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For December 2011 Exam, question 5(b), regarding WAREHOUSE,
it’s stated in the answer key that
“If the impact of the uninsured level of inventory is such that the company’s going concern status is impacted, consideration should be given to modifying the audit report opinion This would involve including an emphasis of matter paragraph drawing attention to the possible risk in relation to going concern”.
The audit opinion should be modified because if the company’s financial statements are prepared on the going concern basis when it’s going concern status is impacted, it basically means the financial statements don’t fully show a true and fair view right sir ?
Another issue, they said modify the audit opinion by including an emphasis of matter paragraph. But an emphasis of matter paragraph is only included when the audit opinion is unmodified; because the financial statements in fact show a true and fair view but there is something that needs to be brought to the user’s attention by means of an additional paragraph. Am I right sir?
It’s confusing. Could you please explain sir?
First of all, emphasis of matter is no longer used if there is a going concern worry. Instead a Material Uncertainty Related to Going Concern Paragraph.
That is used if there is some uncertainty as to going concern but drawing up the FS on a GC basis is still appropriate. This is a modified report but not a modified opinion.
If the company has no realistic chance of survival (ie much more serious than uncertainty relating to GC), the FS should be drawn up on a break-up basis. If they are produced on a going concern basis then there needs to be an Adverse opinion ie a modified opinion because the FS clearly do no sow a T&F view.
You cannot modify an opinion by using an EoM para. This modifies the report but not the opinion. The opinion is only one paragraph of the report.
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