AUD 1.7 - Emphasis Of Matter, Other Matter, And Explanatory Paragraphs

Question 1

Who uses emphasis of matter and other matter paragraphs?

Answer 1

Nonissuers (private companies)

Question 2

When does the auditor include an emphasis of matter paragraph?

Answer 2

When referring to an appropriately presented or disclosed matter that is super important and fundamental to the users of the financial statements.

Question 3

Does an emphasis of matter paragraph effect an audit opinion?

Answer 3

No

Question 4

What are the requirements when including an emphasis of matter paragraph in an audit report?

Answer 4

1. Not specified but typically placed after the opinion paragraph
2. Heading “Emphasis of matter”
3. Indicate auditors opinion is not modified with respect to the matter emphasized

Question 5

When is an emphasis of matter paragraph required?

Answer 5

1. To describe a justified change in accounting principle that has a material effect on the financials
2. Subsequently discovered facts lead to a change in the audit opinion
3. The financials were prepared in accordance with a special purpose framework

Question 6

When is an emphasis of matter paragraph not required but may still be used at the auditor’s discretion?

Answer 6

1. Uncertainty related to the outcome of important litigation
2. Major catastrophe having a significant effect on the entity’s financial position
3. Significant related party transactions
4. Unusually important subsequent events
5. Conditions raising substantial doubt about an entity’s ability to continue as a going concern

Question 7

When is an emphasis of matter paragraph not appropriate to include in the audit report?

Answer 7

If the matter requires the auditor to modify the opinion or if its a KAM to be separately communicated

Question 8

If a loss due to an undetermined lawsuit is probable and you can estimates the loss amount, how should management account for it? What if its probable but cannot be estimated?

Answer 8

Probable & estimated: accrue and disclose
Probable & cannot estimate: disclose

Question 9

If a loss due to an undetermined lawsuit is reasonably possible and you can estimates the loss amount, how should management account for it? What if its reasonably possible but cannot be estimated?

Answer 9

For both scenarios, just disclose

Question 10

If a loss due to an undetermined lawsuit is remote and you can estimates the loss amount, how should management account for it? What if its remote but cannot be estimated?

Answer 10

For both scenarios, ignore

Question 11

When does an auditor include an other matter paragraph in the audit report?

Answer 11

When matters not included in the financials are relevant to the users understanding of the audit

Question 12

What are requirements when including the other matters paragraph in the auditors report?

Answer 12

1. Not specified, but generally placed following the opinion paragraph and the emphasis of matter paragraph
2. Use the heading “other matters”
3. Describe the matter

Question 13

When is an other matters paragraph required in the audit report?

Answer 13

1. Anytime the auditor includes an alert in the audit report that restricts the use of the auditors report
2. Subsequently discovered facts lead to a change in the audit opinion
3. The prior period financials were audited by a predecessor auditor and that report is not reissued
4. If management refuses to make revisions requested by the auditor
5. To restrict the use of the report when contractual or regulatory basis of accounting frameworks are used

Question 14

When is the other matters paragraph not required but might be used by an auditor?

Answer 14

1. To describe the reasons why the auditor cannot withdraw from an engagement
2. Law require the auditor to provide further explanation of the auditors responsibilities
3. The auditor is to report on more than one set of financials that have been prepared with different general purpose frameworks

Question 15

Who uses explanatory paragraph?

Answer 15

Issuers (public companies)

Question 16

When is an explanatory paragraph included in the auditors report?

Answer 16

When required by PCAOB auditing standards or at the auditors discretion but it does not effect the audit opinion

Question 17

What requirements must be met when including an explanatory paragraph in the audit report?

Answer 17

1. Appropriate heading
2. Describe the matter
3. Location of relevant disclosures about the matter
4. Generally should follow the opinion paragraph

Question 18

When is an explanatory paragraph required?

Answer 18

1. Substantial doubt about the entity’s ability to continue as a going concern
2. Material change between periods in accounting principles or method of application
3. Change in reporting entity
4. Change in an investee’s year-end that has a material effect
5. Material misstatement in previously issued financials that’s been corrected
6. Data required by SEC has been omitted
7. Prior year audit report is not present
8. Prior year audit opinion is updated
9. Management is required to report on internal controls over financial reporting but the auditor has not been engaged to perform an audit on managements assessment

Question 19

The auditor should include an emphasis of matter paragraph (private) or an explanatory paragraph (public) if what four criteria are met in regards to a change in accounting principle? If any of the criteria is not met, what should the auditor do?

Answer 19

1. New principle is in accordance with applicable reporting framework
2. Method of accounting for the change is acceptable
3. Disclosures related to the accounting change are appropriate
4. The entity has justified that the alternative accounting principle is preferable

If any of the above is not met, the audit should evaluate if a material misstatement could result and modify the opinion accordingly.

Question 20

The following situations relating to consistency require an emphasis of matter paragraph (private) or an explanatory paragraph (public):

Answer 20

1. Change in accounting estimate that is inseparable from change in accounting principle (example: change in depreciation method)
2. Corrections of an error in accounting principle (example: change from cash method to accrual)
3. Change in reporting entity that results in financials that are those of a different reporting entity
4. Correction of a material misstatement in previously issued financials
5. If an investee of the company makes a change in accounting principle that is material to the investing entity