Question

Kate has a very unusual auditing situation. An unusual transaction has created a situation where following GAAP seems problematic. Kate needs advice. Which of the following is true as Kate considers how to handle the situation?
a. Circumstances justifying departure from GAAP do not include new legislation or evolution of a new business form.
b. To depart from GAAP, all Kate need to is describe the departure, its approximate effects, and the reasons why compliance with GAAP would mislead.
c. To depart from GAAP, all Kate need do is demonstrate that following GAAP would mislead investors.
d. To depart from GAAP, Kate need both demonstrate that following GAAP would mislead investors, and describe the departure, its approximate effects, and the reasons why compliance would mislead.

Answer 1

Answer:

b. To depart from GAAP, all Kate needs to do is to describe the departure, its approximate effects, and the reasons why compliance with GAAP would mislead.

Explanation:

The Code of Professional Conduct known as Rule 203 of the AICPA states that "a member should not approve any statements that do not follow Generally Accepted Accounting Principles ( GAAP)."  However, it makes one exception.  It permits the auditor to issue a statement explaining the reasons for the departure.