CPA Exam — AUDForming Conclusions and ReportingHard
An auditor is performing an audit of a publicly traded company. During the audit, the auditor discovers management's intent to sell a significant segment of its business, which is adequately disclosed in the financial statements. The auditor believes this matter is fundamental to users' understanding of the financial statements. How should the auditor address this in the audit report?
- AIssue a qualified opinion due to the uncertainty of the sale.
- BInclude an Other-Matter paragraph to highlight the sale.
- CInclude an Emphasis-of-Matter paragraph in the audit report.
- DIssue an unmodified opinion without any additional paragraphs.
Show answer & explanationAnswer & explanation
Correct answer: C. Include an Emphasis-of-Matter paragraph in the audit report.
An Emphasis-of-Matter paragraph is used when a matter, although appropriately presented or disclosed in the financial statements, is of such importance that it is fundamental to users' understanding of the financial statements. A significant segment sale (even if disclosed) would typically fall into this category.
Why the other options are wrong
- A. A qualified opinion is issued for material misstatements or scope limitations, not for appropriately disclosed fundamental matters.
- B. An Other-Matter paragraph is for matters *other than* those presented or disclosed in the financial statements that are relevant to the audit or report itself, not for disclosed matters fundamental to the F/S.
- D. Omitting an additional paragraph would be appropriate if the matter is not fundamental to users' understanding, which is contradicted by the scenario.
Emphasis-of-Matter Paragraph
An Emphasis-of-Matter paragraph draws users' attention to a matter appropriately presented or disclosed in the financial statements that, in the auditor's judgment, is fundamental to users' understanding of the financial statements.
- Matter is disclosed in F/S
- Fundamental to users' understanding
- Does not modify the opinion
Memory trick: EOM is for F/S Disclosures, OMP for Audit Details.