CHAPTER 18
REPORTS ON AUDITED FINANCIAL STATEMENTS

Answers to Review Questions

18-1 An auditor is associated with financial statements when he or she has consented to the use of his or her name in a document such as an annual report.

18-2 Accounting changes can be categorized into changes that affect consistency and those that do not affect consistency. The word “consistency” refers to the application of accounting principles. If a change in accounting principle or in the method of its application has a material effect on the comparability and consistency of the financial statements and the auditor concurs with the change, the auditor should refer to the change in an explanatory or emphasis-of-matter paragraph. Accounting changes that affect comparability but do not affect consistency, such as a change in an estimate or the correction of an error that does not involve a change in accounting principle, are normally disclosed in the footnotes to the financial statements but do not require an explanatory or emphasis-of-matter paragraph in the auditor's report.

An accounting change can affect comparability but not consistency because an accounting principle can be consistently applied even when the underlying data used to apply it may change. For example, when the estimate of the useful life of a building changes, the company may still consistently apply straight-line depreciation, but the depreciation expense will not be comparable to that of the previous year due to the change in estimate.

18-3 An example of a client-imposed scope limitation is where a client requests that the auditor not confirm accounts receivable because of concerns about creating conflicts with customers over amounts owed. An example of a circumstances-imposed scope limitation is when the auditor is not engaged to conduct the audit until after year-end. Under such circumstances, the