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For the following question below, i dont understand why we need to give just a unmodified opinion ? My answer was actually to issue and unmodified opinion plus a emphasis of matter paragraph as the users of the audit report need to be aware of the lawsuit. How am i wrong ?
Qn) You are an audit manager in Bond & Co and you are nearing completion of the audit of Paddington Co. You are now resolving the last few issues before deciding on the appropriate audit opinion.Paddington’s profit before tax is $29m. During the year being audited Paddington’s main competitor filed a lawsuit for $3m alleging a breach of copyright. This case is on-going and will not be resolved prior to the audit report being signed. Paddington’s lawyers believe the claim is only possible to succeed. Paddington has sufficient cash to make the settlement if they lose the case.
Assuming that the lawsuit of $3m is correctly treated in the financial statements and all other issues have been resolved, what audit opinion will be issued
Answer: unmodified opinion
Explanation: Because the matter is correctly treated in the financial statements and there is no significant uncertainty facing paddington since they have sufficient cash to pay when they lose the case.If in the auditor’s judgement there is a matter that is fundamental to users’ understanding then an Emphasis of Matter paragraph may be considered necessary.
The law suit, though material, is not fundamental to users’ understanding. If the company didn’t have the cash available, then an EoM would be relevant.
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