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

What action is required if a company's accounting change is addressed in the notes to the financial statements but has no current year effect?

1. Notify authorities of the change.

2. Update the accounting principles applied.

3. Ensure correct disclosure in the next audit.

4. Clearly disclose the change in the current year's notes.

The correct answer is: Clearly disclose the change in the current year's notes.

If a company's accounting change is detailed in the notes to the financial statements but has no effect on the current year's financial results, it is essential to clearly disclose the change in the current year's notes. This disclosure is crucial because it informs users of the financial statements about the nature of the change and aids in providing transparency regarding the accounting practices adopted by the company. Proper disclosure serves the purpose of transparency, ensuring that stakeholders, including investors and analysts, understand what changes have occurred and why they don't affect the current year's results. This allows them to assess past trends and future implications adequately. Accurate and complete disclosure aligns with financial reporting standards, which emphasize the importance of clarity and completeness in the notes to the financial statements, particularly when changes may impact future periods or financial health. The other options don't address the primary need for clear and current communication to financial statement users. Notifying authorities or updating accounting principles may not be necessary since the change does not affect current results, and ensuring correct disclosure in the next audit would not fulfill the immediate requirement to inform stakeholders in the current period.