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

For an entity undergoing a significant change in accounting principle, what is required from the auditor?

1. Explicitly state the concurrence or opposition to the change.

2. Issue an adverse opinion if the change is not disclosed.

3. Explain the impact of the change in the opinion paragraph.

4. Report the change in an emphasis-of-matter paragraph.

The correct answer is: Report the change in an emphasis-of-matter paragraph.

When an entity undergoes a significant change in accounting principle, the auditor is required to provide clarity regarding this change to the users of the financial statements. Reporting the change in an emphasis-of-matter paragraph is essential because it directs the reader's attention to a matter that is relevant to their understanding of the financial statements. This paragraph highlights significant details without suggesting that the financial statements are misstated or that the auditor is expressing an adverse opinion about them. The emphasis-of-matter paragraph is used specifically to provide context for the change, explaining its nature and its effects on the financial statements while confirming that the financial statements are still presented fairly in all material respects. This approach ensures the users are aware of the change and can better comprehend its implications without compromising the overall integrity of the audit opinion. In contrast, stating concurrence or opposition, issuing an adverse opinion for lack of disclosure, or adding explanatory content in the opinion paragraph does not adequately address the necessity of informing about the change in a way that is separate from the overall opinion. The emphasis-of-matter paragraph ensures that significant changes are appropriately highlighted, preserving the clarity and usefulness of the audit report.