CPA Exam — AUDForming Conclusions and ReportingMedium
An auditor's report on financial statements prepared in accordance with the cash basis of accounting should include an Emphasis-of-Matter paragraph that:
- ARefers to the note to the financial statements that describes the basis of accounting used.
- BIndicates a material uncertainty related to going concern.
- CExplains that the financial statements are not audited.
- DStates that the auditor is not independent of the entity.
Show answer & explanationAnswer & explanation
Correct answer: A. Refers to the note to the financial statements that describes the basis of accounting used.
When reporting on financial statements prepared using a special purpose framework (like the cash basis), an Emphasis-of-Matter paragraph is required to draw users' attention to the financial statement note that describes the basis of accounting used, as this is fundamental to understanding the statements.
Why the other options are wrong
- B. A going concern uncertainty would be an EOM, but it's a separate issue from the basis of accounting.
- C. This statement is not part of an EOM for SPF; if the financial statements were not audited, a different report (e.g., review or compilation) would be issued.
- D. Independence is generally required for an audit; this is not a standard EOM for SPF.
SPF Report Emphasis-of-Matter
An Emphasis-of-Matter paragraph in an audit report on special purpose financial statements draws attention to the note that describes the basis of accounting used, which is fundamental to users' understanding.
- Required for special purpose framework audits.
- Highlights the specific basis of accounting (e.g., cash basis, tax basis).
- Ensures users understand the framework, not a GAAP/IFRS presentation.
Memory trick: SPF Report: Opinion on *Special* Basis, EOM paragraph to *Explain* it.