Question

All of the following are causes for the addition of an explanatory paragraph under both AICPA and PCaOB standards except for?

1) emphasis of a matter
2) reports involving other auditors
3) lack of consistent application of generally accepted accounting principles
4) auditor agrees with a departure from promulgated accounting principles

Answer 1

An explanatory paragraph is added to an audit report under AICPA and PCAOB standards for emphasis of a matter, reports involving other auditors, or lack of consistent GAAP application. However, an auditor's agreement with a departure from promulgated accounting principles is disclosed differently and is not a cause for such an explanatory paragraph. So the correct answer is option 1.

Step-by-step explanation:

The question relates to the causes that might lead an auditor to add an explanatory paragraph to their report under American Institute of Certified Public Accountants (AICPA) and Public Company Accounting Oversight Board (PCAOB) standards.

These causes typically include the following:

• Emphasis of a matter
• Reports involving other auditors
• Lack of consistent application of generally accepted accounting principles (GAAP)

However, the fourth option listed in the question, auditor agrees with a departure from promulgated accounting principles, is not a cause for the addition of an explanatory paragraph.

Rather, if an auditor concurs with a departure from established accounting principles and believes it is necessary and the financial statements are still presented fairly, such agreement is typically disclosed in the body of the audit report or in a separate basis for opinion paragraph, not as an explanatory paragraph.