CPA Exam — AUDForming Conclusions and ReportingMedium
An auditor has completed an audit of a publicly traded company. The auditor concluded that the financial statements are presented fairly in all material respects in accordance with GAAP, but there is substantial doubt about the entity's ability to continue as a going concern. Which of the following best describes the appropriate auditor's opinion and the additional paragraph required?
- AA qualified opinion with an emphasis-of-matter paragraph.
- BAn unmodified opinion with an emphasis-of-matter paragraph.
- CAn adverse opinion with an emphasis-of-matter paragraph.
- DAn unmodified opinion with an other-matter paragraph.
Show answer & explanationAnswer & explanation
Correct answer: B. An unmodified opinion with an emphasis-of-matter paragraph.
When there is substantial doubt about an entity's ability to continue as a going concern, and the financial statements are otherwise presented fairly, the auditor issues an unmodified opinion and includes an emphasis-of-matter paragraph to highlight this uncertainty.
Why the other options are wrong
- A. A qualified opinion is issued for material misstatements or scope limitations, not for going concern uncertainties when the financial statements are otherwise fair.
- C. An adverse opinion is issued when financial statements are materially and pervasively misstated, which is not the case here if the going concern issue is appropriately disclosed.
- D. An other-matter paragraph is used for matters other than those presented or disclosed in the financial statements that, in the auditor's judgment, are relevant to users' understanding of the audit, the auditor's responsibilities, or the auditor's report, not for going concern uncertainties.
Going Concern Emphasis-of-Matter
An emphasis-of-matter paragraph is added to an unmodified audit report when substantial doubt about an entity's ability to continue as a going concern exists, provided the issue is adequately disclosed in the financial statements.
- Issued with an unmodified opinion.
- Highlights a matter appropriately presented or disclosed in the financial statements.
- Used when substantial doubt about going concern exists.
Memory trick: When the company's future looks hazy, the auditor's report gets a 'heads-up' paragraph.