In: Accounting
What is the title of the additional paragraph that must be included in the audit report in each of the following circumstances?
(i) The financial statements are Special Purpose Financial Statements
(ii) The client has adopted early a new accounting standard as permitted by the AASB.
(iii) This is the first time that the financial statements have been audited.
(iv) The auditor believes that there is significant uncertainty about the outcome of a regulatory action.
(i) The financial statements are Special Purpose Financial Statements
Section 700 addresses the form and content of the auditor's report, including the specific ordering for certain elements. In the case of an auditor's report on special purpose financial statements
a. the auditor's report should describe the purpose for which the financial statements are prepared or refer to a note in the special purpose financial statements that contains that information, when the financial statements are prepared in accordance with
i. a regulatory or contractual basis of accounting or
ii. an other basis of accounting, and the auditor is required to restrict use of the auditor's report pursuant to paragraph .06a–b of section 905, Alert That Restricts the Use of the Auditor's Written Communication.
b. if management has a choice of financial reporting frameworks in the preparation of the special purpose financial statements, the explanation of management's responsibility for the financial statements should also make reference to its responsibility for determining that the applicable financial reporting framework is acceptable in the circumstances.
(ii)The client has adopted early a new accounting standard as permitted by the AASB.
The auditor should evaluate and report on a change in accounting estimate effected by a change in accounting principle like other changes in accounting principle. In addition, the auditor should recognize a change in the reporting entity by including an explanatory paragraph, including an appropriate title, in the auditor's report, unless the change in reporting entity results from a transaction or event. A change in reporting entity that results from a transaction or event, such as the creation, cessation, or complete or partial purchase or disposition of a subsidiary or other business unit does not require recognition in the auditor's report.
A change in accounting principle that has a material effect on the financial statements should be recognized in the auditor's report on the audited financial statements. If the auditor concludes that the criterias per Standards have been met, the auditor should add an explanatory paragraph, including an appropriate title, to the auditor's report, as described in paragraphs A-B of this standard. If those criteria are not met, the auditor should treat this accounting change as a departure from generally accepted accounting principles and, if the effect of the change in accounting principle is material, issue a qualified or an adverse opinion.
A.
The following is an example of an explanatory paragraph for a change in accounting principle other than a change due to the adoption of a new accounting pronouncement:
[Appropriate Title]
As discussed in Note X to the financial statements, the Company has elected to change its method of accounting for [describe accounting method changes] in [year(s) of financial statements that reflect the accounting method change].
B. The explanatory paragraph relating to a change in accounting principle should be included in reports on financial statements in the year of the change and in subsequent years until the new accounting principle is applied in all periods presented. If the new accounting change is accounted for by retrospective application to the financial statements of all prior periods presented, the additional paragraph is needed only in the year of the change.
(iii) This is the first time that the financial statements have been audited.
No special title is required.
(iv) The auditor believes that there is significant uncertainty about the outcome of a regulatory action.
The auditor may emphasize a matter regarding the financial statements in the auditor's report ("emphasis paragraph") when an uncertainty relating to the future outcome of significant litigation or regulatory actions.