Consistency of Financial Statements 1257
AU-C Section 708
Consistency of Financial Statements
Source: SAS No. 122; SAS No. 136.
Effective for audits of nancial statements for periods ending on or
after December 15, 2012, unless otherwise indicated.
Introduction
Scope of This Section
.01 This section addresses the auditor's evaluation of the consistency of the
nancial statements between periods, including changes to previously issued
nancial statements and the effect of that evaluation on the auditor's report on
the nancial statements.
Effective Date
.02 This section is effective for audits of nancial statements for periods
ending on or after December 15, 2012.
Objectives
.03 The objectives of the auditor are to
a. evaluate the consistency of the nancial statements for the peri-
ods presented and
b. communicate appropriately in the auditor's report when the
comparability of nancial statements between periods has been
materially affected by a change in accounting principle or by ad-
justments to correct a material misstatement in previously issued
nancial statements.
Definition
.04 For purposes of generally accepted auditing standards, the following
term has the meaning attributed as follows:
Current period. The most recent period upon which the auditor is
reporting.
Requirements
Evaluating Consistency
.05 The auditor should evaluate whether the comparability of the nan-
cial statements between periods has been materially affected by a change in
accounting principle or by adjustments to correct a material misstatement in
previously issued nancial statements. (Ref: par. .A1)
.06 The periods included in the auditor's evaluation of consistency depend
on the periods covered by the auditor's opinion on the nancial statements.
When the auditor's opinion covers only the current period, the auditor should
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1258 Audit Conclusions and Reporting
evaluate whether the current-period nancial statements are consistent with
those of the preceding period, regardless of whether nancial statements for
the preceding period are presented. When the auditor's opinion covers two or
more periods, the auditor should evaluate consistency between such periods
and the consistency of the earliest period covered by the auditor's opinion with
the period prior thereto, if such prior period is presented with the nancial
statements being reported upon. The auditor also should evaluate whether
the nancial statements for the periods being reported upon are consistent
with previously issued nancial statements for the relevant periods. (Ref:
par. .A2–.A3)
Change in Accounting Principle
.07 The auditor should evaluate a change in accounting principle to deter-
mine whether (Ref: par. .A4–.A6)
a. the newly adopted accounting principle is in accordance with the
applicable nancial reporting framework,
b. the method of accounting for the effect of the change is in accor-
dance with the applicable nancial reporting framework,
c. the disclosures related to the accounting change are appropriate
and adequate, and
d. the entity has justied that the alternative accounting principle
is preferable.
.08 If the auditor concludes that the criteria in paragraph .07 have been
met, and the change in accounting principle has a material effect on the nan-
cial statements, the auditor should include an emphasis-of-matter paragraph
1
in the auditor's report that describes the change in accounting principle and
provides a reference to the entity's disclosure. If the criteria in paragraph .07
are not met, the auditor should evaluate whether the accounting change results
in a material misstatement and whether the auditor should modify the opinion
accordingly.
2
(Ref: par. .A7–.A9)
.09 The auditor should include an emphasis-of-matter paragraph relating
to a change in accounting principle in reports on nancial statements in the
period of the change, and in subsequent periods, until the new accounting prin-
ciple is applied in all periods presented. If the change in accounting principle
is accounted for by retrospective application to the nancial statements of all
prior periods presented, the emphasis-of-matter paragraph is needed only in
the period of such change.
.10 The auditor should evaluate and report on a change in accounting es-
timate that is inseparable from the effect of a related change in accounting
principle like other changes in accounting principle, as required by paragraphs
.08–.09. (Ref: par. .A10)
.11 When a change in the reporting entity results in nancial statements
that, in effect,are those of a different reporting entity, the auditor should include
an emphasis-of-matter paragraph in the auditor's report that describes the
change in the reporting entity and provides a reference to the entity's disclo-
sure, unless the change in reporting entity results from a transaction or event.
The requirements in paragraph .09 also apply. (Ref: par. .A11)
1
Paragraphs .06–.07 of section 706A, Emphasis-of-Matter Paragraphs and Other-Matter Para-
graphs in the Independent Auditor's Report.
2
See section 705, Modications to the Opinion in the Independent Auditor's Report.
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Consistency of Financial Statements 1259
.12 If an entity's nancial statements contain an investment accounted
for by the equity method, the auditor's evaluation of consistency should include
consideration of the investee. If the investee makes a change in accounting prin-
ciple that is material to the investing entity's nancial statements, the auditor
should include an emphasis-of-matter paragraph in the auditor's report to de-
scribe the change in accounting principle. The requirements in paragraph .09
also apply.
Correction of a Material Misstatement in Previously Issued
Financial Statements
.13 The auditor should include an emphasis-of-matter paragraph in the
auditor's report when there are adjustments to correct a material misstatement
in previously issued nancial statements. The auditor should include this type
of emphasis-of-matter paragraph in the auditor's report when the related nan-
cial statements are restated to correct the prior material misstatement. The
paragraph need not be repeated in subsequent periods. (Ref: par. .A12–.A13)
.14 The emphasis-of-matter paragraph should include
a. a statement that the previously issued nancial statements have
been restated for the correction of a material misstatement in the
respective period and
b. a reference to the entity's disclosure of the correction of the ma-
terial misstatement. (Ref: par. .A14)
.15 If the nancial statement disclosures relating to the restatement to
correct a material misstatement in previously issued nancial statements
are not adequate, the auditor should address the inadequacy of disclosure
as described in section 705, Modications to the Opinion in the Independent
Auditor's Report.
Change in Classification
.16 The auditor should evaluate a material change in nancial statement
classication and the related disclosure to determine whether such a change
is also either a change in accounting principle or an adjustment to correct
a material misstatement in previously issued nancial statements. If so, the
requirements of paragraphs .07–.15 apply. (Ref: par. .A15–.A16)
Application and Other Explanatory Material
Evaluating Consistency (Ref: par. .05–.06)
.A1 Unless the auditor's report explicitly states otherwise, the auditor's
report implies that the auditor is satised that the comparability of nancial
statements between periods has not been materially affected by a change in
accounting principle or by adjustments to correct a material misstatement in
previously issued nancial statements. There may be no effect on comparabil-
ity between or among periods because either (a) no change in an accounting
principle has occurred, or (b) there has been a change in an accounting
principle or in the method of application, but the effect of the change on the
comparability of the nancial statements is not material. When no material
effect on comparability results from a change in accounting principle or an
adjustment to previously issued nancial statements, the auditor need not
refer to consistency in the auditor's report.
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1260 Audit Conclusions and Reporting
.A2 The periods covered in the auditor's evaluation of consistency depend
on the periods covered by the auditor's opinion on the nancial statements. If an
entity presents comparative nancial statements and has a change in auditors
in the current year, the auditor evaluates consistency between the year covered
by the auditor's opinion and the immediately preceding year in accordance with
the requirements in paragraph .06.
.A3 When an entity accounts for a change in accounting principle by ap-
plying the principle to one or more prior periods that were included in previ-
ously issued nancial statements, as if that principle had always been used
(commonly referred to as retrospective application), the nancial statements
presented generally will be consistent. However, the previous periods' nancial
statements presented with the current period's nancial statements will reect
the change in accounting principle and, therefore, will appear different from
those previous periods' nancial statements on which the auditor previously
reported. The evaluation required by paragraph .06 encompasses previously
issued nancial statements for the relevant periods.
Change in Accounting Principle (Ref: par. .07)
.A4 A change in accounting principle is a change from one accounting
principle in accordance with the applicable nancial reporting framework to
another accounting principle in accordance with the applicable nancial re-
porting framework when (1) two or more accounting principles apply or (2) the
accounting principle formerly used is no longer in accordance with the appli-
cable nancial reporting framework. A change in the method of applying an
accounting principle also is considered a change in accounting principle.
.A5 The applicable nancial reporting framework usually sets forth the
method of accounting for the effects of a change in accounting principle and the
related disclosures.
.A6 The issuance of an accounting pronouncement that requires use of a
new accounting principle, interprets an existing principle, expresses a prefer-
ence for an accounting principle, or rejects a specic principle is sufcient justi-
cation for a change in accounting principle, as long as the change in accounting
principle is made in accordance with the applicable nancial reporting frame-
work.
Reporting on Changes in Accounting Principles (Ref: par. .08–.11)
.A7 The following is an example of an emphasis-of-matter paragraph for a
change in accounting principle resulting from the adoption of a new accounting
pronouncement:
Emphasis of Matter
As discussed in Note X to the nancial statements, in [insert year(s) of nan-
cial statements that reect the accounting method change], the entity adopted
new accounting guidance [insert description of new accounting guidance]. Our
opinion is not modied with respect to this matter.
.A8 The following is an example of an emphasis-of-matter paragraph when
the entity has made a voluntary change in accounting principle (that is, other
than a change due to the adoption of a new accounting pronouncement).
Emphasis of Matter
As discussed in Note X to the nancial statements, the entity has elected to
change its method of accounting for [describe accounting method change]in
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Consistency of Financial Statements 1261
[insert year(s) of nancial statements that reect the accounting method change].
Our opinion is not modied with respect to this matter.
.A9 If a change in accounting principle does not have a material effect on
the nancial statements in the current year but the change is expected to have a
material effect in later years, the auditor is not required to recognize the change
in the auditor's report in the current year. The applicable nancial reporting
framework may include a requirement for the entity to disclose such situations
in the notes to the nancial statements. Section 700, Forming an Opinion and
Reporting on Financial Statements, section 703, Forming an Opinion and Re-
porting on Financial Statements of Employee Benet Plans Subject to ERISA,
as applicable, and section 705 require the auditor to evaluate the appropriate-
ness and adequacy of disclosures in connection with forming an opinion and
reporting on the nancial statements.
3
[As amended, effective for audits of -
nancial statements for periods ending on or after December 15, 2021, by SAS
No. 136.]
.A10 Paragraph .10 requires the auditor to evaluate and report on a
change in accounting estimate that is inseparable from the effect of a related
change in accounting principle like other changes in accounting principle. It
is sometimes difcult to differentiate between a change in an accounting esti-
mate and a change in an accounting principle because the change in accounting
estimate may be inseparable from the effect of a related change in accounting
principle. For example, when a change is made to the method of depreciation of
an asset to reect a change in the estimated future benet of the asset or the
pattern of consumption for those benets, such change in accounting may be
inseparable from a change in estimate.
Change in Reporting Entity
.A11 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. Examples of a change in the reporting entity that is not a result of a
transaction or event include
a. presenting consolidated or combined nancial statements in place
of nancial statements of individual entities.
b. changing specic subsidiaries that make up the group of entities
for which consolidated nancial statements are presented.
c. changing the entities included in combined nancial statements.
Correction of a Material Misstatement in Previously Issued
Financial Statements (Ref: par. .13–.14)
.A12 A change from an accounting principle that is not in accordance with
the applicable nancial reporting framework to one that is in accordance with
the applicable nancial reporting framework is a correction of a misstatement.
.A13 Section 560, Subsequent Events and Subsequently Discovered Facts,
addresses the auditor's responsibilities when adjustments have been made to
correct a material misstatement in previously issued nancial statements.
3
Paragraph .15 of section 700, Forming an Opinion and Reporting on Financial Statements, para-
graph .40 of section 703, Forming an Opinion and Reporting on Financial Statements of Employee
Benet Plans Subject to ERISA, and paragraphs .07 and .A7 of section 705. [As amended, effective for
audits of nancial statements for periods ending on or after December 15, 2021, by SAS No. 136.]
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1262 Audit Conclusions and Reporting
Reporting on a Correction of a Material Misstatement in Previously Issued
Financial Statements
.A14 The following is an example of an emphasis-of-matter paragraph
when there has been a correction of a material misstatement in previously is-
sued nancial statements:
Emphasis of Matter
As discussed in Note X to the nancial statements, the 20X2 nancial state-
ments have been restated to correct a misstatement. Our opinion is not modi-
ed with respect to this matter.
Change in Classification (Ref: par. .16)
.A15 Changes in classication in previously issued nancial statements
do not require recognition in the auditor's report unless the change represents
the correction of a material misstatement or a change in accounting principle.
For example, certain reclassications in previously issued nancial statements,
such as reclassications of debt from long-term to short-term or reclassica-
tions of cash ows from the operating activities category to the nancing activ-
ities category, might occur because those items were classied incorrectly in the
previously issued nancial statements. In such situations, the reclassication
also is the correction of a misstatement.
.A16 In some cases, changes in classication in previously issued nancial
statements may result from changes in the entity's business or operating struc-
ture. The auditor may need to obtain a further understanding of the underlying
rationale for such reclassications to determine whether the requirements of
paragraph .16 apply.
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