Comparative Statements and Consistency
When financial statements for two or more periods are presented together, the auditor must evaluate whether they are consistent and comparable. Changes in accounting principles, corrections of material misstatements, and reclassifications can all affect the comparability of financial statements across periods. Understanding how these changes impact the auditor's report — and when an emphasis-of-matter paragraph or opinion modification is required — is essential for the AUD exam.
This section covers the consistency standard under AU-C 708, factors affecting comparability, reporting implications for various changes, predecessor auditor considerations, and the difference between comparative financial statements and corresponding figures.
The Consistency Standard (AU-C 708)
The auditor must evaluate whether the comparability of financial statements between periods has been materially affected by:
- A change in accounting principle
- A correction of a material misstatement in previously issued financial statements
- An adjustment to the opening balance of retained earnings or net assets
If any of these changes materially affect comparability, the auditor must include an emphasis-of-matter paragraph in the auditor's report (for nonissuers under AICPA standards) or an explanatory paragraph (for issuers under PCAOB standards).
The consistency standard does not require the auditor to reference every change in accounting estimate, presentation change, or reclassification. It is focused specifically on changes in accounting principles and corrections of material misstatements. However, certain reclassifications may also require reporting if they are material.
Factors Affecting Comparability or Consistency
Change in Accounting Principle
A change in accounting principle occurs when an entity adopts a different generally accepted accounting principle from the one previously used. This includes both:
| Type | Description | Example |
|---|---|---|
| Voluntary change | Management elects to change from one acceptable method to another | Gies Co. switches from FIFO to weighted-average for inventory valuation |
| Mandatory change | A new accounting standard requires adoption of a different method | Bear Co. adopts ASC 842 (Leases), changing from operating lease treatment to right-of-use asset recognition |
Key considerations:
- The change must be to a generally accepted principle
- Management must demonstrate that the new principle is preferable (for voluntary changes)
- The change is typically applied retrospectively with restatement of prior-period financial statements, unless the new standard specifies otherwise
- If applied retrospectively, the auditor includes an emphasis-of-matter paragraph referencing the change
Example: Kingfisher Industries changes its depreciation method from double-declining balance to straight-line for all machinery and equipment, effective January 1, 2025. The auditor evaluates whether the new method is preferable and, once satisfied, adds an emphasis-of-matter paragraph to the report describing the change.
A change in accounting estimate (such as revising the useful life of an asset) is not a consistency matter and does not require an emphasis-of-matter paragraph. However, a change in estimate that is inseparable from a change in principle (e.g., changing depreciation methods) is treated as a change in principle for reporting purposes.
Correction of a Material Misstatement
When an entity corrects a material misstatement in previously issued financial statements through a restatement, this is a consistency matter that requires:
- An emphasis-of-matter paragraph in the auditor's current report
- Reference to the entity's disclosure note describing the nature of the correction
Example: MAS Inc. discovers that it failed to record a $2 million liability in its 2024 financial statements. In 2025, MAS Inc. restates its 2024 financial statements. The auditor's 2025 report includes an emphasis-of-matter paragraph referencing the restatement of the 2024 financial statements.
Material Change in Classification
A material reclassification in the financial statements (e.g., reclassifying a significant amount from operating expenses to cost of goods sold) does not typically trigger the consistency standard. However, if the reclassification is so significant that it affects the comparability of financial statements between periods, the auditor may consider adding an emphasis-of-matter or other-matter paragraph.
Reporting Implications
Emphasis-of-Matter Paragraph for Consistency Matters
When a consistency matter is identified, the auditor adds an emphasis-of-matter paragraph that:
- Is placed after the opinion paragraph (under SAS 146 / AU-C 706)
- Uses the heading "Emphasis of Matter" (or similar descriptive heading)
- References the note to the financial statements that describes the change
- States that the auditor's opinion is not modified with respect to the matter
The emphasis-of-matter paragraph does not change the opinion. The auditor can still issue an unmodified opinion — the paragraph simply draws the reader's attention to the change in principle or restatement.
Example language:
As discussed in Note 4 to the financial statements, Illini Entertainment changed its method of accounting for revenue contracts in 2025 due to the adoption of [new standard]. Our opinion is not modified with respect to this matter.
Updating Opinions on Prior-Period Financial Statements
When comparative financial statements are presented and the auditor audited both periods, the auditor may need to update the opinion on the prior-period financial statements. Common scenarios:
| Scenario | Action |
|---|---|
| Prior period had an unmodified opinion and no changes have occurred | Reissue the unmodified opinion on the prior period |
| Prior period had a qualified opinion, and the matter has been resolved | Update to an unmodified opinion on the prior period; include an other-matter paragraph explaining the change |
| Prior period financial statements have been restated | Issue the current opinion on the restated prior-period financial statements; include an emphasis-of-matter paragraph referencing the restatement |
| New information indicates the prior-period opinion should be different | Update the opinion; include an other-matter paragraph explaining why the opinion differs from the one previously issued |
If the auditor becomes aware that the previously issued financial statements are materially misstated and management refuses to correct them, the auditor must take steps to prevent future reliance on the prior report. This may include notifying those charged with governance, regulatory agencies, or persons known to be relying on the financial statements.
Restatement of Prior-Period Financial Statements
A restatement occurs when management corrects a material misstatement in previously issued financial statements. The auditor's reporting responsibilities depend on whether the auditor also audited the restated period:
| Situation | Auditor's Responsibility |
|---|---|
| Same auditor for both periods | Express an updated opinion on the restated prior-period financial statements; include an emphasis-of-matter paragraph |
| Different auditor for the prior period | The current auditor is not required to express an opinion on the restated prior-period financial statements but should consider the restatement in evaluating opening balances |
Example: BIF Partners restates its 2024 financial statements to correct a material revenue recognition error. The same audit firm audited both 2024 and 2025. In the 2025 comparative report, the auditor includes an emphasis-of-matter paragraph referencing the restatement and updates the opinion on the 2024 financial statements.
Initial Engagements and Opening Balances
In an initial engagement (the first year the current auditor audits the entity), the auditor must obtain sufficient appropriate evidence about:
- Whether the opening balances contain misstatements that materially affect the current period's financial statements
- Whether appropriate accounting policies are consistently applied (or changes are properly accounted for and disclosed)
- Whether the prior-period financial statements (if presented comparatively) were audited by a predecessor auditor
| Opening Balance Issue | Impact on Current Period Report |
|---|---|
| Opening balances are fairly stated | No modification needed |
| Unable to obtain sufficient evidence about opening balances | Qualified or disclaimer of opinion on results of operations and cash flows (the balance sheet may still receive an unmodified opinion) |
| Opening balances contain a misstatement that materially affects the current period | Qualified or adverse opinion, depending on materiality and pervasiveness |
If the auditor cannot obtain sufficient evidence about opening balances (for example, the predecessor auditor's workpapers are unavailable and alternative procedures are insufficient), the auditor may need to qualify the opinion on the income statement and statement of cash flows while still issuing an unmodified opinion on the balance sheet.
Predecessor Auditor Considerations
When comparative financial statements include a period audited by a predecessor auditor, the current auditor has specific responsibilities:
Communication with the Predecessor
The current (successor) auditor should:
- Request that the predecessor auditor reissue their report on the prior-period financial statements
- If the predecessor agrees to reissue, the predecessor's report is presented alongside the current auditor's report
- If the predecessor does not reissue (or the predecessor firm no longer exists), the current auditor includes an other-matter paragraph referencing the prior-period audit
Other-Matter Paragraph Content
When the predecessor auditor's report is not reissued, the current auditor's other-matter paragraph should include:
- A statement that the prior-period financial statements were audited by another auditor
- The type of opinion expressed by the predecessor (e.g., unmodified, qualified)
- The date of the predecessor's report
- If the predecessor's opinion was modified, the reasons for the modification
Example: Illini Security engages a new audit firm for its 2025 financial statements. The prior auditor (who audited 2024) declines to reissue their report. The new auditor's report includes an other-matter paragraph:
The financial statements of Illini Security for the year ended December 31, 2024, were audited by another auditor, whose report dated March 15, 2025, expressed an unmodified opinion on those statements.
Comparative Statements vs. Corresponding Figures
There are two approaches to presenting prior-period financial information:
| Approach | Description | Auditor's Reporting Responsibility |
|---|---|---|
| Comparative financial statements | Full prior-period financial statements are presented alongside current-period statements | The auditor expresses (or re-expresses) an opinion on each period presented |
| Corresponding figures | Prior-period amounts are included only as part of the current-period financial statements (for comparison purposes) | The auditor's opinion refers only to the current period |
U.S. Practice
- In the United States, the comparative financial statements approach is standard for both issuers and nonissuers
- The auditor issues an opinion on each year presented
- Issuers typically present three years of income statements/cash flows and two years of balance sheets
International Practice
- Under International Standards on Auditing (ISAs), the corresponding figures approach is permitted
- Some jurisdictions use corresponding figures as the default approach
- The auditor's opinion references only the current period when corresponding figures are used
For the CPA exam, focus on the comparative financial statements approach, as this is standard U.S. practice. Understand that the auditor must express an opinion on each period presented and that consistency matters may affect the opinion on the prior period.
Summary
| Concept | Key Points |
|---|---|
| Change in accounting principle | Requires emphasis-of-matter paragraph referencing the note disclosure; opinion remains unmodified if properly applied |
| Voluntary vs. mandatory change | Voluntary changes require demonstration of preferability; mandatory changes are required by new standards |
| Correction of material misstatement | Restatement is a consistency matter requiring an emphasis-of-matter paragraph |
| Change in accounting estimate | Not a consistency matter; no emphasis-of-matter paragraph required |
| AU-C 708 | Governs the auditor's evaluation of consistency in comparative financial statements |
| Updating prior-period opinion | The auditor may update the opinion based on new information or resolution of prior issues |
| Initial engagements | Auditor must obtain evidence about opening balances; inability may lead to scope limitation on income statement and cash flows |
| Predecessor auditor | If predecessor does not reissue report, include an other-matter paragraph with type of opinion, date, and any modifications |
| Comparative statements | U.S. standard — auditor opines on each period presented |
| Corresponding figures | International approach — auditor opines only on the current period |
| Emphasis-of-matter placement | After the opinion paragraph; does not modify the opinion |