CPA Exam — AUDForming Conclusions and ReportingMedium
An auditor's report includes an emphasis-of-matter paragraph to highlight a matter appropriately presented or disclosed in the financial statements that, in the auditor's judgment, is fundamental to users' understanding. Which of the following would most likely warrant an emphasis-of-matter paragraph?
- AA change in accounting principle that has a material effect on the financial statements and is appropriately applied.
- BA significant scope limitation imposed by management preventing the auditor from observing inventory.
- CSubstantial doubt about the entity's ability to continue as a going concern, which is adequately disclosed.
- DA material misstatement in revenue recognition identified by the auditor.
Show answer & explanationAnswer & explanation
Correct answer: C. Substantial doubt about the entity's ability to continue as a going concern, which is adequately disclosed.
An emphasis-of-matter paragraph is used to draw attention to a matter that is appropriately presented or disclosed in the financial statements and is fundamental to users' understanding. Substantial doubt about going concern, when adequately disclosed, is a classic example.
Why the other options are wrong
- A. A change in accounting principle that is appropriately applied generally does not require an emphasis-of-matter paragraph unless it's a significant change that is fundamental to users' understanding, but going concern is a more direct and common example.
- B. A significant scope limitation would lead to a qualified opinion or a disclaimer of opinion, not an emphasis-of-matter paragraph.
- D. A material misstatement would lead to a qualified or adverse opinion, not an emphasis-of-matter paragraph.
Emphasis-of-Matter Paragraph
An emphasis-of-matter paragraph is included in an auditor's report to draw users' attention to a matter presented or disclosed in the financial statements that is fundamental to their understanding of the financial statements.
- Does not affect the auditor's opinion.
- Matter must be appropriately presented/disclosed.
- Used for going concern, special purpose frameworks, etc.
Memory trick: Report modifications: Opinions Change, Emphasis Highlights, Others Inform.