Final answer:
Changes in reporting entities affect both comparability and consistency in financial statements, which usually necessitates an explanatory paragraph in the audit report to inform users of significant changes.
Step-by-step explanation:
The statement is false. Changes in reporting entities do indeed affect comparability as there is a change in what is being reported from one period to another. However, they also affect consistency if the accounting treatments, policies, or the scope of the financial statements change significantly.
Therefore, when a substantial change in reporting entity occurs, such as the inclusion of an additional company in combined financial statements, it usually requires an explanatory paragraph in the audit report.
This is because the users of the financial statements need to be made aware of the changes to make informed decisions. Auditors typically include this information in an explanatory paragraph to highlight the change in comparability and to maintain transparency and clarity in financial reporting.