Question Tag: Emphasis of Matter

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  • 10 Marks

AA – Nov 2023 – L2 – Q5c – Completion Procedures and Reporting

This question requires brief notes on the terms: Qualified opinion, Disclaimer of opinion, Emphasis of Matter paragraph, and Other Matter paragraph.

ISA 705: Modifications to the opinion in the independent auditor’s report and ISA 706: Emphasis of Matter paragraphs and Other Matter paragraphs in the independent auditor’s report provide modifying phrases for use when issuing modified reports.

Required:
Write brief notes on the following terms:

i) Qualified opinion
ii) Disclaimer of opinion
iii) Emphasis of Matter paragraph
iv) Other Matter paragraph
(10 marks)

  • Qualified Opinion:
    A qualified opinion is expressed when the auditor concludes that an unmodified opinion cannot be issued, but the misstatement or scope limitation is not pervasive. The financial statements are fairly presented, except for the issue identified, which may be a material misstatement or a limitation on audit scope.
  • Disclaimer of Opinion:
    A disclaimer of opinion is expressed when the auditor is unable to obtain sufficient appropriate audit evidence to form an opinion, and the possible effects are so material and pervasive that the auditor cannot express an opinion on the financial statements.
  • Emphasis of Matter Paragraph:
    An Emphasis of Matter paragraph is used to draw attention to a matter appropriately presented or disclosed in the financial statements that is fundamental to users’ understanding. It does not affect the auditor’s opinion but highlights important matters.
  • Other Matter Paragraph:
    An Other Matter paragraph is included in the auditor’s report to highlight 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.
  • 10 Marks

AA – Aug 2022 – L2 – Q5c – Completion Procedures and Reporting

Distinguishes between Emphasis of Matter and Other Matter paragraphs in the audit report and explains communication requirements.

ISA 706 (Revised): Emphasis of Matter Paragraphs and Other Matter(s) paragraphs in the Independent Auditor’s Report requires that an auditor’s report may include an “emphasis of matter” paragraph and/or an “other matter” paragraph.

Required:
Distinguish between Emphasis of Matter and Other Matter paragraphs, showing clearly requirements of Audit Report and communication with those charged with governance.

Emphasis of Matter Paragraph:
An Emphasis of Matter paragraph is used to draw the attention of users of the financial statements to matters that are presented or disclosed in the financial statements that are fundamental to understanding them. The key points regarding an Emphasis of Matter paragraph are:

  1. Inclusion in the Audit Report:
    The paragraph is included in a separate section with the heading “Emphasis of Matter.”
  2. Reference to Disclosures:
    The auditor must refer to specific notes in the financial statements that explain the matter in detail.
  3. No Modification to Opinion:
    The inclusion of an Emphasis of Matter paragraph does not modify the auditor’s opinion on the financial statements.
    (5 marks)

Other Matter Paragraph:
An Other Matter paragraph is used to communicate matters that are not presented or disclosed in the financial statements but are relevant to users’ understanding of the audit, the auditor’s responsibilities, or the audit report. The key points regarding an Other Matter paragraph are:

  1. Inclusion in the Audit Report:
    The paragraph is included in a separate section with the heading “Other Matter.”
  2. Matters Relevant to the Audit:
    The paragraph is used to communicate additional information that is necessary for users to understand the audit process or auditor’s responsibilities, such as restrictions on the audit scope or legal obligations.
  3. Not Related to the Financial Statements:
    Unlike an Emphasis of Matter paragraph, this paragraph refers to matters not already disclosed in the financial statements.
    (4 marks)

Communication with Those Charged with Governance:
If the auditor expects to include an Emphasis of Matter or Other Matter paragraph in the audit report, they must communicate this to those charged with governance, discussing the nature of the paragraph and the reasons for its inclusion.

  • 15 Marks

AA – Nov 2018 – L2 – Q5 – Completion Procedures and Reporting

Evaluates the use of an adverse opinion and the inclusion of an emphasis of matter paragraph in audit reports.

The auditors of ABC Ltd issued an adverse opinion on the financial statements of the company for the year ended 31 December 2017. This was due to the fact that management could not make available the cash book, general ledger, and debtors ledger to the auditors for examination.

Some of the engagement team members may not agree to the issue of an adverse opinion and are suggesting an unmodified report with an emphasis of matter paragraph.

Required:
a. Comment on the action of the auditors to issue an adverse opinion. (10 marks)
b. Explain to your team members the circumstances that will make auditors include an emphasis of matter paragraph in the Independent Auditor’s report. (5 marks)

(Total: 15 marks)

a. Comment on the Auditors’ Action to Issue an Adverse Opinion:

  1. Justification for Adverse Opinion: An adverse opinion is issued when the financial statements are materially misstated and do not provide a true and fair view of the company’s financial position. In this case, management’s failure to provide key documents, such as the cash book, general ledger, and debtors ledger, severely limits the auditor’s ability to gather sufficient appropriate audit evidence.
  2. Impact on Financial Statements: The absence of these key records means that the financial statements cannot be substantiated, and the figures provided by management could be materially misstated. This makes it impossible for the auditor to conclude that the financial statements are free from material misstatement, justifying the adverse opinion.
  3. Pervasive Effect: The issue is pervasive as it affects multiple areas of the financial statements, including cash, revenue, receivables, and possibly other balances. A pervasive issue affects the overall reliability of the financial statements, making the adverse opinion the appropriate course of action.
  4. Limitation of Scope vs Adverse Opinion: Although some team members suggest issuing a modified opinion with an emphasis of matter paragraph, the situation represents a significant limitation in the scope of the audit. An emphasis of matter paragraph would be inappropriate in this case because it is typically used when highlighting matters already disclosed in the financial statements, not when there is an inability to obtain sufficient audit evidence.
  5. Conclusion: The adverse opinion issued by the auditors is appropriate and justified under the circumstances, as the lack of essential financial records makes it impossible to verify the accuracy of the financial statements. (10 marks)

b. Circumstances for Including an Emphasis of Matter Paragraph:

  1. Definition of Emphasis of Matter: An emphasis of matter paragraph is included in the audit report to draw users’ attention to a matter that is appropriately disclosed in the financial statements but is of such importance that it is fundamental to users’ understanding of the financial statements.
  2. Uncertainty or Significant Event: An emphasis of matter paragraph may be included if there is an uncertainty relating to the outcome of significant litigation, regulatory actions, or major events such as natural disasters that have a significant impact on the company’s financial position but are properly disclosed.
  3. Application of New Accounting Standard: If a company applies a new accounting standard early, and the application has a material impact on the financial statements, the auditor may include an emphasis of matter paragraph to highlight this fact to users of the financial statements.
  4. Going Concern: If there is material uncertainty about the entity’s ability to continue as a going concern, and this uncertainty is appropriately disclosed in the financial statements, the auditor may include an emphasis of matter paragraph to highlight this to the users.
  5. Importance of Disclosure: It is important to note that the inclusion of an emphasis of matter paragraph does not modify the audit opinion. It is included to highlight key matters already presented in the financial statements. (5 marks)

(Total: 15 marks)

  • 10 Marks

AAA – May 2021 – L3 – Q4a – Reporting | Government external audit and public accountability

Discuss additional guidance for public sector auditors on the use of emphasis of matter paragraphs in audit reports according to ISSAI 1706 (Revised).

ISSAI 1706 (Revised) provides the requirements for an auditor who, having formed an opinion on the financial statements, has determined that it is necessary to draw users’ attention, by way of clear additional communication in the auditor’s report, to:

(a) A matter, although appropriately presented or disclosed in the financial statements, that is of such importance that it is fundamental to users’ understanding of the financial statements; or (b) As appropriate, any other matter relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report.

Required:

What additional guidance for public sector auditors relates to “Emphasis of Matter Paragraphs” in the Auditor’s Report? (10 marks)

In the public sector, audit mandates or expectations may expand the circumstances relevant for reporting by public sector auditors in an Emphasis of Matter paragraph. The additional guidance for public sector auditors in relation to emphasis of matter paragraphs as per ISSAI 1706 (Revised) includes the following considerations:

  1. Legislative Actions: Public sector auditors may need to draw attention to legislative actions on programs or budgets that have a significant impact on the financial statements or on the entity’s operations.
  2. Contradictive Laws and Regulations: Auditors should consider highlighting any laws, regulations, or directives that contradict each other and have a significant effect on the entity’s financial position or operations.
  3. Fraud, Abuse, or Losses: Public sector auditors may use an emphasis of matter paragraph to draw attention to instances of fraud, abuse, or significant losses that have been identified during the audit, even if these are appropriately disclosed in the financial statements.
  4. Significant Transactions: Emphasis may be necessary when there are significant transactions that have a material impact on the financial statements, particularly if these transactions are complex or unusual in nature.
  5. Significant Internal Control Deficiencies: Where there are significant deficiencies in internal controls that have been identified, public sector auditors may highlight these in the auditor’s report, as they are fundamental to understanding the entity’s financial reporting process.
  6. Questionable Business Practices: If there are questionable business practices that raise concerns about the entity’s compliance with laws and regulations or its ethical conduct, these may be highlighted in the auditor’s report.
  7. Ineffective Use of Public Resources: Auditors may also draw attention to instances where public resources have been used ineffectively or uneconomically, especially if this has a significant impact on the entity’s financial statements.
  8. Environmental and Social Responsibility Issues: Public sector auditors may include emphasis on environmental issues, corporate social responsibility matters, or ethical issues involving public officials if these are significant to understanding the financial statements.
  9. Prior Period Restatements: If there have been prior period restatements that are significant and impact the comparability of the financial statements, these may be highlighted through an emphasis of matter paragraph.
  • 20 Marks

AAA – May 2021 – L3 – Q3 – Reporting | The audit approach

Evaluate the appropriateness of draft auditor’s reports for two clients and discuss the use of emphasis of matter and other matter paragraphs in audit reports.

You have recently been promoted to Senior Manager of Life Matters and Associates, a firm of Chartered Accountants. As part of your job description, you are to handle two clients in a given month. Below are some issues you will be faced with during the audit of these clients. The financial year-end for each client is 30 September 2020.

You are reviewing the Audit Senior’s draft auditor’s reports for the two clients, Factory Co Ltd and Toys Co Ltd.

Toy Co Ltd

The Audit Senior suggests that Toys Co Ltd’s audit opinion should not be qualified but should include an emphasis of matter paragraph after the audit opinion to highlight the situation below:

In October 2020, a legal claim was filed against Toys Co Ltd by a toy retailer. The suit was from a customer who slipped on a greasy step outside one of the retail outlets. The matter has been fully disclosed as a material contingent liability in the notes to the financial statements. Audit working papers also provided sufficient evidence that no provision is necessary as Toys Co Ltd’s lawyers have stated in writing that the likelihood of the claim succeeding is remote. The amount of the claim is fixed and is adequately covered by cash resources.

Factory Co Ltd

Factory Co Ltd, a listed company, permanently closed several branches in May 2020, with all closure costs finalised and paid in August 2020. The said branches all produced the same items, which contributed 10% of Factory Co Ltd’s total revenue for the year ended 30 September 2020 (2019 – 23%). The closure has been discussed accurately and fully in the Chairman’s statement and Directors’ Report. However, the closure was not stated in the notes to the financial statements nor separately disclosed on the financial statements.

The audit senior has proposed an unmodified audit opinion for Factory Co Ltd as the matter has been fully addressed in the Chairman’s statement and Directors’ Report.

Required:

a) Evaluate whether the Audit Senior’s draft auditor’s report is appropriate, and where you disagree, recommend the amendment necessary to the draft auditor’s report of:

i) Toy Co Ltd (4 marks)

ii) Factory Co Ltd (6 marks)

b) Assuming the auditors of Life Matters and Associates are contemplating whether to use an emphasis of matter paragraph and other matter paragraph in the audit report, explain both options and the situations when each is relevant. (10 marks)

a) Evaluation of Draft Auditor’s Reports:

i) Toy Co Ltd:

  • Legal Claim Evaluation: The claim was an event after the balance sheet date. Suppose the accident occurred before the year-end of 30 September 2020. In that case, the claim gives additional evidence of a year-end condition and thus meets the definition of an adjusting post-balance sheet event. In this case, the matter appears to have been properly disclosed in the notes to the financial statements per IAS 10: Events After the Balance Sheet Date and IAS 37: Provisions, Contingent Liabilities, and Contingent Assets. A provision would only be necessary if the claim was probable to succeed, and there is sufficient appropriate evidence that this is not the case. There is, therefore, no material misstatement.
  • Audit Opinion Recommendation: The audit manager is correct to propose an unmodified opinion. However, the audit report doesn’t need to contain an emphasis of matter paragraph. ISA 705: Modifications to the Independent Auditor’s Report states that an emphasis of matter paragraph should be used to highlight a matter where there is significant uncertainty. Uncertainties are only regarded as significant if they involve a level of concern about the company’s going concern status or would have an unusually significant effect on the financial statements. This is not the case here, as there is enough cash to pay the damages in the unlikely event that the claim goes against Toys Co Ltd. This appears to be a one-off situation with a low risk of the estimate being subject to change, and thus there is no significant uncertainty.

(4 marks)

ii) Factory Co Ltd:

  • Discontinued Operations: The factory closures constitute a discontinued operation per IFRS 5: Non-Current Assets Held for Sale and Discontinued Operations due to discontinuing a separate major component of the business. It is a major component due to the 10% contribution to revenue in the year to 30 September 2020 and 23% contribution in 2019. In addition, it is a separate business component of the company due to the factories having made only one item, indicating a separate income-generating unit.
  • Disclosure Requirements: Under IFRS 5, there must be separate disclosure on the face of the income statement of the post-tax results of the discontinued operation and of any profit or loss resulting from the closures. The revenue and costs of the discontinued operation should be separately disclosed either on the face of the income statement or in the notes to the financial statements. Cash flows relating to the discontinued operation should also be separately disclosed per IAS 7: Cash Flow Statements. In addition, as Factory Co Ltd is a listed company, IFRS 8: Operating Segments requires separate segmental disclosure of discontinued operations.
  • Audit Opinion Recommendation: Failure to disclose the above information in the financial statements is a material breach of International Accounting Standards. The audit opinion should therefore be qualified on the grounds of disagreement on disclosure requirements of IFRS 5, IAS 7, and IFRS 8. The matter is material but not pervasive, and therefore an ‘except for’ opinion should be issued. The opinion paragraph should clearly state the reason for the qualification and indicate the financial significance of the matter. The audit opinion relates only to the financial statements that have been audited. Therefore, the contents of the other information (Chairman’s statement and Directors’ Report) are irrelevant when deciding if the financial statements show a true and fair view or are fairly presented.

(6 marks)

b) Emphasis of Matter and Other Matter Paragraphs:

  • Emphasis of Matter Paragraph:
    • An ’emphasis of matter’ paragraph is used to draw the reader’s attention to a matter presented or disclosed in the financial statements, which is fundamental to understanding those financial statements.
    • When an auditor’s report contains an emphasis of matter paragraph, the opinion is not modified. Therefore, it can only be used where the auditor has obtained sufficient appropriate audit evidence that the matter is not materially misstated in the financial statements. (If the matter is materially misstated, a modified opinion is required.)
    • Although the opinion is not modified, there is an item in the financial statements, properly presented or disclosed, that the auditor wishes to bring to the attention of users because it is fundamental to an understanding of the financial statements.
  • Circumstances for Emphasis of Matter Paragraph:
    • Where there is an uncertainty relating to the future outcome of exceptional litigation or regulatory action.
    • A significant subsequent event that occurs between the date of the financial statements and the date of the auditor’s report.
    • Where the entity has adopted a new IFRS early, which has had a pervasive effect on the financial statements.
    • To draw attention to a major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position.
    • Early application of a new accounting standard that has a pervasive effect on the financial statement.
  • Other Matter Paragraph:
    • An ‘other matter’ paragraph is used if the auditor considers it necessary to communicate a matter other than those included in the financial statements that, in his opinion, is relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report.
    • This is the paragraph that is used to highlight a matter that has not adequately been presented and disclosed in the financial statements but, in the auditor’s judgment, is fundamental for users’ understanding of the audit, audit work, and the auditor’s responsibility.
  • Circumstances for Other Matter Paragraph:
    • Where the auditor is unable to resign from the engagement even though the possible effect of a limitation of scope imposed by management is pervasive (relevant to users’ understanding of the audit). This should be rare in practice.
    • Where local law or custom allows the auditor to elaborate on his responsibilities in his report (relevant to users’ understanding of the auditor’s responsibilities or auditor’s report).
    • Another example when an other matter paragraph might be used is when the prior year financial statements were audited by a previous auditor, or not audited because this is the first-year audit for the current auditor.
    • The auditor is reporting on a set of financial statements prepared using different frameworks, e.g., both IFRS and GAAP.

(10 marks)

  • 8 Marks

AAA – Nov 2017 – L3 – Q5b – Reporting, Audit Evidence

Evaluate the suitability of the unmodified audit report issued for a client with significant going concern uncertainties and recommend improvements.

Your firm, Atinalp Consulting, is the Auditor of Ghana Kitchen Utensils Limited, a company that was incorporated in the 1960s, as part of Ghana’s industrial revolution after the Republic had attained independence. It manufactures and distributes kitchenware in the local and the West African markets. It has seen good old days but has suffered from the effects of cheap imports in the past few years.

The financial statements for the year ended 31 December 2015 have the following note:

Going Concern

The Company incurred a net loss for the year ended 31 December 2015 of GH¢24.8 million (2014: GH¢14.4 million) and as of that date its current liabilities exceeded its current assets by GH¢37.8 million (2014: GH¢24.9 million). The Company continues to incur losses.

The directors are engaging with strategic investors to help turn the fortunes of the Company around. A strategic investor has shown substantial interest in the Company and has approached the directors of the Company with the intent of acquiring a controlling interest in the Company. In September 2015, the shareholders passed a resolution authorizing the directors to enter into discussion with this strategic investor. If discussions are successful, this strategic investor will become a major shareholder. Based on preliminary discussions, the strategic investor is expected to further invest into the operations of the Company in addition to financing the necessary acquisition of shares directly from the company.

The investments and expertise of this strategic investor are expected to ensure a change of the Company to one that is profit-making. In pursuance of this transaction, the company has completed a professional revaluation of its assets and equipment.

The financial statements are prepared on the basis of accounting policies applicable to a going concern. This basis presumes that funds will be available to finance future operations and that the realization of assets and settlement of liabilities will occur in the ordinary course of business.

The ability of the Company to continue as a going concern largely depends on the successful conclusion of the takeover by the strategic investor and its ability to execute plans to turn around the fortunes of the Company.

The opinion section of the audit report issued by your firm was as follows:

Opinion

In our opinion, the financial statements give a true and fair view of the financial position of Ghana Kitchen Utensils Limited as at 31 December 2015, and of its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and in the manner required by the Companies Act, 1963 (Act 179).

Required:
Comment on the suitability of the report issued and recommend some improvement, if any, you believe would be necessary under the circumstances.

(8 marks)

Suitability of the Audit Report:

  • Lack of Emphasis of Matter Paragraph:
    • The report issued is not fully suitable given the significant going concern uncertainties mentioned in the financial statements. Although the opinion is unmodified, there is a material uncertainty related to the going concern assumption, which should have been highlighted.
  • Requirement for an Emphasis of Matter Paragraph:
    • The International Standards on Auditing (ISA) 570 (Revised) requires that when there is a material uncertainty related to going concern, the auditor should include an Emphasis of Matter paragraph in the auditor’s report to draw attention to the note in the financial statements that discloses the matter.

Recommended Improvements:

  • Inclusion of an Emphasis of Matter Paragraph:
    • The audit report should be amended to include an Emphasis of Matter paragraph immediately following the opinion paragraph. This paragraph should draw attention to the note on going concern in the financial statements, clearly indicating the material uncertainty that may cast significant doubt on the entity’s ability to continue as a going concern.
  • Suggested Wording:
    • A suggested wording for the Emphasis of Matter paragraph could be as follows:

    Emphasis of Matter

    • We draw attention to Note [X] in the financial statements, which indicates that the Company incurred a net loss of GH¢24.8 million during the year ended 31 December 2015 and, as of that date, the Company’s current liabilities exceeded its current assets by GH¢37.8 million. These conditions, along with other matters as set forth in Note [X], indicate the existence of a material uncertainty that may cast significant doubt on the Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.

(4 marks for suitability assessment, 4 marks for recommended improvements = 8 marks)

  • 4 Marks

AAA – March 2023 – L3 – Q5c – Reporting, Current issues

Differentiate between the emphasis of matter and other matter paragraphs with examples.

An auditor’s report may include an ‘emphasis of matter’ paragraph and/or an ‘other matter’ paragraph. These types of paragraph are the subject of ISA 706: Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report. The purpose of these paragraphs is to provide additional communication in the auditor’s report.

Required:
Differentiate between the ‘emphasis of matter’ paragraph and ‘other matter’ paragraph citing ONE (1) circumstance in each case. (4 marks)

An emphasis of matter paragraph draws the attention of users to an item (or ‘matter’) that is included in the financial statements and which the auditor considers fundamental to an understanding of the financial statements.

  • Note that if such a matter is considered a ‘Key Audit Matter’ (per ISA 701), then it shall be addressed in the ‘key audit matters’ section of the auditor’s report rather than in an ‘emphasis of matter’ paragraph.

An other matter paragraph deals with a matter which is not included in the financial statements but which is relevant to an understanding of the audit, the auditor’s responsibilities or the auditor’s report.

(4 marks)

  • 10 Marks

AAA – Nov 2015 – L3 – Q1a – The meaning of audit and assurance

Define and explain the use of Emphasis of Matter and Other Matter paragraphs in audit reports per ISA 706.

a) You are the partner responsible for the audit of ABC Co, for the year ended 30th April 2014. The final audit has been completed and you have asked the audit manager to draft the audit report. The manager is aware that there is guidance for auditors relating to audit report in ISA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report. The manager has asked for your assistance in this matter.

Required:

i) Define an ‘Emphasis of Matter paragraph’ and explain, providing examples, the use of such a paragraph. (6 marks)

ii) Define an ‘Other Matter paragraph’ and explain, providing examples, the use of such a paragraph. (4 marks)

i) An Emphasis of Matter (EoM) paragraph is a paragraph in the auditor’s report that is appropriately presented or disclosed, but which is so important that special emphasis is needed for users.

An EoM is different from a modification to the auditor’s opinion. An EoM paragraph does not modify the opinion; indeed, it should state clearly that this is the case. An auditor should only include an EoM if s/he has sufficient appropriate audit evidence that the matter is not materially misstated.

The EoM should provide a clear reference to the matter, and to where the appropriate disclosures and other information can be found in the financial statements.

Examples of when an EoM should be used include:

  • An uncertainty relating to the future outcome of exceptional litigation
  • Early application of a new accounting standard that has a pervasive effect on the financial statements.
  • A major catastrophe that has had a significant effect on the entity’s financial position
  • Significant going concern issues (6 marks)

ii) An Other Matter (OM) paragraph has in common with the EoM the fact that it does not modify the auditor’s opinion. However, whereas the EoM refers to a matter within the financial statements, an OM refers to information that is rightly not present in the financial statements, but which is so important for users’ understanding of them that it needs to be highlighted in the auditor’s report.

Examples of situations include:

  • Law, regulation, or generally accepted practice may require or permit the auditor to elaborate on matters that provide further explanation of the auditor’s responsibilities or report.
  • The auditor may be reporting on more than one set of financial statements (e.g., a set of statements prepared under a national reporting framework, and a set of statements prepared under International Financial Reporting Standards).
  • Any restriction on the distribution of the auditor’s report.

The OM is thus a means for the auditor to communicate with users, and should state explicitly that the matter referred to is not required to be included in the financial statements. (4 marks)

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