Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

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When an entity changes its method of accounting for income taxes, what should the auditor's report include?

Refer to the financial statement note that discusses the change in detail.
State the auditor's explicit concurrence with or opposition to the change.
Describe the cumulative effect of the change on the audited financial statements.
Explain why the change is justified under generally accepted accounting principles.

The correct answer is: Refer to the financial statement note that discusses the change in detail.

When an entity changes its method of accounting for income taxes, the auditor's report should indeed refer to the financial statement note that discusses the change in detail. This is essential because it directs users of the financial statements to the specific disclosures that provide a comprehensive understanding of the nature and implications of the change. The note in the financial statements typically outlines the reasons for the accounting change, the effects on financial results, and the rationale for the new method adopted. This level of transparency helps stakeholders appreciate the context and ensures that users are informed about significant accounting policies that could impact their interpretation of the financial statements. Providing a reference allows the auditor to confirm that the change has been accounted for in accordance with the relevant accounting standards, reinforcing the credibility of the financial reporting process. This approach adheres to the objectives of clarity and completeness in financial reporting, ensuring that all necessary details are available for user analysis. Other suggestions, like stating concurrence or opposition to the change, describing cumulative effects, or justifying the change under generally accepted accounting principles, may blur the auditor's role, which is primarily focused on the fairness and accuracy of the presentation, rather than evaluating the appropriateness of the accounting method chosen by management.