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:
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)
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An emphasis of matter paragraph is a paragraph included in the auditor’s reports that refers to a matter appropriately presented or disclosed in the financial statement that in the auditors judgement, is of such importance that it is fundamental to users ‘ understanding of the financial statement. Emphasis of matter paragraphs are used to draw readers’ attention to a matter already presented or disclosed in the financial statement that the auditor feels is fundamental to their understanding, provided that the auditor has obtained sufficient appropriate audit evidence that the matter is not materially misstated.
Example of situations in which the auditor might include an emphasis of matter paragraph in the auditor’s report are:
- An uncertainty relating to the future outcome of exceptional litigation or regulatory action
- Early application of a new accounting standard that has a pervasive effect on the financial statements.
- A major catastrophe that has had or continues to have a significant effect on the entity’s financial position.