This memo outlines the following questions: What is the methodology used in determining deferred taxes, what is the procedures for reporting accounting changes and error corrections, and what is the rationale behind establishing the subsidiary as a corporation. It will also detail the professional responsibilities of a CPA and what the differences between a review and an audit are. The professional responsibilities of a CPA are to uphold the rules set forth by the State board of Certified Public Accountants, and to conduct ourselves in a manner bound by the rules of the AICPA’s Professional Code of Conduct. They also include: independence, scope of service, confidentiality, practice development, and difference on accounting issues. A CPA at all times should maintain a high level of ethical conduct that goes above and beyond society’s laws. As a CPA we are to keep our professional judgment unbiased and base our opinions on factual information and keep all personal interest separate from the work. CPA’s should keep all client information confidential, and only report information deemed necessary for investors and outside users, as well as determine and discuss with the client and differences in accounting issues that relate to transactions are handled so that they may be resolves in an accurate and timely manner (Schroeder, 2005). The difference between and audit and a review is that an audit provides a basis for an opinion for a company’s financials. A review on the other hand does not offer a basis for an opinion due to the lack of contemplation of internal control structure. A review proposes no assurance of an awareness of any or all significance matter that would normally be exposed during an audit ( K2S, pc, 2007). Deferred taxes reported are temporary differences they are calculated based on what was required to be reported versus what has been posted to the corporation’s books. The provisional difference is the distinction between the tax basis of an asset or liability and its reported carrying or book value in the financial statements, which results in taxable amounts or deductible amounts in potential years (Kieso, 2007). Accounting for deferred taxes involves the following steps: calculate taxable income and income tax payable for the year, compute deferred income taxes at the end of the year, determine deferred tax expense and make the journal entry to record income taxes, and classify deferred tax assets and liabilities as current or noncurrent in the financial statements (Schroeder, Clark, & Cathey 2005).
The methodology that is used to determine deferred taxes are based upon the Financial Accounting Standards Board (FASB) issued statement no. 109, Accounting for Income Taxes. Statement no. 109 which states that an enterprises must consider assumptions that concern any future economic event, allowing an enterprise to evaluate if a valuation allowance is required, and recognize deferred tax liabilities for all of their temporary taxable differences. An organization under this standard recognizes their deferred tax assets for deductible temporary differences and operating losses and tax credits carried forward (FASB, 2011).
There are three types of accounting changes: Change in Accounting Principle, Change in Accounting Estimate, and Change in Reporting Entity (Schroeder, Clark, & Cathey, 2005, p.1152). The Financial Accounting Standards Board states that reporting accounting changes should be done using the retrospective approach. The retrospective approach reflects the changes done in previous financial statements so that they are more comparable. To report these changes first the corporation adjusts each prior period financial statements and then the corporation “adjusts the carrying amounts of assets and liabilities as of the beginning of the first year presented” (Kieso, 2007). Reporting an error correction is similar to reporting an accounting change. First the corporation makes the necessary adjustments to the prior period financial statements and then the corporation discloses the error as a restatement. Errors should be corrected as soon as they are discovered. To correct errors the restatement approach should be employed and all prior period statements that are presented should be corrected and the beginning balance of retained earnings for the first period presented should be restated when the error effects occur in a period prior to that one (Kieso, 2007).
The rationale behind establishing the subsidiary as a corporation is due to legal and tax motivations. To comprise the subsidiary as a corporation the corporation would “maintain a Capital Stock account, Additional Paid-In Capital accounts, and a Retained Earnings account” (Bline, Fischer, & Skekel, 2004). Owners of a corporation generally only contain a limited liability to their investment. Changing ownership in a corporation is easy and does not require approval. The corporation and stockholders cover the tax burden in a corporation. It is more sensible to form a corporation that has a little more flexibility and less liability versus a partnership or sole proprietorship (Bline, Fischer, & Skekel, 2004).
In close CPA’s responsibility is to uphold a high level of professional standard based on rules and laws put forth by the state board of Accountancy and the AICPA Rules of Conduct. The difference between and audit and a review is that an audit provides a basis for an opinion for a company’s financials. Deferred taxes reported are temporary differences they are calculated based on what was required to be reported versus what has been posted to the corporations books, and are determined based on Financial Accounting Standard Board’s issued statement no. 109. The procedure for accounting that reporting accounting changes should be done using the retrospective approach, and should be accounted for when an accounting change is discovered. Error corrections regardless of their level of significance should always be pointed out to the investors. Lastly, a corporation is most common and allows the owners to be separate from the company reducing their risk.

References

Bline, D. M., Fischer, M. L., and Skekel, T. D. (2004) Advanced Accounting. Hoboken, NJ: Wiley.
Financial Accounting Standards Board. (2011). Statement 109. Retrieved from www.fasb.org on March 4, 2012.
Kieso, D. E., Weygandt, J. J. and Warfield, T. D. (2007). Intermediate Accounting. (12th ed.). Hoboken, NJ: Wiley.
K2S, pc. (2007). What's the difference between an audit, review and compilation. Retrieved from http://www.k2scpa.com/knowledge-sharing/2007/07/whats-the-difference-between-an-audit-review-and-compilation
Schroeder, R. G., Clark, M. W., and Cathey, J. M. (2005). Financial accounting theory and analysis (8th ed). Hoboken, NJ: Wiley
Ulvog, J. L., CPA. (2006). Audit, Review, or Compilation? http://ulvogcpa.com/Audit_or_Review.html