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CA Intermediate · Auditing and Ethics · Audit Report

The auditor of Sundaram Foods Ltd has obtained sufficient appropriate evidence that the company's financial statements are fairly presented. A major fire in the factory after year-end is properly disclosed in Note 32. The auditor wants to draw users' attention to this note because it is fundamental to their understanding. Which is the correct way to do this under SA 706?

The auditor should add an Emphasis of Matter paragraph in a separate headed section referring to Note 32 and leave the opinion unmodified. The fire is adequately disclosed and fundamental to users' understanding, so SA 706 calls for emphasis, not modification, and an Other Matter paragraph is for undisclosed matters.

  1. AQualify the opinion and refer to Note 32 in the Basis for Qualified Opinion section
  2. BInclude an Emphasis of Matter paragraph in a separate section of the report, with a heading, referring to Note 32, and keep the opinion unmodifiedCorrect
  3. CInclude an Other Matter paragraph, since the fire is not presented in the financial statements
  4. DReport the fire only in the Key Audit Matters section and omit any other paragraph

Explanation

An Emphasis of Matter paragraph refers to a matter already appropriately presented or disclosed in the financial statements that is fundamental to users' understanding. It appears in a separate section with an appropriate heading, and the opinion remains unmodified. Other Matter paragraphs deal with matters not presented or disclosed in the financial statements, which is not the case here. Qualifying the opinion is wrong because the disclosure is adequate.

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