Emphasis of a Matter, Other Matter, Explanatory Paragraph A1 M7 Flashcards
What type of opinion to issue if there is a change of Accounting Principles?
- The Auditor may issue a clean opinion and add an emphasis of the matter if it is disclosed and will have a material effect on the financials.
- If the effects are immaterial no emphasis of the matter paragraph is needed.
- If management lacks reasonable justification may give a modification based on materiality
Change in Estimate vs. Change in Accounting Principle
- A change in accounting estimate (such as a change in the useful life of a depreciable asset, uncollectible receivables, obsolete inventory, and warranty obligations) is accounted for prospectively and does not affect the comparability of financial statements between periods. Because the auditor’s unmodified opinion implies that consistency exists, no modification to the report is necessary.
- Changes in inventory valuation (FIFO, LIFO, etc.), Fixed Asset Valuation, bond carrying values. Assuming the effect is material, a change in accounting principle results in the addition of an emphasis-of-matter paragraph in the auditor’s report. (Note: A lack of reasonable justification for the change may also give rise to a report modification based on material misstatement of the financial statements.)
How do we handle justified GAAP Departures?
If usual accounting standards make the financial statements misleading, the auditor should express an unmodified opinion on the financial statements and include an emphasis-of-matter paragraph.
What Type of Report will be issued for unjustified accounting change?
An unjustified accounting change may cause the auditor to issue a qualified or adverse opinion.
When is a Emphasis of a Matter Paragraph required and when is it Auditor’s Judgement?
REQUIRED USE:
- A justified change in accounting principle with a significant effect on the financial statements.
- All Special Purpose Framework, except for regulatory basis.
- A lack of consistency that has a material effect. If all the acceptability criteria for the accounting change are met, the auditor may issue an unmodified opinion.
- Subsequent Events An emphasis-of-matter or other-matter paragraph would be added to the auditor’s report if subsequently discovered facts led to a change in audit opinion (emphasis if related to a disclosure other matter if not).
AUDITOR’S JUDGEMENT Emphasis-of-Matter:
- Significant related party transactions
- Uncertainty related to the outcome of unusually important litigation no emphasis if not UNUSUALLY important.
- Major catastrophe that has a significant effect on the entity’s financial position.
- Previously incorrect application of accounting principle when a correction occured.
- Substantial doubt remains but is satisfied that the going concern disclosures by management are adequate
Subsequent changes that lead to audit opinion changes provides what effects on audit reports?
Subsequently discovered facts that lead to a change in an audit opinion may be presented in an emphasis-of-matter paragraph or other-matter paragraph on a unqualified opinion.
Where should each paragraph live in the Auditor’s Report non-issuer?
- 1st Opinion
- 2nd Basis of Opinion
- Emphasis of the Matter can fit in the Auditor’s Report anywhere after the 1st 2 section.
- Mangement’s Responsibility
- Auditors Responsibility
End of basic Audit Report
- KAM optional only if engaged unless Adverse or Disclaim of opinion then forbidden.
Where should each paragraph live in the Auditor’s Report issuer?
- 1st Opinion
- 2nd Basis of Opinion
- Explanatory Paragraph after 2nd section.
End of basic Audit Report
- Mandatory CAM (Unless Adverse or Disclaim of opinion).
When to use Other Matters Paragraph?
- When current period financial statements are audited and presented in comparative form with compiled statements and emphasis of the matter was used in the previous financials to explain why EOM was used.
- Reviewed financial statements from the prior period or in comparative form with prior period financial statements that were not audited, reviewed, or compiled.
3 reasons for required restricted use with emphasis or explanatory paragraph
- projection financials
- I/C and Compliance
- ocboa-contractual or regulatory basis
When should you disclose, accrue, ignore, or disclose and accrue in litigations?
What are the separate section choices of the audit report?
Separate Section titled:
- “Substantial Doubt about the Entities Ability to Continue as a Going Concern”
- Other Information (Predecessor Auditor missing report)
- Other Supplementary Information
