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IIA CIA Exam
Certified Internal Auditor Exam (Page 66 )

Updated On: 12-Jan-2026
Page 66 of 342
PDF with 1702 Questions

An entity changes its method of accounting for depreciation during the current year because it believes that the result will be reliable and more relevant information. In its financial statements for the year. how should the entity report the adjustment resulting from the change in accounting policy if the practicability criterion is met?

  1. Not disclosed in the financial statements.
  2. Reported as an adjustment to beginning retained earnings of the earliest period presented.
  3. Disclosed as a separate type of depreciation expense, directly following depreciation expense for the current year.
  4. Included in the determination of profit or loss for the current period as a cumulative effect adjustment.

Answer(s): B

Explanation:

Under IAS 8, Accounting Policies, Changes in Estimates and Accounting Errors, a voluntary change in accounting policy should be applied retrospectively unless any resulting adjustment that relates to prior periods is not reasonably determinable. Thus, if it is not impracticable to apply the new policy retroactively, the policy should be applied to comparative information as far back as practicable. The entity should determine the cumulative effect on the opening and closing balance sheets for the earliest period for which it is practicable to do so.



An accounting change requiring retrospective treatment is a change in

  1. The residual value of equipment.
  2. Depreciation methods from straight-line to diminishing-balance.
  3. An accounting policy inseparable from a change in an accounting estimate.
  4. A provision for warranty costs.

Answer(s): B

Explanation:

A change in depreciation methods is reported as a change in accounting policy. A voluntary change in accounting policy is applied retrospectively unless it is impracticable. Retrospective application means adjusting the opening balances of equity for the first period presented and restating other comparative amounts.



A retrospective voluntary change in an accounting policy in the current period should be accounted for in comparative reports by

  1. An adjustment directly to equity balances for the first period presented and restatement of other comparative amounts.
  2. A line item on the current income statement for the cumulative effect of the change.
  3. Presentation of pro forma comparative information.
  4. Note disclosure only in the current period.

Answer(s): A

Explanation:

A voluntary change in accounting policy is applied retrospectively unless it is impracticable to determine period-specific effects or the cumulative effect. Retrospective application means adjusting the opening balances of equity for the first period presented and restating other comparative amounts.



In the prior accounting period, an entity incorrectly expensed a newly purchased piece of equipment rather than establishing an asset balance and beginning to depreciable it over the estimated useful life of the item. To correct this material error in the single- period financial statements of the current period, the entity records which entry?

  1. Option A
  2. Option B
  3. Option C
  4. Option D

Answer(s): A

Explanation:

To correct the prior-period material error. the entity must, in the single-period statements issued for the current period, adjust the affected opening balances. Hence, the entity must debit equipment for its cost and credit accumulated depreciation for the depreciation expense appropriate for the first year of the estimated useful life. Retained earnings must be credited because the error understated profit or overstated loss in the prior period.



The following financial statement notes are extracts from the audited financial statements of public entities. Which note describes a change in accounting estimate?

  1. The entity changed its amortization of capital assets based on a reassessment of the useful lives of the assets. Accordingly. the entity changed its rate of amortization from 5% and 6% to 8% and 10%. for machinery and equipment.
  2. Prior to Year 5, plant and equipmentother than customer service replacement parts) were depreciated using the diminishing-balance method. Plant and equipment are now depreciated on a straight-line basis.
  3. During the year, the entity changed a method of accounting pursuant to a change in an International Financial Reporting Standard.
  4. Effective January 1. Year 5, the entity changed to the LIFO method of inventory valuation. Prior to Year 5, the FIFO method was used.

Answer(s): A

Explanation:

Accounting estimates, e.g., service lives, residual values, warranty costs, uncollectible accounts. and inventory obsolescence are a necessary part of preparing financial statements. However, they inevitably change as no casts occur and as additional experience and information are obtained. When altered conditions require a change in estimate, it is accounted for prospectively. Thus, a change in the estimate of the service lives of depreciable assets is a change in accounting estimate.



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