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CMA Intermediate · Corporate Accounting and Auditing · Audit Report and Reporting under CARO

While auditing Kaveri Textiles Ltd, the auditor finds that a material misstatement exists in inventory valuation and that management has refused to correct it. The auditor considers adding an Emphasis of Matter (EOM) paragraph describing the matter instead of modifying the opinion. Which statement is correct as per SA 706 (Revised)?

An Emphasis of Matter paragraph cannot replace a modified opinion. Under SA 706 (Revised), it is not a substitute for a modification required by SA 705 (Revised). A material, uncorrected misstatement in inventory requires the opinion itself to be modified, not merely highlighted.

  1. AAn EOM paragraph can replace a modified opinion if the matter is clearly described in the report
  2. BAn EOM paragraph is not a substitute for a modified opinion required by SA 705 (Revised) in the circumstances of the engagementCorrect
  3. CAn EOM paragraph automatically converts the opinion into a qualified opinion
  4. DAn EOM paragraph is mandatory whenever a material misstatement is found

Explanation

SA 706 (Revised) states that an EOM paragraph is not a substitute for a modified opinion in accordance with SA 705 (Revised) when required by the circumstances. Since the inventory misstatement is material and uncorrected, the opinion itself must be modified. Describing it in an EOM paragraph would leave the opinion unmodified, which is wrong.

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