Welcome back. In our last Auditing CPA Exam class, we went over the standard unmodified opinion word for word, and as I said in the last CPA Review lectures, it's essential that you memorize the unmodified opinion word forward. That is really how you begin your study of reporting issues because you'll find you come back to it time and again, because when you study.
What modifications have you made to the unmodified opinion? It is so helpful if you know it cold and you can just zero in on the modifications, you'll find it helps you time and again. Now what we want to get into in this class is something that we might add to the unmodified opinion. For example, we might add to the unmodified opinion an emphasis of matter paragraph.
An emphasis of matter paragraph would come in after the opinion paragraph. It's not modifying the opinion. Let me say that again. When there's an emphasis of matter paragraph, it comes after the opinion paragraph because we're not modifying the opinion. It's an unmodified opinion. Now, an emphasis of matter paragraph could be required or at the auditor's discretion.
Now when does it used? An emphasis of matter paragraph is used for information that is. Recorded in the financial statements. It's properly recorded. It's fully disclosed, but the emphasis is going to be added because it's essential to the user's understanding of the financial statements. That's when you need an emphasis of matter paragraph.
It's for information that's recorded properly in the financial statements. It's fully disclosed, but the emphasis is added because it's fundamental. It's essential to the user's understanding of the financial statement. Now, if you look in your viewer's guide, you'll see the four situations where an emphasis of matter paragraph is required.
Number one, an emphasis of matter paragraph is required when there's substantial doubt about the entity's ability to continue as a going concern. And we'll talk about going concern issues later in these classes, but when there's substantial doubt about the entity's ability to continue as a going concern, that is a required emphasis of matter.
Paragraph number two. An emphasis of matter paragraph is required when there's a justified change in accounting principle that has a material effect on the financial statements. I think you know what we're talking about. Let's say a company changes from an old generally accepted accounting principle to a new generally accepted accounting principle.
For the same transactions for the same set of circumstances. They changed their inventory costing method from Fife photo lifeboat, lifeboat, a FIFO five photo weighted average, something like that. They changed their method of accounting for long-term contracts from the percentage of completion to completed contract or from completed contract to percentage of completion.
These situations come up. Well, if there's a justified notice, it's justified change in principle that has a material effect on the statements. That is a required emphasis of matter paragraph. Notice this includes a change in entity that would be included in this, in this emphasis of matter paragraph. A change in entity.
A parent sub have always issued separate statements this year. They want to consolidate their statements. That's a change in the reporting entity. A change in entity. That would be included in this section. This would also include correcting an error, correcting an error that involves a principal. In other words, you miss applied a principle or you go from an unacceptable principal to an acceptable principal.
If it involves an accounting principle, correcting an error, not mathematical mistakes, but if you correct an error that involves an accounting principle, that would be in this section. Also. A change in estimate inseparable from a change in principle. And you know the classic example of that, a change in depreciation methods, a change in depreciation methods is a change in estimate that's affected by a change in principle that would be included in this emphasis of matter.
Paragraph. By the way, not a change in estimate. We use to estimate the machine would last for six years. Now we think it'll last for eight. Just a simple change in estimate is not in this section, but a justified change in principle that has a material effect on the statements. That's a required emphasis of matter.
Paragraph number three, if the financial statements are prepared with an applicable special purpose framework other than a regulatory basis, that's intended for general use, that's an emphasis of matter paragraph. An emphasis of matter paragraph is required. Number four, when subsequently discovered facts lead to a change in opinion, and we'll talk about that later in these classes.
But anytime subsequently discovered facts have led to a change in audit opinion, that's going to be required. A required emphasis of matter paragraph. Now, an emphasis of matter paragraph
may be used, may be used for uncertainty. It may be used if there's a major catastrophe, it may be used. If there were significant related-party transactions and it may be used if there are significant subsequent events. Now after the emphasis of matter paragraphs, then there are other matter paragraphs.
So remember it's the opinion paragraph followed by emphasis of matter paragraphs and then after the emphasis of matter paragraphs. There would be other matter paragraphs. Now when do we use an other matter paragraph? We use an other matter paragraph and again, it could be required or at the auditor's discretion.
We're going to use another matter paragraph to describe a matter that is relevant to the user's understanding of the audit the auditor's responsibility. When do we use an emphasis of matter paragraph? When do we use that? When we want to emphasize a matter that's essential to the user's understanding of the financial statements, but we're going to use an other matter paragraph two, for a matter that's relevant to the user's understanding of the audit opinion or the auditor's responsibility.
Now again, if you look in your viewer's guide, you'll see the nine situations where an other matter paragraph is required. Number one, if the auditor has to restrict use of the audit report. That's a required other matter. Paragraph number two, if there are subsequently discovered facts that lead to a change in audit opinion.
Now notice that was one of our required emphasis of matter paragraphs. See here the auditor has a choice. If there are subsequently, and we will talk about this later in the class in the classes, but if there are subsequently discovered facts that lead to a change in audit opinion, that will either be a required emphasis of matter.
Paragraph. Or an other matter paragraph based on the auditor's judgment of its importance. Obviously the auditor thinks it's extremely important. It's auditor judgment. It would be more likely to be an emphasis of matter paragraph. The auditor thinks it has less importance. It would be an other matter paragraph, but it has to be one of the other.
It's required to be one or the other, but it could be one of the other. Number three, if the financial statements of prior periods are audited by a predecessor auditor and the predecessor auditor's report is not going to be reissued, not going to be reissued, and again, we'll talk about that later in these classes, but that would be a required of the matter paragraph number four if the current period financial statements are audited and presented in comparison with compiled statements or reviewed statement.
For prior periods or PR or presented in comparison with prior periods that were not compiled, not review. That's required. Other matter, paragraph number five. If there's a material inconsistency and other information and management refuses to revise the other information presented alongside audited financial statements that number six, that'd be a required other matter paragraph.
If the auditor chooses to report on supplementary information in the audit report rather than a separate report. Number seven, there'll be another matter paragraph required if the auditor wants to refer to supplementary information that's required. It's required supplementary information and we'll talk about other information and supplementary information later in these classes.
Number eight, there'll be another matter paragraph required if the auditor has to restrict the use of the report when a special purpose. A financial statement, special purpose financial statements are presented in accordance with contractual or regulatory basis, but again, I'm not talking about a regulatory basis intended for general use.
And then finally, number nine and other matter paragraphs would be required to, if a report on compliance is included with the audit report. Those are the nine situations. Where an other matter paragraph is required. Now, an other matter paragraph may be necessary notice first to explain why the auditor cannot withdraw when there's management imposed scope limitation and we will be talking about that, but if the auditor is unable to withdraw from it from an engagement when there's a management imposed scope limitation that may require dr the auditor's judgment may require an other matter paragraph and other matter paragraphs may be necessary when.
The auditor is either required or permitted to provide further explanation of their audit responsibility. And then finally, on other matter, the paragraph may be necessary if the auditor is engaged to report on more than one set of financial statements with a different general-purpose framework. Now it's important that you study
When an emphasis of matter paragraph is required and when it may be used, when an other matter paragraph is required or may be used, it is the sort of thing the exam is likely to ask questions time and again, uh, you know about these issues, the emphasis of matter, paragraphs, other matter paragraphs, one of they used, why are they used?
Make sure you focus in now before I see you in the next class. You'll see at the beginning of the next class, there are six multiple-choice questions that have to be done, and it is essential that you answer those six questions before you start that class and we talk about the questions together. It's very important that you're an active participant in these classes.
Don't just watch the classes passively, you know, take good notes when there are questions assigned. You get your answers and then we'll discuss them together. You'll find. You get much more out of the classes if you do those simple things, and this is what we both want. We both want you to get a lot out of these classes.
So before I see you next in that next CPA Exam class, I want you to do those six multiple-choice questions and get your answers and then we'll discuss them together. And in the next class, we'll continue our discussion on reporting issues. Keep studying, don't fall behind, and I look to see you in the next class.
Is your CPA Review on track for Exam Day?