Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs

Question 1

An auditor includes an emphasis-of-matter paragraph in an otherwise unmodified report in order to emphasize that the entity being reported upon is a subsidiary of another business enterprise. The inclusion of this emphasis-of-matter paragraph
Is appropriate and would not negate the unmodified opinion.
Is considered a qualification of the report.
Is a violation of generally accepted reporting standards if this information is disclosed in footnotes to the financial statements.
Necessitates a revision of the opinion paragraph to include the phrase “with the foregoing explanation.”

Answer 1

Is appropriate and would not negate the unmodified opinion.

This answer is correct because the report is still considered unmodified.

Question 2

An auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time.  If the entity’s disclosures concerning this matter are adequate, the audit report may include a(n)
Disclaimer of opinion
Qualified opinion
Yes Yes
Yes No
No Yes
No No

Answer 2

Yes No

This answer is correct because while a disclaimer of opinion may be appropriate, a “except for” qualified opinion is never appropriate when substantial doubt about an entity’s ability to continue as a going concern has been adequately disclosed.

Question 3

In which of the following should an auditor’s report refer to the lack of consistency when there is a change in accounting principle that is significant?
The scope paragraph.
The opinion paragraph.
An emphasis-of-matter paragraph following the opinion paragraph.
An emphasis-of-matter paragraph before the opinion paragraph.

Answer 3

An emphasis-of-matter paragraph following the opinion paragraph.

This is correct because the professional standards require an emphasis-of-matter paragraph following the opinion paragraph.

Question 4

When an auditor concludes there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time, the auditor’s responsibility is to
Prepare prospective financial information to verify whether management’s plans can be effectively implemented.
Project future conditions and events for a period of time not to exceed 1 year following the date of the financial statements.
Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements.
Consider the adequacy of disclosure about the entity’s possible inability to continue as a going concern.

Answer 4

Consider the adequacy of disclosure about the entity’s possible inability to continue as a going concern.

This answer is correct because when, after considering management’s plans, the auditor concludes there is substantial doubt, he or she should consider the possible effects on the financial statements, and the adequacy of the related disclosure. In addition, an emphasis-of-matter paragraph should be added to the audit report.

Question 5

The auditor who wishes to point out that the entity has significant transactions with related parties should disclose this fact in
An emphasis-of-matter paragraph to the auditor’s report.
An explanatory note to the financial statements.
The body of the financial statements.
The “Summary of significant accounting policies” section of the financial statements.

Answer 5

An emphasis-of-matter paragraph to the auditor’s report.

This answer is correct because when the auditor wishes to emphasize such a matter, it should be done in an emphasis-of-matter paragraph to the auditor’s report. The report is still considered unmodified.

Question 6

Kane, CPA, concludes that there is substantial doubt about Lima Co.’s ability to continue as a going concern for a reasonable period of time. If Lima’s financial statements adequately disclose its financial difficulties, Kane’s auditor’s report is required to include an emphasis-of-matter paragraph that specifically uses the phrase(s)
Possible discontinuance

of operations
Reasonable period of time,

not to exceed 1 year
Yes    Yes
Yes     No
No     Yes
No      No

Answer 6

No No

This answer is correct because the emphasis-of-matter paragraph presented in the professional standards includes neither of the terms.

Question 7

Green, CPA, concludes that there is substantial doubt about JKL Co.’s ability to continue as a going concern.

If JKL’s financial statements adequately disclose its financial difficulties, Green’s auditor’s report should

Include a separate paragraph following the opinion paragraph
Specifically use the words “going concern”
Specifically use the words “substantial doubt”
Yes Yes Yes
Yes Yes No
Yes No Yes
No Yes Yes

Answer 7

Yes Yes Yes

Green’s audit report should include an emphasis-of-matter paragraph following the opinion paragraph to bring attention to the existence of the going concern issue. The paragraph should include the phrases “substantial doubt” and “going concern.”

Question 8

An auditor most likely would express an unmodified opinion and would not add an emphasis-of-matter or other-matter paragraph to the report if the auditor
Wishes to emphasize that the entity had significant transactions with related parties.
Concurs with the entity’s change in its method of accounting for inventories.
Discovers that supplementary information required by FASB has been omitted.
Believes that there is a remote likelihood of a material loss resulting from an uncertainty.

Answer 8

Believes that there is a remote likelihood of a material loss resulting from an uncertainty.

You Answered Correctly!
An unmodified audit report would be appropriate, since there is no need for disclosure if the likelihood of a material loss is indeed remote.

Question 9

A separate paragraph following the opinion paragraph of an auditor’s report describes an uncertainty as follows:

As discussed in Note X to the financial statements, the Company is a defendant in a lawsuit alleging infringement of certain patent rights and claiming damages. Discovery proceedings are in progress. The ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying financial statements.

What type of audit report should the auditor issue under these circumstances?

Unmodified.
"Subject to" qualified.
"Except for" qualified.
Disclaimer.
 You Answered Correctly!
The auditor should express an unmodified opinion. The disclosure of the contingent liability has been made and is considered adequate by the auditor.

An emphasis-of-matter paragraph may be added after the opinion paragraph to bring attention to the uncertainty.

Answer 9

Unmodified.

The auditor should express an unmodified opinion. The disclosure of the contingent liability has been made and is considered adequate by the auditor.

An emphasis-of-matter paragraph may be added after the opinion paragraph to bring attention to the uncertainty.