What is the purpose of an emphasis-of-matter paragraph?
To refer to a matter that is appropriately presented or disclosed in the financial statements (GAAP issue) and is of such importance that it is fundamental to the users' understanding of the FS.
True / False: Inclusion of an emphasis-of-matter paragraph means the auditor cannot issue an unqualified (unmodified) opinion?
False
The paragraph highlights important information that is appropriately presented; it has nothing to do with the opinion.
What are the requirements for placement, heading, and content for an emphasis-of-matter paragraph?
It is placed in the auditor's report
Immediately following the Opinion
Heading "Emphasis-of-Matter" (or similar)
Describes the matter being emphasized and its location within the FS
Clarifies that the auditor's opinion is not modified with respect to the matter emphasized.
When is an emphasis-of-matter paragraph required?
The auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern
To describe a justified change in accting principle that has a material effect on the FS
Subsequently discovered facts lead to a change in audit opinion
The FS are prepared in accordance with a special purpose framework
When is an emphasis-of-matter paragraph not required, but strongly encouraged (professional judgment)?
An uncertainty related to the outcome of unusually important litigation or regulatory action
A major catastrophe having a significant effect on the entity's financial position
Significant related party transactions
Unusually important subsequent events.
What are the rules regarding the accounting and disclosure of uncertainties, such as lawsuits. When should the uncertainty be included in an emphasis-of-matter paragraph?
If the loss is probableandcan be estimated = accrue in the FS and disclose
If the loss is probable but cannot be estimated = disclose
If the loss is reasonably possible and can be estimated = disclose
If the loss is reasonably possible but cannot be estimated = disclose
If the loss is remote = generally ignore
The auditor would typically not add an emphasis-of-matter paragraph if these rules are followed.
What is the purpose of an Other-Matter paragraph and are these used for issuers or nonissuers?
Non-issuers
To refer to a matter other than those presented or disclosed in the FS that are relevant to the users' understanding of the audit, the auditor's responsibilities, or the auditor's report (GAAS).
What are the requirements for placement, heading, and content for an other-matter paragraph?
It is placed in the auditor's report
Immediately following the Opinion and any Emphasis-of-Matter paragraph(s)
Heading "Other-Matter" (or similar)
Describes the matter being emphasized
When is an other-matter paragraph required?
Anytime the auditor includes an alert that restricts the use of the auditor's report
Subsequently discovered facts lead to a change in audit opinion
The FS of the prior period were audited by a predecessor auditor and their report is not reissued
Current audited FS are presented in comparative form
Material inconsistency exists in other information (not the FS) in a document containing audited FS. The other info require revision and mgmt refuses.
To refer to required supplementary info that is required to accompany the FS
A report on compliance is included in the auditor's report
When is an other-matter paragraph not required, but strongly encouraged (professional judgment)?
To describe the reasons why an auditor cannot withdraw from an engagement, but should
Law, regulation, or generally accepted practice require or permit the auditor to provide further explanation of the auditor's responsibilities
The auditor has been engaged to report on more than one set of FS, when each set of FS has been prepared in accordance with a different framework
What is the biggest difference between an Emphasis-of-Matter versus Other-Matter paragraph?
The Emphasis-of-Matter paragraph refers to items that are disclosed.
The Other-Matter paragraph refers to items that are not disclosed ("other than those disclosed")
What is the purpose of an Explanatory paragraph and are these used for issuers or nonissuers?
Issuers
To refer to a matter other than those presented or disclosed in the FS that are relevant to the users' understanding of the audit, the auditor's responsibilities, or the auditor's report (GAAS).
True / False: Inclusion of an explanatory paragraph means the auditor cannot issue an unqualified (unmodified) opinion?
False
The paragraph highlights important information that is appropriately presented; it has nothing to do with the opinion.
What are the requirements for placement, heading, and content for an explanatory paragraph?
It is placed in the auditor's report
Generally immediately following the Opinion for an unqualified report, OR
Before the Opinion if the FS are created using a special purpose framework OR the prior year audit opinion is updated.
There is no heading
Describes the matter being emphasized
When is an explanatory paragraph required?
The prior year opinion is updated
FS are prepared using a special purpose framework
There is substantial doubt about the entity's ability to continue as a going concern
There has been a material change in accting principles
A material misstatement in previously issued FS has been corrected
Other info in a document containing audited FS is materially inconsistent with info appearing in the FS
Selected quarterly financial data required by the SEC Reg S-K has been omitted or has not been reviewed
Supplementary info required by the FASB, GASB, or FASAB has been omitted, or the auditor is unable to complete procedures regarding the info.
When is an explanatory paragraph not required, but strongly encouraged (professional judgment)?
Whenever the auditor wishes to emphasie a matter regarding the FS
True / False: Unless the auditor's report explicitly states otherwise, the auditor's report implies that the FS are comparable between periods.
True
What 2 events may negatively impact consistency of FS between reporting periods?
A change in accounting principle
An adjustment to correct a material misstatement in previously issued FS
What factors must be met regarding the acceptability for a change in accting principle? Where in the auditor's report is the change made known?
The newly adopted accting principle is in accordance with the framework
the method of accting for the change is acceptable
the disclosures related to the change are appropriate
the entity has justified that the alternative accting principle is preferable
True / False: A change in estimate (only) is not a consistency issue.
True
Which of the following is a consistency issue, and which is not, a change in: (1) allowance for doubtful accounts, (2) depreciation method, (3) estimated useful life of equipment
(1) this is a change in estimate only and not a consistency issue
(2) this is a change in estimate that is inseparable from a change in accting principle and does affect consistency
(3) this is a change in estimate only and not a consistency issue
The following paragraph is called _______, and should be placed in ______ section of the auditor's report: "This report is intended solely for the information and use of First National Bank..."
Called a "restriction of use" paragraph
Placed in the Other-Matters (nonissuer) or Explanatory (issuer) paragraph.
The entity presents comparative financial statements, and makes a change in accounting principle that but does not provide reasonable justification. The auditor should express a qualified in (1) only the year of the accting principle change, or (2) each year that the FS initially reflecting the change are presented?
(2) each year that the FS initially reflecting the change are presented