A1-Emphasis-of-Matter, Other-Matter, and Explanatory Paragraphs

Question 1

What is an emphasis-of-matter paragraph? (nonissuers)

Answer 1

• It is an additional and necessary explanation that is required by GAAS or at auditor’s discretion to include in the audit report in a separate paragraph (before other-matter paragraph) when expressing an “unmodified opinion” with respect to the matter emphasized and the location of relevant disclosures.

Question 2

When an emphasis-of-matter paragraph is required to be used?

Answer 2

used when referring to a matter what is “appropriately presented or disclosed” in the FS
- when describe a justified change in accounting principle that has a material effect
- when subsequently discovered facts lead to a change in audit opinion
- when FS are prepared with an applicable special purpose framework

Also may be used when necessary: professional judgement
- important subsequent events. Watch for phrase “unusually important”
- major catastrophe or related party transactions
- substantial doubt about an entity’s ability to continue as a going concern

Not appropriate to be used:
- when auditor is required to express a modified opinion
- Or if key audit matter to be used separately

Question 3

When an other-matter paragraph is used? (nonissuers)

Answer 3

• refer to matters “other than those presented or disclosed in the FS”
• after the opinion and emphasis-of-matter paragraphs
• required when:
  + to alert in audit report that restricts use
  + comparative financial statements

Question 4

When an explanatory paragraph is used? (issuers)

Answer 4

• follow the opinion paragraph
• when going concern
• when other information the the audited FS is materially inconsistent with the information in the FS
• when quarterly financial date required by SEC regulation S-K has been omitted or has been reviewed
• when management is required to report on the company’s internal controls over financial report but the auditor has not been engaged to perform an audit of management’s assessment

may be used when necessary: professional judgement

Question 5

what are the 4 criteria of acceptability of a change in accounting principle?

Answer 5

1. the change (newly adopted accounting principle) is in accordance with applicable financial reporting framework
2. the method of accounting is acceptable
3. appropriate and adequate disclosures
4. the alternative accounting principle is preferable and justified by management