provide information to outside CPAs who are examining a subsidiary that has been set up as a corporation. As part of their review, the CPAs have asked you to provide them with the following explanations:

• The methodology used to determine deferred taxes • The procedures for reporting accounting changes and error corrections • The rationale behind establishing the subsidiary as a corporation

Prepare your response to the three questions. Before submitting your response, your manager would like to know a little bit more about the request. She has asked you to tell her what your professional responsibilities are as a CPA, and the difference between a review and an audit.

Provide draft responses to the above questions. Additionally, provide your manager with a summary of your responsibilities in an internal memo (no more than 1,050 words).

1. The methodology used to determine deferred taxes
Because tax reporting and financial reporting are based on two sets of assumptions, they create temporary differences between the amounts reported on the financial statements and income tax statements. A modified cash basis is used for tax reporting and accrual basis is used for financial reporting (Intermediate book, 966). A company will recognized deferred tax assets and liabilities on their balance sheet based on the differences between the financial statement carrying values and the tax basis (Book1,166).

Deferred tax asset and deferred tax liability are two different types that result from taxable temporary differences. “A deferred tax liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year”( Intermediate book, 967). “A deferred tax asset represents the increase in taxes refundable (or saved) in future years as a result of deductible temporary differences