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Cpa Report

In: Business and Management

Submitted By mokwenye
Words 1667
Pages 7
Vincent Mokwenye
ACCA 545- Financial Reporting
Monday December 18, 2012
Memorandum- CPA Report

MEMORANDUM
Date: December10, 2012
To: Libby Grimes
Re: CPA Report

This memo is in response to the request for information from the CPA firm examining our subsidiary. The memo addresses information regarding the methodology used to determine deferred taxes, the various procedures used for reporting accounting changes and error corrections, and the rationale for establishing the subsidiary as a corporation. In addition it provides information on the professional responsibilities of Certified Public Accountants (CPA’s). Finally, a distinction is made between a financial audit and a financial review.

The Methodology used to Determine Deferred Taxes
It is common knowledge that companies report different amounts of income on their income statements and tax returns respectively. This difference is caused by the fact that taxable income is determined on the cash basis of accounting using the internal revenue service (IRS) code; whereas the pre-tax income reported on the income statement is determined on the accrual basis of accounting using generally accepted accounting principle (GAAP). This difference in accounting basis causes the differences in the amounts reported on the income statements and the tax returns. This temporary difference is responsible for deferred tax liability or asset that is recorded on a company’s balance sheet. Therefore, where the amount of taxes payable in the future years is known, it must be accrued and reported on the balance sheet as a deferred tax (Kieso, Weygandt, & Warfield, 2008).

Procedures for reporting accounting changes and error corrections
When a company changes the accounting principles that it has hitherto used to report a class of transactions to another principle, there is said to be a change in accounting...

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