AUD 1.07 - Emphasis-of-Matter

  1. 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.
  2. 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.
  3. 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.
  4. 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
  5. 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.
  6. 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 probable and can 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.
  7. 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).
  8. 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
  9. 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
  10. 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
  11. 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")
  12. 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).
  13. 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.
  14. 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
  15. 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.
  16. When is an explanatory paragraph not required, but strongly encouraged (professional judgment)?
    Whenever the auditor wishes to emphasie a matter regarding the FS
  17. True / False: Unless the auditor's report explicitly states otherwise, the auditor's report implies that the FS are comparable between periods.
    True
  18. 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
  19. 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
    • Auditor's Report: Nonissuer = Emphasis-of-Matter; Issuer = Explanatory
  20. True / False: A change in estimate (only) is not a consistency issue.
    True
  21. 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
  22. 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.
  23. 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
Author
BethM
ID
332078
Card Set
AUD 1.07 - Emphasis-of-Matter
Description
Becker Review 2017
Updated