[isaak]

Becker Question –

Which of the following is true?

When an auditor includes a paragraph after the opinion paragraph emphasizing a significant related party transaction, the opinion would be considered a qualified opinion.

b.

The auditor may issue an unmodified opinion when a material departure from GAAP exists.

c.

If an auditor believes there is substantial doubt about an entity’s ability to continue as a going concern, and management has properly disclosed the situation, the auditor may not issue an unmodified opinion.

d.

When a material accounting change has been properly accounted for and disclosed, the auditor may not issue an unmodified opinion.

Why choice c is not correct,since the auditor can disclaim an opinion.

[Gusher_hi]

When the going concern uncertainty is addressed through proper disclosure of the circumstances in the notes to the FS, an auditor must issue an unqualified opinion with emphasis of matter paragraph.

[isaak]

the correct answer from Becker is b

[isaak]

I do not know why choice c is not correct.

[Gusher_hi]

Sorry Isaak, I misunderstood the question. I revised my initial response. Option B is controversial though in a sense that it does not provide complete information. A qualified opinion at the minium must be issued in this situation unless the misstatement arising from material departure was corrected by the client.

[Gusher_hi]

Option C is incorrect because it is saying that a clean opinion must not be issued despite the fact that the going concern uncertainty has been addressed through disclosure in the notes. In this situation, a clean opinion can still be issued but with an emphasis of matter paragraph which then makes a reference to that specific note disclosure about the circumstances surrounding going concern. Without the proper disclosure, the opinion must be qualified.

These are just my opinions based on my professional experience. I am not using Becker and I just started studying AUD.

[Gusher_hi]

In any event, it is impossible for the auditor to disclaim an opinion in relation to the situation described in item C. Disclaimer indicates pervasiveness of the issue and actual or potential misstatement being material to the FS. These factors are not present in option C situation.

[isaak]

The auditor is not precluded from choosing to disclaim an opinion due to a going concern uncertainty,so the auditor may not issue an unmodified opinion. The auditor can disclaim an opinion instead.

[Gusher_hi]

Therefore despite the ambiguity or insufficiency of information provided, option B becomes the only sensible answer given the fact that the statement is true under certain conditions (which were not fully indicated in the problem). Whereas, for the other options, there is zero possibility of these statements being true.

[isaak]

check this question

An auditor concludes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable amount of time. If the entity's disclosures concerning this concern are adequate, the audit report may include which of the following:

disclaimer of opinion except for qualified opinion

the answer is yes,no.

In Becker,it says, “Although the general rule in going concern cases is to add an explanatory paragraph to the unqualified opinion, the auditor is not precluded from choosing to disclaim an opinion in cases involving uncertainties. The decision between the unqualified opinion w/explanatory paragraph and a disclaimer of opinion is based on the auditor's judgement.”

[Gusher_hi]

You looking at it wrong, Isaak. You have to comprehend the question which is indicating that issuance of a clean opinion is NOT an option. That is a false statement given that is one of the possible options under AU 570. Also that circumstances described in the option C indicates that clean option is the right report type to be issued.

You cannot solely use AU 570 for your argument that nothing precludes an auditor from disclaiming an opinion given that that option is effectively governed by AU 705. AU 705 is very explicit on when an auditor must disclaim an opinion which is in essence the worst-case scenario. Read the standards again.

Trust in me in this one. I wrote a lot of clean opinions with emphasis of matter paragraph under AU / ISA 570 or AU 705 / ISA 705 particularly on going concern. Disclaimers in this situation is a rarity.

[Gusher_hi]

Audit is very conceptual so you need to understand the interrelationships of the standards.

AU 570.18 states that “Nothing in this section precludes an auditor from disclaiming an opinion in cases involving uncertainties. When the auditor disclaims an opinion, the report should not include the going-concern emphasis-of-matter paragraph described in paragraph .15 of this section but, rather, describe the substantive reasons for the auditor's disclaimer of opinion in the auditor's report as required by section 705. The auditor should consider the adequacy of disclosure of the uncertainties and their possible effects on the financial statements as described in paragraph .12 of this section even when disclaiming an opinion.”

Note that clear reference to AU 705 as the governing standard when an auditor decides to disclaim an opinion. Based on the specific situation under option C, there are no basis to justify a disclaimer of opinion. Clean opinion is the correct report type.

[Gusher_hi]

But to simplfy this, look at the problem from this perspective. You do not need to even refer to disclaimer to answer this question right.

The question that should clear everything is that: “Given the situation provided in option C, is it true that the auditor MUST NOT issue a clean opion? True or false?”

Based on AU 570, that is clearly a false statement.

AU 570.15 states that “If, after considering identified conditions or events and management's plans, the auditor concludes that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time remains, the auditor should include an emphasis-of-matter paragraph in the auditor's report to reflect that conclusion.”

As we all know, an emphasis of matter paragraph is not a modification of opinion. Therefore we conclude that a clean opinion with emphasis of matter paragraph is the correct report to be issued which renders the statement in option C incorrect.

[Gusher_hi]

Becker is correct except that it did not lead you to the correct standard governing disclaimers of opinion.

[isaak]

Ok, thanks for you quick response, that helps me a lot!

[isaak]

i think if the question states that auditor MUST NOT issue an unmodified opinion on choice c,then I would not think about other possibility. Thanks again!

[Author]

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