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

What should an auditor do if an accounting change is not material to the current year's financial statements but is expected to have a material effect later?

1. Treat it as a subsequent event.

2. Include it as a consistency modification in the auditor's report.

3. Disclose it in the notes and refer it in the auditor's report.

4. Disclose it only in the notes of the current year's financial statements.

The correct answer is: Disclose it only in the notes of the current year's financial statements.

When an accounting change is not material to the current year's financial statements but is anticipated to have a material effect in the future, the appropriate response is to disclose it only in the notes of the current year's financial statements. This approach provides transparency regarding the change while respecting the principle of materiality, ensuring that users of the financial statements are informed about potential future impacts without overwhelming them with information that is not relevant to the current year. Disclosing in the notes allows stakeholders to understand the nature of the change and its expected future implications without altering the current year’s results, which remain unaffected by the change. It maintains consistency and clarity in financial reporting, ensuring that all users are aware of significant changes that could influence their assessment of the company's future performance. The other options either imply unnecessary modifications to the auditor's report or suggest inappropriate treatment of the change based on the current materiality context. By opting for a note disclosure, the auditor adheres to the standards of proper communication while acknowledging that the change, while immaterial now, could be significant later.