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Below is a question from BPP revision kit:
The auditor may wish to draw the users’ attention to a matter which is not presented or disclosed in the financial statements but which is relevant to the users’ understanding of the auditor’s report.
How would this affect the auditor’s report?
A) An emphasis of matter paragraph would be included.
B) The audit opinion would be qualified.
C) An other matters paragraph would be included.
D) The auditor’s report would not be affected as the auditor’s report only refers to matters presented or disclosed in the financial statements.The answer according to the kit is:
B) The audit opinion would be modified.
However, my question is, Why is the answer not C: An other matter paragraph would be included?
ISA 706 “Emphasis of matter paragraphs and other matter paragraphs in the independent auditor’s report” provides guidance to auditors on the inclusion of paragraphs in the auditor’s report that either draws users’ attention to a matter that is of such importance that it is fundamental to their understanding or that is relevant to their understanding of the audit, the auditor’s responsibilities or the auditor’s report.
It is my understanding (or may be a misunderstanding?) that the inclusion of an emphasis of matter paragraph and/or other matter paragraph, though modify the audit report, do not affect the audit opinion (unmodified opinion).
Please clarify.
Also according to the text, a qualified opinion must be expressed in the following two situations:
(1) The auditor concludes that misstatements are material, but not pervasive, to the financial statements.
(2) The auditor cannot obtain sufficient appropriate audit evidence on which to base the opinion but concludes that the possible effects of undetected misstatements, if any, could be material but not pervasive.The question only mentions that the auditor may wish to draw the users’ attention to a matter which is not presented or disclosed in the financial statements but which is relevant to the users’ understanding of the auditor’s report. No relation to the above two points. Hence I don’t see how option B applies.
Please clarify. 🙂
‘The auditor may wish to draw the users’ attention to a matter which is not presented or disclosed in the financial statements but which is relevant to the users’ understanding of the auditor’s report.’
This means that the FS do not show a true and fair view because they have omitted an important disclosure.
An emphasis of matter paragraph (not an other matter) can draw attention only to something that has been properly disclosed in the FS. The EoM does what it says: it draws attention, emphasises, something in the FS. As you say, this does not modify the audit opinion.
Opinions can be modified for two reasons:
1 There is a material misstatement;
2 Sufficient appropriate audit evidence is not available.So, if a required disclosure has not been made in the FS, this cannot be corrected by an EoM paragraph: the audit opinion must be modified instead.
Now, you also have to separate an EoM para and an other matter para. The EoM emphasises something in the FS. An other matter para refers to something NOT in the FS. Typically it refers to something in the directors’ report or chairman’s statement. These documents are not part of the FS so are not covered by the opinion paragraph (it only forms an opinion on the FS). However, what if the director’s report says something that is wrong and misleading? Shareholders might read that first and believe that rather than what’s in the FS. Therefore the other matters para can be included in the audit report to draw attention to something wrong elsewhere. The audit opinion cannot be modified because it does not cover director’s reports etc anyow.
HTH
I am afraid sir, I still have some doubt.
Below is the definition given in ISA 706 (revised) for other matter paragraph:
Para 7:
For purposes of the ISAs, the following terms have the meanings attributed below:(a) 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.
(b) Other Matter paragraph – A paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.
Which is the same as the question right?
Further down, Para A15 states this:
The content of an Other Matter paragraph reflects clearly that such other matter is not required to be presented and disclosed in the financial statements. An Other Matter paragraph does not include information that the auditor is prohibited from providing by law, regulation or other professional standards, for example, ethical standards relating to confidentiality of information. An Other Matter paragraph also does not include information that is required to be provided by management.
Hence I believe for the given question question the answer would be (C) An other matters paragraph would be included.
BPP is right; so am I. There is NO doubt about that in this case as it is a very standard point.
The FS do not show a true and fair view because the material information has been omitted so the only option is to have a modified opinion.
I can add no more than I have already explained.
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