Audit and Assurance Practice Exam

What should auditors consider when evaluating a change in accounting principles?

1. Only compliance with legal standards

2. The potential impact on financial statement users

3. Recent trends in the industry

4. Management's justification alone

The correct answer is: The potential impact on financial statement users

When evaluating a change in accounting principles, auditors need to consider the potential impact on financial statement users. This is crucial because the primary purpose of financial statements is to provide useful information to stakeholders, including investors, creditors, and regulators. Any change in accounting principles can affect the comparability, reliability, and relevance of the financial information presented, which in turn influences users’ decisions. Understanding how a change will affect users' interpretation of the financial statements ensures that the auditors assess whether the change enhances or diminishes the quality of the information being reported. This involves analyzing the implications of the new accounting policy on key financial metrics, such as revenue recognition and asset valuation, and ensuring that stakeholders are adequately informed about these changes. While compliance with legal standards, recent trends in the industry, and management's justification may all play roles in the evaluation process, they do not capture the core concern of how the change will ultimately affect those who rely on the financial statements for their economic decisions. The emphasis on users' impact aligns with the auditors' responsibility to provide assurance that the financial statements are not only compliant but also useful and informative.