[The following paragraphs of AS 2820, amended to read as follows, will be effective for audits of fiscal years ending on or after December 15, 2017. See PCAOB Release No. 2017-001. The current standard can be found  here.]

.06     The auditor should evaluate and report on a change in accounting estimate effected by a change in accounting principle like other changes in accounting principle.⁵ In addition, the auditor should recognize a change in the reporting entity⁶ by including an explanatory paragraph, including an appropriate title, in the auditor's report, unless the change in reporting entity results from a transaction or event. A change in reporting entity that results from a transaction or event, such as the creation, cessation, or complete or partial purchase or disposition of a subsidiary or other business unit does not require recognition in the auditor's report.

⁵     SFAS No. 154, paragraph 2e, defines a "change in accounting estimate effected by a change in accounting principle" as "a change in accounting estimate that is inseparable from the effect of a related change in accounting principle."

⁶     "Change in reporting entity" is a change that results in financial statements that, in effect, are those of a different reporting entity. See SFAS No. 154, paragraph 2f.

.08     A change in accounting principle that has a material effect on the financial statements should be recognized in the auditor's report on the audited financial statements. If the auditor concludes that the criteria in paragraph .07 have been met, the auditor should add an explanatory paragraph, including an appropriate title, to the auditor's report, as described in paragraphs .12–.15 of this standard. If those criteria are not met, the auditor should treat this accounting change as a departure from generally accepted accounting principles and, if the effect of the change in accounting principle is material, issue a qualified or an adverse opinion.^8A

Note: If a company's financial statements contain an investment accounted for by the equity method, the auditor's evaluation of consistency should include consideration of the investee. If the investee makes a change in accounting principle that is material to the investing company's financial statements, the auditor should add an explanatory paragraph, including an appropriate title (immediately following the opinion paragraph), to the auditor's report, as described in paragraphs .12–.15.

^8A     AS 3105, Departures from Unqualified Opinions and Other Reporting Circumstances, describes reporting requirements related to a qualified or an adverse opinion.

Correction of a Material Misstatement in Previously Issued Financial Statements

.09     The correction of a material misstatement in previously issued financial statements should be recognized in the auditor's report on the audited financial statements through the addition of an explanatory paragraph, including an appropriate title, as described in paragraphs .16 and.17 of this standard.

.10     The accounting pronouncements generally require certain disclosures relating to restatements to correct misstatements in previously issued financial statements. If the financial statement disclosures are not adequate, the auditor should address the inadequacy of disclosure as described in paragraph .31 of AS 2810, Evaluating Audit Results, and AS 3105, Departures from Unqualified Opinions and Other Reporting Circumstances.

Change in Classification

.11     Changes in classification in previously issued financial statements do not require recognition in the auditor's report, unless the change represents the correction of a material misstatement or a change in accounting principle. Accordingly, the auditor should evaluate a material change in financial statement classification and the related disclosure to determine whether such a change also is a change in accounting principle or a correction of a material misstatement. For example, certain reclassifications in previously issued financial statements, such as reclassifications of debt from long-term to short-term or reclassifications of cash flows from the operating activities category to the financing activities category, might occur because those items were incorrectly classified in the previously issued financial statements. In such situations, the reclassification also is the correction of a misstatement. If the auditor determines that the reclassification is a change in accounting principle, he or she should address the matter as described in paragraphs .07, .08, and .12–.15. If the auditor determines that the reclassification is a correction of a material misstatement in previously issued financial statements, he or she should address the matter as described in paragraphs .09, .10, .16 and.17.

Reporting on Consistency of Financial Statements

Change in Accounting Principle

.12     A change in accounting principle that has a material effect on the financial statements should be recognized in the auditor's report on the audited financial statements through the addition of an explanatory paragraph, including an appropriate title (immediately following the opinion paragraph). The explanatory paragraph should include identification of the nature of the change and a reference to the note disclosure describing the change.

.13     The following is an example of an explanatory paragraph for a change in accounting principle resulting from the adoption of a new accounting pronouncement:

[Appropriate Title]

As discussed in Note X to the financial statements, the Company has changed its method of accounting for [describe accounting method changes] in [year(s) of financial statements that reflect the accounting method change] due to the adoption of [name of accounting pronouncement].

.14     The following is an example of an explanatory paragraph for a change in accounting principle other than a change due to the adoption of a new accounting pronouncement:

[Appropriate Title]

As discussed in Note X to the financial statements, the Company has elected to change its method of accounting for [describe accounting method changes] in [year(s) of financial statements that reflect the accounting method change].

.15     The explanatory paragraph relating to a change in accounting principle should be included in reports on financial statements in the year of the change and in subsequent years until the new accounting principle is applied in all periods presented. If the new accounting change is accounted for by retrospective application to the financial statements of all prior periods presented, the additional paragraph is needed only in the year of the change.

Correction of a Material Misstatement in Previously Issued Financial Statements

.16     Correction of a material misstatement in previously issued financial statements should be recognized in the auditor's report through the addition of an explanatory paragraph, including an appropriate title (immediately following the opinion paragraph).¹⁰ The explanatory paragraph should include (1) a statement that the previously issued financial statements have been restated for the correction of a misstatement in the respective period and (2) a reference to the note disclosure describing the correction of the misstatement. The following is an example of an appropriate explanatory paragraph when there has been a correction of a material misstatement in previously issued financial statements:

[Appropriate Title]

As discussed in Note X to the financial statements, the 20X2 financial statements have been restated to correct a misstatement.

¹⁰     AS 3105.52–53 apply when comparative financial statements are presented and the opinion on the prior-period financial statements differs from the opinion previously expressed.

.17     This type of explanatory paragraph in the auditor's report should be included in reports on financial statements when the related financial statements are restated to correct the prior material misstatement. The paragraph need not be repeated in subsequent years.

[Effective pursuant to SEC Release No. 34-81916, File No. PCAOB-2017-01 (October 23, 2017)]