CPA Quiz: Other Reporting Considerations
20 questions · exam conditions
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Other Reporting ConsiderationsQuestion 1 of 20

A nonissuer retailer is undergoing a review engagement under AICPA standards for interim financial statements for the quarter ended March 31, 20X6. In the accompanying quarterly press release, management states "operating cash flows were positive," but the interim statement of cash flows included with the reviewed financial statements shows negative operating cash flows. Management refuses to revise the press release. What action should the accountant take regarding the inconsistency?

Issue a modified review conclusion stating the interim financial statements are materially misstated due to the press release inconsistency.
Perform additional inquiries and analytical procedures to determine whether the interim financial statements are misstated, and if the press release remains inconsistent, consider communicating with management and those charged with governance and whether to withdraw from the review engagement.
Reclassify the interim cash flows to agree to the press release, since review engagements permit management's representations to override interim statements when inconsistent.
Report the inconsistency directly to the SEC because interim press releases are regulated filings for all nonissuers.
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CPA Quiz

CPA Quiz: Other Reporting Considerations

Practice Other Reporting Considerations in CPA with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Other Reporting Considerations, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

A nonissuer retailer is undergoing a review engagement under AICPA standards for interim financial statements for the quarter ended March 31, 20X6. In the accompanying quarterly press release, management states "operating cash flows were positive," but the interim statement of cash flows included with the reviewed financial statements shows negative operating cash flows. Management refuses to revise the press release. What action should the accountant take regarding the inconsistency?

  1. Issue a modified review conclusion stating the interim financial statements are materially misstated due to the press release inconsistency.
  2. Perform additional inquiries and analytical procedures to determine whether the interim financial statements are misstated, and if the press release remains inconsistent, consider communicating with management and those charged with governance and whether to withdraw from the review engagement. (correct answer)
  3. Reclassify the interim cash flows to agree to the press release, since review engagements permit management's representations to override interim statements when inconsistent.
  4. Report the inconsistency directly to the SEC because interim press releases are regulated filings for all nonissuers.
Explanation: Under AR-C 90, when performing interim reviews, accountants must consider information that comes to their attention suggesting the financial statements may be materially misstated, including inconsistencies with accompanying information. The press release's mischaracterization of operating cash flows as positive when they are negative requires additional inquiries to determine if the interim statements are misstated, followed by appropriate communications and consideration of withdrawal if the inconsistency remains unresolved. Modifying the review conclusion (A) is premature without completing additional procedures; reclassifying cash flows (C) to match an incorrect press release would create a misstatement; and SEC reporting (D) is inapplicable to nonissuers. The professional framework for reviews requires accountants to investigate inconsistencies through inquiry and analytical procedures, communicate findings with appropriate parties, and consider engagement continuance when material inconsistencies persist, following a measured escalation approach rather than immediate report modification.

Question 2

A nonissuer health services entity is audited under AICPA standards and presents audited financial statements accompanied by required supplementary information (RSI) related to pension funding. The auditor identifies that the RSI uses a discount rate inconsistent with the one used in the audited pension note, and management refuses to correct the RSI. The RSI is clearly labeled as "required supplementary information," and the auditor has performed the applicable limited procedures. How should the auditor report discrepancies between the financial statements and other information?

  1. Express a qualified opinion on the financial statements because the RSI contains a material misstatement.
  2. Add an other-matter paragraph describing the material departure in the RSI (or stating the RSI is not presented in accordance with guidelines), without modifying the opinion on the financial statements. (correct answer)
  3. Omit any reference to the RSI because it is outside the audited financial statements and therefore outside the auditor's responsibilities.
  4. Include an emphasis-of-matter paragraph stating the financial statements are materially misstated due to the RSI inconsistency.
Explanation: Under AU-C 730, auditors apply limited procedures to required supplementary information (RSI) and report material departures from prescribed guidelines in an other-matter paragraph without modifying the financial statement opinion. The RSI's use of an inconsistent discount rate represents a material departure from prescribed guidelines that should be described in an other-matter paragraph. The auditor does not modify the financial statement opinion (A) because RSI is outside the basic financial statements; omitting reference (C) violates the requirement to report on RSI when material departures exist; and an emphasis-of-matter paragraph (D) is inappropriate because RSI departures don't affect the financial statements themselves. The professional framework distinguishes between information within the basic financial statements (affecting the opinion) and RSI (addressed through other-matter paragraphs), requiring auditors to report RSI departures while maintaining the integrity of the financial statement opinion when the statements themselves are fairly presented.

Question 3

A nonissuer entity engages a CPA to perform an attestation examination on management's compliance report over a grant program. The compliance report includes a schedule of expenditures that does not agree to the audited financial statements, and the practitioner believes the schedule is materially misstated. Management refuses to correct the schedule. What is the most appropriate course of action for the practitioner?

  1. Issue an unmodified opinion on the compliance report because differences between the schedule and the financial statements are outside the attestation engagement scope.
  2. Modify the examination report (qualified or adverse, depending on materiality/pervasiveness) because the subject matter is materially misstated and management will not correct it. (correct answer)
  3. Convert the engagement to an agreed-upon procedures engagement and issue findings instead of an opinion without obtaining management's agreement.
  4. Apply PCAOB standards and include a Critical Audit Matter describing the discrepancy.
Explanation: This question tests AT-C 205 on examination engagements for nonissuers. The key facts are the material misstatement in the compliance schedule and refusal to correct. Choice B aligns with AT-C 205, requiring qualified or adverse opinion for misstated subject matter. Choice A is incorrect because inconsistencies affect the opinion under AT-C 205; choice C is wrong as converting engagements requires agreement; choice D is incorrect because PCAOB does not apply. Practitioners modify opinions for attestation misstatements. A framework is to evaluate pervasiveness; choose qualification or adverse accordingly.

Question 4

An issuer is undergoing a PCAOB audit. The Form 10-K includes audited financial statements and a section of other information that states the company has "no material weaknesses in internal control," but the auditor's ICFR opinion will be adverse due to a material weakness. Management refuses to revise the statement. What action should the auditor take regarding the inconsistency?

  1. Issue an adverse opinion on the financial statements because the other information contradicts the ICFR conclusion.
  2. Read the other information and, if management refuses to correct a material inconsistency, describe it in the auditor's report on the financial statements and/or take other appropriate action under PCAOB standards. (correct answer)
  3. Treat the statement as outside the scope of the audit and take no action because it is not in the audited financial statements.
  4. Communicate only to management in writing; PCAOB standards do not permit communication to those charged with governance for other-information matters.
Explanation: This question tests PCAOB AS 2710 on other information for issuers in integrated audits. The key facts are the inconsistency between the other information's ICFR statement and the auditor's adverse ICFR opinion, with refusal to revise. Choice B aligns with AS 2710, requiring reading, discussion, and if uncorrected, describing the inconsistency in the auditor's report or other actions. Choice A is incorrect because other-information inconsistencies do not trigger adverse opinions on financial statements; choice C is wrong as auditors have responsibilities for other information under AS 2710; choice D is incorrect because AS 2710 allows and encourages communication to governance. Auditors must compare other information to audit knowledge for consistency. A decision rule is to determine if the inconsistency implies financial statement issues; if not, report it separately without opinion modification.

Question 5

A nonissuer is audited under AICPA standards with comparative financial statements. The prior year auditor's report was unmodified. In the current year, management changes depreciation methods, properly accounts for the change, and includes adequate disclosure, but the auditor's draft report omits any reference to the change affecting consistency between periods. What modifications are required in the auditor's report?

  1. No modification is required because a properly accounted for change in principle never affects the auditor's report for a nonissuer.
  2. Add an emphasis-of-matter paragraph describing the change in accounting principle that materially affects comparability, while still expressing an unmodified opinion. (correct answer)
  3. Issue a qualified opinion due to a lack of consistency between periods caused by the change in depreciation method.
  4. Apply PCAOB requirements and include a critical audit matter describing the change in accounting principle as the required modification.
Explanation: Under AU-C 708, when a material change in accounting principle affects comparability between periods presented, the auditor must add an emphasis-of-matter paragraph describing the change while maintaining an unmodified opinion if the change is properly accounted for and disclosed. The change in depreciation methods materially affects comparability and requires emphasis even though management properly implemented and disclosed it. Omitting any reference (A) violates the consistency reporting requirement; a qualified opinion (C) is inappropriate because this is a properly implemented change, not a GAAP departure; and CAMs (D) apply only to issuer audits under PCAOB standards. The professional framework distinguishes between improperly implemented changes (requiring opinion modification) and properly implemented changes affecting comparability (requiring emphasis-of-matter paragraphs), ensuring users are alerted to factors affecting period-to-period comparisons while confirming the current period's fair presentation through an unmodified opinion.

Question 6

A nonissuer not-for-profit is audited under AICPA standards and includes a supplementary schedule of functional expenses that is not required supplementary information and is presented outside the basic financial statements. The auditor agreed to report on the supplementary schedule in relation to the financial statements as a whole. The auditor discovers the schedule allocates $400,000 of occupancy costs to program services, but the audited financial statements allocate only $250,000 to program services, and management refuses to correct the schedule. What modifications are required in the auditor's report?

  1. Issue an adverse opinion on the financial statements because the supplementary schedule is inconsistent with the audited allocations.
  2. Add an other-matter paragraph describing the inconsistency and state the supplementary schedule is fairly stated in relation to the financial statements as a whole.
  3. Modify the in-relation-to opinion on the supplementary schedule (for example, qualify or disclaim on the schedule) while leaving the opinion on the basic financial statements unmodified. (correct answer)
  4. Remove any reference to the supplementary schedule and still permit the entity to present the schedule as "audited" because the basic financial statements are audited.
Explanation: Under AU-C 725, when reporting on supplementary information in relation to financial statements as a whole, the auditor must evaluate whether the information is fairly stated in all material respects in relation to those statements. The material inconsistency in expense allocations between the supplementary schedule and audited statements requires modifying the in-relation-to opinion on the schedule while maintaining an unmodified opinion on the basic financial statements. An adverse opinion on the financial statements (A) is inappropriate because the statements themselves are properly presented; adding an other-matter paragraph stating fair presentation (B) contradicts the identified inconsistency; and removing references while allowing "audited" labeling (D) would be misleading. The professional framework requires auditors to separately evaluate and opine on supplementary information, modifying that specific opinion when material inconsistencies exist while preserving the appropriate opinion on the basic financial statements that are themselves fairly presented.

Question 7

A nonissuer manufacturing company is undergoing a financial statement audit under AICPA standards with comparative financial statements for 20X5 and 20X4. During the audit, the auditor notes the 20X4 inventory balance in the 20X5 comparative statements differs from the audited 20X4 financial statements because management reclassified certain items from inventory to prepaid expenses only in the comparative presentation. Management refuses to restate the 20X4 comparative amounts and also refuses to add a note explaining the reclassification. What is the most appropriate course of action for the auditor?

  1. Issue an unmodified opinion because the inconsistency relates only to the prior year and does not affect the current-year financial statements.
  2. Withdraw from the engagement because any inconsistency in comparative statements automatically requires withdrawal under AICPA standards.
  3. Modify the opinion due to a departure from generally accepted accounting principles affecting the comparability of the comparative financial statements. (correct answer)
  4. Add an emphasis-of-matter paragraph describing the inconsistency and state that the prior-year financial statements are unaudited.
Explanation: Under AU-C 700, when comparative financial statements are presented, the auditor must evaluate whether the comparative information is consistent with the current period and properly presented. The scenario describes a reclassification between inventory and prepaid expenses that affects only the comparative (prior year) presentation without adequate disclosure, which constitutes a departure from GAAP affecting comparability. The auditor should modify the opinion because the lack of disclosure about the reclassification represents inadequate disclosure under the applicable financial reporting framework. An unmodified opinion (A) is inappropriate because the inconsistency affects the fair presentation of comparative statements; withdrawal (B) is excessive as this is a resolvable reporting issue; and an emphasis-of-matter paragraph (D) is insufficient because this represents a GAAP departure, not just a matter requiring emphasis. The professional judgment framework requires auditors to modify opinions when comparative financial statements contain material departures from GAAP, including inadequate disclosure of reclassifications that affect comparability between periods.

Question 8

A nonissuer construction contractor is audited under AICPA standards and prepares financial statements using the cash basis of accounting (a special-purpose framework). The notes describe revenue recognition as "recognized when earned under the percentage-of-completion method," which is inconsistent with the cash basis presentation. Management refuses to revise the note disclosure. What is the most appropriate course of action for the auditor?

  1. Issue an unmodified opinion because note disclosures are optional under a special-purpose framework and do not affect the auditor's report.
  2. Modify the opinion due to inadequate or misleading disclosure that results in a special-purpose framework departure in the financial statements. (correct answer)
  3. Apply PCAOB reporting requirements for special-purpose frameworks and include a CAM describing the note inconsistency.
  4. Restrict use of the auditor's report to management only, which eliminates the need to address inconsistent disclosures.
Explanation: Under AU-C 800, special purpose framework financial statements must include adequate disclosure of the framework used and its effects, with any misleading disclosures constituting departures requiring opinion modification. The note's description of percentage-of-completion revenue recognition directly contradicts the cash basis framework actually used, creating a material misstatement through inadequate disclosure that requires opinion modification. An unmodified opinion (A) is inappropriate because even special purpose frameworks require accurate, non-misleading disclosures; PCAOB requirements and CAMs (C) don't apply to nonissuer audits; and restricting report use (D) doesn't cure misleading disclosures. The professional framework requires auditors to evaluate whether special purpose framework financial statements, including disclosures, are presented fairly within that framework, modifying opinions when disclosures are materially misleading or inconsistent with the actual basis of presentation, as users rely on accurate framework identification to properly interpret the statements.

Question 9

An issuer is audited under PCAOB standards, and management files Form 10-K containing audited financial statements and Management's Discussion and Analysis (MD&A). In MD&A, management states that gross margin improved due to lower material costs, but the audited notes indicate a significant increase in material costs and that margin improved primarily due to price increases. Management refuses to revise MD&A. Which type of opinion should the auditor issue, given the circumstances?

  1. An unmodified opinion on the financial statements, and address the MD&A inconsistency through required PCAOB other information procedures and related communications rather than changing the financial statement opinion. (correct answer)
  2. A qualified opinion on the financial statements due to a scope limitation caused by management's refusal to revise MD&A.
  3. A disclaimer of opinion on the financial statements because inconsistent MD&A automatically precludes an opinion under PCAOB standards.
  4. An adverse opinion on the financial statements because MD&A is considered part of the audited financial statements for issuers.
Explanation: Under PCAOB AS 2710, auditors must read other information in documents containing audited financial statements and respond to material inconsistencies, but such inconsistencies do not automatically require modification of the financial statement opinion. The MD&A's mischaracterization of gross margin drivers represents a material inconsistency requiring communication with management and the audit committee, but the financial statements themselves are fairly presented, warranting an unmodified opinion. A qualified opinion (B) is inappropriate as there's no scope limitation on the financial statement audit; a disclaimer (C) is excessive and unsupported by PCAOB standards; and an adverse opinion (D) is incorrect because MD&A is not part of the audited financial statements. The professional framework distinguishes between the audited financial statements (subject to the audit opinion) and other information (subject to reading and consistency procedures), requiring appropriate responses to inconsistencies without inappropriately modifying opinions on properly presented financial statements.

Question 10

A nonissuer construction contractor is undergoing a audit of GAAP financial statements that include required supplementary information (RSI) related to pension plan funding. The RSI schedule shows employer contributions of $4.2 million, but the audited financial statements and underlying records support $3.7 million, and management refuses to correct the RSI. What modifications are required in the auditor's report?

  1. No modification is needed because RSI is outside the scope of the audit and the auditor has no reporting responsibility.
  2. Add an explanatory paragraph to the opinion paragraph qualifying the opinion due to the RSI misstatement.
  3. Describe the RSI departure in the RSI section of the auditor's report (or an other-matter paragraph), indicating the RSI is materially misstated, while expressing an unmodified opinion on the financial statements. (correct answer)
  4. Issue a disclaimer of opinion on the financial statements because a material misstatement exists in information accompanying the financial statements.
Explanation: This question tests AU-C 730 on required supplementary information (RSI) in audits of nonissuers. The key facts are the material misstatement in the RSI pension contributions and management's refusal to correct. Choice C aligns with AU-C 730, requiring the auditor to describe the misstatement in an other-matter paragraph while maintaining an unmodified opinion on the financial statements. Choice A is incorrect because auditors have reporting responsibilities for RSI under AU-C 730 even if outside the audit scope; choice B is wrong as RSI issues do not qualify the financial statement opinion per AU-C 730; choice D is incorrect because a disclaimer is not appropriate for RSI misstatements unless pervasive to the financial statements. Auditors should verify RSI consistency with audited data and report deficiencies separately. A professional judgment framework is to evaluate RSI materiality independently; if misstated, report it without affecting the basic financial statements' opinion.

Question 11

A nonissuer manufacturing company is undergoing a financial statement audit for the year ended December 31, 20X5, with comparative financial statements for 20X4 presented. The auditor notes that the 20X4 cost of goods sold amount in the 20X5 comparative statements differs from the audited 20X4 financial statements due to a reclassification that management made only in the comparative presentation, and management refuses to adjust the 20X4 comparative column or disclose the reclassification. What is the most appropriate course of action for the auditor?

  1. Issue an unmodified opinion because the current-year financial statements are fairly stated, and comparative differences are not within the scope of the audit.
  2. Require management to restate the 20X4 comparative amounts or disclose the reclassification; if not corrected, modify the opinion for a material misstatement of the comparative financial statements. (correct answer)
  3. Communicate the matter only to the audit committee and include an emphasis-of-matter paragraph describing the reclassification even though it is not disclosed in the financial statements.
  4. Apply PCAOB other-information requirements and include an explanatory paragraph describing the inconsistency in the auditor's report regardless of materiality.
Explanation: This question tests AU-C 708 on consistency of financial statements and the auditor's responsibility for comparative presentations in nonissuer audits. The key facts are the reclassification in the 20X4 comparative amounts without restatement or disclosure, management's refusal to correct, and the resulting material misstatement in the comparative financial statements. Choice B aligns with AU-C 708 and AU-C 705, as the auditor must request correction and, if refused, modify the opinion for the GAAP departure affecting comparability. Choice A is incorrect because comparative differences are within the audit scope under AU-C 700, requiring evaluation for consistency; choice C is wrong as AU-C 720 does not permit emphasizing undisclosed matters without opinion modification; choice D is incorrect because PCAOB standards do not apply to nonissuers and materiality affects reporting under AICPA standards. When evaluating comparative financial statements, auditors should assess whether changes are properly accounted for, disclosed, and presented to ensure fair presentation. A useful decision rule is to determine if the inconsistency materially affects users' understanding; if so, modification is required unless corrected.

Question 12

An auditor is issuing an unmodified opinion on the comparative financial statements of a nonissuer. In the current year, the entity changed its method of inventory valuation from LIFO to FIFO. The change is justified and has been properly accounted for and disclosed.

What is the appropriate reporting action for the auditor to take regarding this change?

  1. Issue a qualified opinion due to the lack of consistency between accounting periods.
  2. Disclaim an opinion on the current year's income statement and statement of cash flows.
  3. Add an emphasis-of-matter paragraph to the audit report describing the change in accounting principle. (correct answer)
  4. Note the inconsistency in the management representation letter but make no modification to the audit report.
Explanation: A justified change in accounting principle that is properly accounted for and disclosed requires the auditor to add an emphasis-of-matter paragraph (for a nonissuer) to the unmodified opinion. This paragraph highlights the matter to users but does not modify the opinion itself. A qualified opinion would be inappropriate because the change is in conformity with GAAP.

Question 13

An auditor is reporting on the current-year financial statements of a nonissuer. The prior-year financial statements were audited by a predecessor auditor whose report is not being reissued. What must the current auditor do in the report on the current-year financial statements?

  1. Include an other-matter paragraph stating that the prior-year statements were audited by another auditor and providing details of the prior report. (correct answer)
  2. Obtain a letter of representation from the predecessor auditor confirming their independence during the prior-year audit.
  3. Express a qualified opinion on the current-year statement of retained earnings due to the change in auditors.
  4. Perform procedures to obtain sufficient appropriate evidence to express an opinion on the prior-year financial statements.
Explanation: When a predecessor auditor's report on prior-period financial statements is not presented, the successor auditor's report should include an other-matter paragraph. This paragraph should state that the prior-period financial statements were audited by another auditor, the date of the previous report, the type of opinion expressed, and, if the opinion was modified, the reasons for the modification.

Question 14

An auditor issued an unmodified opinion on a nonissuer's financial statements, which were included in an annual report. One month after the report was issued, the auditor became aware of a material inconsistency between the financial statements and the other information that existed at the report date. The financial statements are correct.

What is the auditor's most appropriate course of action if management refuses to revise the other information?

  1. Take no action, as the audit report has already been issued.
  2. Notify those charged with governance and consider notifying regulatory agencies and the public. (correct answer)
  3. Insist that management recall the annual report and immediately issue a qualified opinion.
  4. Wait until the next year's audit to address the unresolved inconsistency.
Explanation: If, after the audit report date, the auditor identifies a material inconsistency in other information that management refuses to correct, the auditor has a responsibility to act. The auditor should notify those charged with governance of the concern and consider taking further action, which may include consulting legal counsel and potentially notifying third parties of the unresolved matter.

Question 15

An auditor for a nonissuer has completed fieldwork but has not yet issued the audit report. Management informs the auditor that it intends to release the annual report, including the auditor's report, before the other information (e.g., MD&A) is finalized and provided to the auditor.

What is the auditor's most appropriate response to management?

  1. Issue the audit report, as the responsibility for other information only applies to documents available at the audit report date.
  2. Request that management provide the final other information to be read before the auditor's report is issued. (correct answer)
  3. Include an other-matter paragraph in the audit report stating that the other information was not read.
  4. Withdraw from the engagement due to a significant scope limitation imposed by management.
Explanation: The auditor is required to read the other information. If it is not available prior to the date of the auditor's report, the auditor should request management to provide it when it becomes available. The auditor should not issue the report if there is a high likelihood of a material inconsistency that management will not resolve. The first and most appropriate step is to request the information before the report is issued.

Question 16

When a predecessor auditor agrees to reissue their audit report on prior-period financial statements presented for comparative purposes with the current-period statements audited by a successor, the predecessor auditor should:

  1. perform a full re-audit of the prior-period financial statements to ensure no new information has come to light.
  2. read the current period's financial statements and obtain a representation letter from the successor auditor. (correct answer)
  3. insist that the successor auditor take full responsibility for the prior-period financial statements.
  4. issue a dual-dated report covering both the original report date and the reissue date.
Explanation: Before reissuing a report on prior-period financial statements, the predecessor auditor should perform limited procedures. These include reading the current period's statements, comparing the prior-period statements with those previously issued and the current-period statements, and obtaining a representation letter from the successor auditor regarding matters that might affect the prior-period statements.

Question 17

A company changes its accounting principle for revenue recognition. The auditor agrees that the new principle is in accordance with GAAP and that the change is properly accounted for and disclosed. However, management is unable to provide reasonable justification for making the change.

Under these circumstances, the auditor should issue which type of opinion?

  1. An unmodified opinion with an emphasis-of-matter paragraph.
  2. A qualified or adverse opinion. (correct answer)
  3. A disclaimer of opinion.
  4. An unmodified opinion with no additional explanatory language.
Explanation: A change in accounting principle requires not only that the new principle be acceptable and properly applied, but also that management provides reasonable justification for the change. An unjustified change is a departure from GAAP. Therefore, the auditor should express a qualified or adverse opinion, depending on the materiality and pervasiveness of the effect.

Question 18

During the year under audit, a parent company acquired a new subsidiary that must be consolidated in the current year's financial statements. The prior year's comparative financial statements do not include this subsidiary. This change has a material effect on comparability.

Assuming the acquisition is properly accounted for and disclosed, how should the auditor report on the consistency of the financial statements?

  1. Issue a qualified opinion due to the lack of consistent presentation between the two years.
  2. No modification to the report is needed as this is a normal business transaction that has been properly disclosed.
  3. Require the company to present pro-forma financial statements for the prior year before issuing an unmodified opinion.
  4. Add an emphasis-of-matter paragraph because a change in the reporting entity has occurred. (correct answer)
Explanation: The acquisition and consolidation of a new subsidiary represents a change in the reporting entity. A change in the reporting entity is a type of change in accounting principle that affects the consistency of the financial statements. Even with proper accounting and disclosure, the auditor is required to add an emphasis-of-matter (nonissuer) or explanatory (issuer) paragraph to the report to highlight this change for users.

Question 19

While reading the Management's Discussion and Analysis (MD&A) section of an issuer's annual report, the auditor identifies a material inconsistency. The MD&A states that net income increased by 15%, while the audited financial statements show a 5% increase. After discussion, management refuses to correct the MD&A.

Which of the following is the most appropriate next step for the auditor?

  1. Issue an adverse opinion on the financial statements.
  2. Communicate the matter with those charged with governance and consider including an explanatory paragraph in the auditor's report. (correct answer)
  3. Revise the MD&A section independently and reissue the annual report on behalf of the client.
  4. Withdraw from the engagement without further communication, as an impasse has been reached.
Explanation: When the auditor identifies a material inconsistency in the other information (MD&A) and management refuses to correct it, the auditor should communicate the matter with those charged with governance. The auditor should also consider other actions, such as including an explanatory paragraph (for an issuer) describing the inconsistency, withholding the report, or withdrawing from the engagement. Communicating with governance is a required step before deciding on the ultimate reporting action.

Question 20

An auditor for an issuer (under PCAOB standards) and an auditor for a nonissuer (under AICPA standards) both audit clients that implemented a justified change in accounting principle with a material effect. Which of the following correctly describes the required report modification for each auditor?

  1. Issuer's auditor adds an explanatory paragraph; nonissuer's auditor adds an emphasis-of-matter paragraph. (correct answer)
  2. Issuer's auditor adds an emphasis-of-matter paragraph; nonissuer's auditor adds an explanatory paragraph.
  3. Both auditors add an other-matter paragraph to the report.
  4. Both auditors qualify their opinions due to the lack of consistency.
Explanation: For a justified change in accounting principle, reporting standards differ slightly between issuers and nonissuers. For an issuer, PCAOB standards require an explanatory paragraph following the opinion paragraph. For a nonissuer, AICPA standards require an emphasis-of-matter paragraph. Both serve to highlight the consistency issue without modifying the opinion.