AAA – Nov 2018 – L3 – Q7 – Audit Reporting

Explanation of Emphasis of Matter, Other Matter, and conditions for modified opinions in audit reporting

Question

You are the partner responsible for the audit of JJ Industries Limited for the year ended 31 December 2017. The final audit has been completed, and you are aware that there is guidance for auditors relating to audit reports – ISA 706: Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report.

Required:

a. i. Explain “Emphasis of Matter paragraph” and provide three examples and the potential situations in which such a paragraph may be used. (6 Marks)

ii. Define “Other Matter paragraph” and give two examples of the use of such a paragraph. (4 Marks)

Note: You are not required to produce draft paragraphs.

b. ISA 705: Modifications to the Opinion in the Independent Auditor’s Report requires the auditor to modify their opinion in the audit report. Discuss the two situations under which the auditor must issue a modified opinion in line with ISA 705. (5 Marks)

Answer

a. Emphasis of Matter and Other Matter Paragraphs:
- i. Emphasis of Matter Paragraph:
  - An Emphasis of Matter paragraph is included in the auditor’s report to draw users’ attention to a matter presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements.
  - Examples of Use:
    1. Going Concern Uncertainty: When there is significant doubt about the entity’s ability to continue as a going concern, but adequate disclosures are provided.
    2. Significant Uncertainty: Situations with major litigation or regulatory actions that could impact the company’s financial position, where disclosures are made.
    3. Early Adoption of New Standards: If the company adopts a new accounting standard earlier than required and this adoption is disclosed in the financial statements.
- ii. Other Matter Paragraph:
  - An Other Matter paragraph is used to refer to a matter that is not presented or disclosed in the financial statements but is, in the auditor’s judgment, relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report.
  - Examples of Use:
    1. Audit of Comparative Information: When the financial statements include comparative information that was audited by a different auditor.
    2. Restriction of Use: When the auditor’s report is intended only for specific users and should not be distributed more widely.
b. Situations Requiring a Modified Opinion (ISA 705):
- 1. Material Misstatement: If the financial statements are materially misstated, the auditor must modify their opinion. This could lead to a qualified opinion if the misstatement is material but not pervasive, or an adverse opinion if the misstatement is both material and pervasive.
- 2. Inability to Obtain Sufficient Appropriate Audit Evidence: When the auditor cannot obtain enough evidence to form a complete opinion, this situation requires a qualified opinion if the issue is material but not pervasive or a disclaimer of opinion if it is material and pervasive, as the lack of evidence precludes forming an opinion on the financial statements.

Tags: Emphasis of Matter, ISA 705, ISA 706, Modified Opinion, Other Matter
Level: Level 3

Topic: Audit Reporting

Uploader: Kofi