Skip to content

CA Intermediate · Auditing and Ethics · Audit Report

In the audit of Meridian Pharma Ltd, a lawsuit with a potentially large liability is pending. Management has adequately disclosed it in Note 32, and the auditor is satisfied that the disclosure is adequate. The matter is fundamental to users' understanding of the financial statements. What is the appropriate auditor response under SA 706 (Revised)?

The auditor should add an Emphasis of Matter paragraph referring to Note 32 while keeping the opinion unmodified. Under SA 706 (Revised), a properly disclosed matter that is fundamental to users' understanding warrants emphasis, not a qualification, and the paragraph states that the opinion is not modified for it.

  1. AQualify the opinion because the matter is significant
  2. BInclude an Emphasis of Matter paragraph referring to Note 32, without modifying the opinionCorrect
  3. CReport the matter as a Key Audit Matter only and not refer to the note
  4. DDisclaim the opinion because the outcome is uncertain

Explanation

SA 706 (Revised) permits an Emphasis of Matter paragraph for a matter appropriately presented or disclosed that is fundamental to users' understanding. Since disclosure is adequate, no modification is needed. The paragraph must refer to the disclosure and state that the opinion is not modified in respect of the matter. Qualification or disclaimer would be wrong since disclosure is adequate and evidence is sufficient.

Did you get it right without looking?

One question tells you little. A timed set on Audit Report shows your real accuracy, how long you take and where you lose marks.

Practise Audit ReportFree diagnostic mock

More Audit Report questions