of-matter paragraph in the auditor's report that describes the change in accounting principle and includes a reference to the footnote disclosure.
- If the criteria above are not met, the auditor should evaluate whether the accounting change results in a material misstatement that will cause the auditor to modify the audit report.
Correction of a Material Misstatement in Previously Issued Financial Statements
The auditor must include an emphasis-of-matter paragraph in the auditor's report when there are adjustments to correct a material misstatement in previously issued financial statements. The auditor should include this type of emphasis-of-matter paragraph in his or her report when the related financial statements are restated to correct the prior material misstatement. The paragraph need not be repeated in subsequent periods. The emphasis-of-matter paragraph should include:
- A statement that the previously issued financial statements have been restated for the correction of a material misstatement in the prior period.
- A reference to the footnote disclosure of the correction of the material misstatement.
Change in classification. The auditor must evaluate a material change in financial statement classification and the related disclosures to determine whether such a change is also either a change in accounting principle or an adjustment to correct a material misstatement in previously issued financial statements. If so, the requirements above apply.
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