Change in Accounting Policy

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Change in Accounting Policies Audit Case Example: ABC Manufacturing Company

Context

If ABC Manufacturing Company has changed its accounting policies during the period, whether due to the adoption of new accounting standards or a voluntary change to improve the relevance and reliability of its financial statements, these changes must be carefully audited. The company must justify that the new policies provide reliable and more relevant information than the previous ones.

Audit Objective

To obtain reasonable assurance that changes in accounting policies made by ABC Manufacturing Company are properly accounted for and disclosed in accordance with the applicable financial reporting framework, ensuring that the financial statements present a true and fair view of the company’s financial position and performance.

Types of Audit Evidence and Documentation for Changes in Accounting Policies Assertions

1. Accuracy and Occurrence

• Case: Verify that the change in accounting policies is accurately applied and that the occurrence of the change is supported by a valid rationale or by new accounting standards.

• Documentation: Document the review of management’s justification for the change, including any relevant board of directors’ resolutions and analysis supporting the change’s benefits.

2. Completeness

• Case: Ensure that all effects of the change in accounting policies are fully reflected in the financial statements, including retrospective adjustments if required.

• Documentation: Outline procedures for verifying the completeness of the accounting policy change’s effects, such as reconciling the opening balances and adjusting prior period comparative information, where applicable.

3. Consistency

• Case: Assess whether the change in accounting policies is applied consistently throughout the financial statements and in subsequent periods.

• Documentation: Summarize the assessment of the consistency of the application of the new accounting policies, including any exemptions or transitional provisions applied under the financial reporting framework.

4. Presentation and Disclosure

• Case: Review the financial statements to ensure that the change in accounting policies is properly disclosed, including the nature of the change, the reasons for the change, and its effects on the financial statements.

• Documentation: Note the evaluation of disclosures related to the change in accounting policies, verifying that they meet the requirements of the financial reporting framework and provide clear information about the impact of the change on the financial statements.

Additional Considerations

• Impact Analysis: Document the analysis of the quantitative impact of the change in accounting policies on the financial statements, including any adjustments to equity, profits, or other key financial metrics.

• Assessment of Internal Controls: Evaluate and document the assessment of any changes to internal controls resulting from the change in accounting policies, ensuring that the new policies are correctly implemented and monitored.

• Inquiries of Management: Perform inquiries with management regarding the rationale for changing accounting policies, the process for selecting and applying the new policies, and any challenges encountered during the transition.

• Communication with Those Charged with Governance: Discuss significant findings related to the change in accounting policies with management and those charged with governance, especially any concerns about the justification for the change, the transparency of disclosures, and the consistency of application.

Conclusion

The audit of changes in accounting policies is integral to ensuring that ABC Manufacturing Company’s financial statements accurately reflect the impact of such changes and continue to present a true and fair view of the company’s financial position and performance. Documenting the audit procedures and findings related to the accuracy, occurrence, completeness, consistency, and presentation and disclosure of changes in accounting policies provides a basis for the auditor’s opinion on the financial statements, enhancing the credibility and comparability of the financial information presented to stakeholders.