Final answer:
The Correct option is 3). Auditors should include more than one modification in the audit report if there is a deviation in statements' preparation in accordance with GAAP and another accounting principle is inconsistently applied. Disclosures must include both consistency and departure from GAAP modifications when applicable.
Step-by-step explanation:
When an auditor encounters a deviation in the statements' preparation in accordance with Generally Accepted Accounting Principles (GAAP) and notes that another accounting principle has been applied inconsistently with the previous year, the auditor is responsible for reporting these inconsistencies. The correct answer to the question is 3) More than one modification should be included in the report, as per auditing standards. The auditor should clearly disclose all such modifications or deviations in the audit report to ensure that the financial statements users are fully informed about the consistency and reliability of the financial information presented.
An auditor's responsibility is to express an opinion on the financial statements and to report any material departures from GAAP that have not been appropriately disclosed in the statements. When the accounting principles applied are different from those of the preceding year and may affect the comparability of financial statements, the auditor has to disclose this fact as a consistency modification in the auditor's report. If the alternative accounting principle is also a deviation from GAAP, this requires an additional modification known as a departure from GAAP modification. In some cases, multiple modifications are necessary to accurately represent the financial situation of the entity.