Memorandum- CPA Report
Vincent Mokwenye
ACCA 545- Financial Reporting
Monday December 18, 2012

Memorandum- CPA Report

MEMORANDUM
Date: December10, 2012
To: Libby Grimes
Re: CPA Report

In response to your request for information, this memo will address the methodology used to determine deferred taxes, the various procedures used for reporting accounting changes and error corrections, and the rationale for establishing the subsidiary as a corporation. In addition it will address our professional responsibilities are as a Certified Public Accountants (CPA’s) and finally distinguish between a financial audit and a financial review.

The Methodology used to Determine Deferred Taxes
The accounting for tax liability is governed by the internal revenue service (IRS) code whereas income statement financial reporting is done according the generally accepted accounting principles (GAAP). The taxable income reported to the IRS is based on the cash basis accounting whereas the pre-tax profit reported in the income statement to the stockholders is prepared using the accrual accounting. As a result, there is a difference between the tax liability reported to the IRS and the tax expense reported in the income statement. This causes the book income reported to stockholders to be different from the tax income reported to the IRS. If certain revenues and/or expenses are reported in different years in income statements and on income tax returns, an asset or liability called deferred income tax exists. If deferred income tax represents the portion of the income tax expense that will be paid in future years, a long-term liability called deferred taxes is recorded on the balance sheet. “Deferred tax liability represents an increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year” (Kieso, Weygandt, &