Under what circumstances an Emphasis of a matter paragraph is include in the audit opinion?

Refer to paragraph 2 of the text

Why a widespread use of Emphasis of Matter paragraph is discouraged by the Auditing Standard?

Widespread use of Emphasis of Matter paragraph is discouraged by the Auditing Standards because:

(a) Emphasis of a matter paragraph diminishes the effectiveness of the auditor’s communication of such matters.

(b) Additional information (not disclosed in financial statements) may imply that information in financial statements is not appropriately disclosed.

(c) Emphasis of matter paragraph is not a substitute for qualified, adverse or disclaimer of opinion, or inadequate disclosure.

Give some examples of other matter paragraph ill other matters

Refer to paragraph 3 of the text

Give five examples of instances which are excluded from other matter paragraph in audit opinion.

Five examples of instances which are excluded from other matter paragraph in audit opinion are:

(a) Proper books of accounts have been kept.

(b) Expenditure was incurred for the propose of business

(c) Investments made, expenditure incurred and business conducted was in accordance with objects of the company.

(d) Ethical standards relating to confidentiality of information

(e)” Information that is required to be provided by management.

Identify the situations in which an auditor may modify his report without affecting his opinion. Also explain how such a modification should be presented in the audit report.

The situations in which” a report 1S modified without affecting the auditor’s opinion are as follows:

(i) If the use of going concern assumption is appropriate but a material uncertainty exists which has been adequately disclosed in the financial statements.

(ii) If there is a significant uncertainty (other than going concern) the resolution of which is dependent upon future events and which may affect the financial statements.

(iii) In case, other information attached with the financial statements are inconsistent with the information in the financial statements.

How modification is presented:

(i) By adding an emphasis of matter paragraph to ‘highlight an important matter affecting the financial statements.

(ii) The above paragraph is required to refer to the note to the financial statements that more extensively discusses the matter.

(iii) The paragraph should preferably by included after the paragraph containing the auditor’s opinion but before the section on any other reporting responsibilities.

(iv) The emphasis of matter paragraph should ordinary refer to the fact that the auditor’s opinion is not qualified in this respect.

In the light of ISA-700 “Forming an opinion and reporting on financial statements”, discuss the auditor’s responsibilities with regard to unaudited supplementary information presented with the audited financial statements.

(i) If supplementary information that is not required by the applicable financial reporting framework is presented with the audited. financial statements, the auditor shall evaluate whether such supplementary information is clearly differentiated from the audited financial statements.

(ii) If such supplementary information is not clearly differentiated from the audited financial statements, the auditor shall ask management to change the presentation of supplementary information by:
• Removing any cross references from the fmancial statements to unaudited supplementary schedules or unaudited notes so that the demarcation between the audited information is sufficiently clear.
• Placing- the unaudited supplementary information outside of the financial statements or, if that is not possible in the circumstances, at a minimum place the unaudited notes together at the end of the required notes to the financial statements and clearly label them as unaudited.

(iii) If management refuses to do so, the auditor shall explain in the auditor’s report that such supplementary information has not been audited.

(iv) The fact of supplementary information is unaudited does not relieve the auditor of the responsibility to read that information to identify material inconsistencies with the audited financial statements.

(v) Supplementary information that is not required by the applicable financial reporting framework but is nevertheless an integral part of the financial statements because it cannot be clearly differentiated from the audited financial statements due to its nature how it is presented shall be covered by the auditor’s ., opinion.

You are the senior responsible for the audit of Iqra Industries Limited (ilL). During the course of the audit you became aware that a legal action has been instituted against IlL by some of its customers, on account of disputes related to performance of its products. In response to your request for an opinion the company’s lawyer has simply stated that “We are totally unable to give any estimate “. No provision was made in the financial statements for the possible loss as a result of the claims (which are considered to be material) or for the related legal expenses, although details of those legal claims were fully disclosed in the notes.


Comment on the implication of the above matter on the auditors’ report and the financial statements of IlL.

Implication on audit report

In case ultimate outcome of the matter cannot be determined, there is a significant uncertainty the resolution of which depends on future events. In this case a reliable estimate of the amount of loss cannot be made a provision need not be made.

The auditor should modify the audit opinion adding a paragraphy for emphasis of a matter.

Posted on November 2, 2015 in Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report

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