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Good day Mam, Can you please confirm the answer to this MTQ, which I feel requires an EOM paragraph but the correct answer behind the Kit is only an unmodified opinion without additional communication
”You are an audit manager in Bond & Co and the audit of Paddington Co is nearing completion. You
are now resolving the last few issues before deciding on the appropriate audit opinion.
Paddington Co’s profit before tax is $29 million. During the audit the following issues have been
identified:
1 Paddington Co’s main competitor filed a lawsuit for $3 million alleging a breach of
copyright. This case is ongoing and will not be resolved prior to the auditor’s report being
signed. Paddington Co’s lawyers believe the claim is only possible to succeed. Paddington
Co has sufficient cash to make the settlement if they lose the case. The lawsuit has not
been mentioned in the financial statements or related disclosures.
2 A warranty provision of $25 million has not been recognised.
3 Depreciation of $1 million has not been recorded in the financial statements.
4 Intangible assets have been overstated in the financial statements by $12 million.”The audit is now complete and the auditor’s report is due to be issued next week. All
adjustments requested have been corrected by management.
Which of the following correctly identifies the implications for the audit opinion and
report of Paddington Co?
? Unmodified opinion with no additional communication
? Unmodified opinion with an Emphasis of Matter paragraphMy concern is, since there are disclosures that disclosed adequately seem to be of importance to shareholders and would impact their decisions so why not include them in EOM para…
A full definition of EoM is:
“Emphasis of Matter paragraph – A paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of SUCH IMPORTANCE that it is FUNDAMENTAL to users’ UNDERSTANDING of the financial statements.”I don’t like to use this phrase, but I think it helps understand the concept, this definition means that the matter disclosed will be “more than simply material”. So yes, $3m is material (c.10%) of profit but has been properly accounted for. Consider this – there are lots of things that require disclosure and the EoM would lose relevance if it was used to highlight every correct disclosure simply because it is material.
A GOOD example of a matter that is “worthy” of the EoM (and is the one mentioned in the notes) is adequate disclosure of a non-adjusting event such as a flood/fire (but not so severe that the entity is no longer a going concern). By definition this is material. What the EoM is saying is “before you read these financial statements you need to be aware that certain assets on SoFP that existed at the reporting date no longer exist due to [note # ref to disaster]….” I think you’ll agree that is pretty fundamental.
Another example is where the financial statements have been drawn up on a basis OTHER than going concern – the EoM is saying to readers “the SoFP is going to look a bit weird compared to what you’re used to because the financial statements have been drawn up on a break up basis … [reference to accounting policy note #1]”. Again – the reader really does need to know that.
Now I know you may say that users may not read the auditor’s report first – except me (that’s always the first thing I read) – so the way I have written it sounds exaggerated – but even if the users have already read the financial statements it’s saying “this is part of the context in which we have formed our opinion – and if you didn’t read that note – go and read it now”.
Ohh Ok, thanks a zillion mam.
That’s a very emphasized explanation indeed <3
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