Question

A CPA has completed her audit of the financial statements of a bus company for the year ended December​ 31, 2019. Prior to​ 2019, the company depreciated its buses over a​ 10-year period. During​ 2019, the company determined that a more realistic estimated life for its buses was 12 years and computed the 2019 depreciation on the basis of the revised estimate. The CPA has satisfied herself that the​ 12-year life is reasonable.            The company has adequately disclosed the change in estimated useful lives of its buses and the effect of the change on 2019 income in a note to the financial statements.

a. State the condition (either change in accounting principle, failure to follow GAAP, none, reporting involving other auditors, or scope of the audit has been restricted)

b. State the materiality level (either Material, immaterial, highly material, material or highly material, or not applicable)

c. List any additional information needed (either amount of loss, auditor's preliminary judgement, client explanation in a memo, or the size of the misstatement)

Answer 1

The answer is given below:

a. The condition is change in accounting policy. The change in method of depreciation is change in accounting policy.

b. The materiality level is highly material. The change in method of depreciation is change in accounting policy and highly material.

c. The additional information needed is client explanation in a memo explaining the client judgement in considering the no. of years of useful life.