Audit and Assurance Practice Exam

When there is a justified departure from GAAP, what should be included in the audit report?

1. A description of the departure and its effects

2. A statement that there is a lack of compliance

3. Details on auditor’s fees

4. Nothing, if justified

The correct answer is: A description of the departure and its effects

When there is a justified departure from Generally Accepted Accounting Principles (GAAP), the audit report must include a description of the departure and its effects. This requirement is crucial because transparency is a foundational principle in auditing and financial reporting. Providing a description helps users understand the nature of the departure, the reasons behind it, and its impact on the financial statements. This information enables stakeholders to assess the implications for the financial health and performance of the entity being audited. By articulating both the departure from GAAP and its effects, auditors ensure that the users of the financial statements are well-informed and can make more accurate assessments and decisions based on the presented financial information. This practice fosters trust and enhances the credibility of the financial reporting process, particularly when deviations from standard practices occur, reflecting both accountability and thoroughness in the audit profession. Including details about auditor’s fees or stating a lack of compliance does not directly address the specifics of the departure itself, nor does silence on the matter fulfill the obligation to keep stakeholders informed.