Professional Documents
Culture Documents
Emphasis of Matter
Paragraphs and Other Matter
Paragraphs in the Independent
Auditor’s Report
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The objective of the auditor, having formed an opinion on the financial statements, is
to draw users’ attention, when in the auditor’s judgment it is necessary to do so, by
way of clear additional communication in the auditor’s report, to:
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• When facts become known to the auditor after the date of the
auditor’s report and the auditor provides a new or amended
auditor’s report (i.e., subsequent events)
Early application (where permitted) of a new accounting standard (for example, a new Sri Lanka
Accounting Standard) that has a material effect on the financial statements in advance of its
effective date.
A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial
position.
A significant subsequent event that occurs between the date of the financial statements and the
date of the auditor’s report.
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In the rare circumstance where the auditor is unable to withdraw from an engagement even though
the possible effect of an inability to obtain sufficient appropriate audit evidence due to a limitation on
the scope of the audit imposed by management is pervasive, the auditor may consider it necessary to
include an Other Matter paragraph in the auditor’s report to explain why it is not possible for the
auditor to withdraw from the engagement.
Law, regulation or generally accepted practice in a jurisdiction may require or permit the auditor to
elaborate on matters that provide further explanation of the auditor’s responsibilities in the audit of
the financial statements or of the auditor’s report thereon.
An entity may prepare one set of financial statements in accordance with a general purpose
framework (e.g., the national framework) and another set of financial statements in accordance with
another general purpose framework (e.g., International Financial Reporting Standards), and engage
the auditor to report on both sets of financial statements. If the auditor has determined that the
frameworks are acceptable in the respective circumstances, the auditor may include an Other Matter
paragraph in the auditor’s report, referring to the fact that another set of financial statements has
been prepared by the same entity in accordance with another general purpose framework and that
the auditor has issued a report on those financial statements.
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Financial statements prepared for a specific purpose may be prepared in accordance with a
general purpose framework because the intended users have determined that such general
purpose financial statements meet their financial information needs. Since the auditor’s report
is intended for specific users, the auditor may consider it necessary in the circumstances to
include an Other Matter paragraph, stating that the auditor’s report is intended solely for the
intended users, and should not be distributed to or used by other parties.
If the financial statements of the prior period were audited by a predecessor auditor and the
auditor is not prohibited by law or regulation from referring to the predecessor auditor’s report
on the corresponding figures and decides to do so, the auditor shall state in an Other Matter
paragraph in the auditor’s report:
a. That the financial statements of the prior period were audited by the predecessor auditor;
b. The type of opinion expressed by the predecessor auditor and, if the opinion was modified,
the reasons therefore; and
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If the prior period financial statements were not audited, the auditor shall state in an Other
Matter paragraph in the auditor’s report that the corresponding figures are unaudited. Such a
statement does not, however, relieve the auditor of the requirement to obtain sufficient
appropriate audit evidence that the opening balances do not contain misstatements that
materially affect the current period’s financial statements.
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Other Matter
The financial statements of ABC Company for the year ended 31 March 2017 were audited by another auditor
who expressed an unmodified opinion on those statements on 27 June 2017.
OR
The financial statements of ABC Company for the year ended 31 March 2017 were audited by another auditor
who expressed a qualified opinion on 27 June 2017 on those statements in relation to the inability to obtain
comfort on existence of inventories as at 31 March 2017.
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General purpose financial statements are prepared on a going concern basis, unless management
either intends to liquidate the entity or to cease operations, or has no realistic alternative but to
do so. Special purpose financial statements may or may not be prepared in accordance with a
financial reporting framework for which the going concern basis is relevant (for example, the
going concern basis is not relevant for some financial statements prepared on a tax basis in
particular jurisdictions).
When the use of the going concern assumption is appropriate, assets and liabilities are recorded
on the basis that the entity will be able to realise its assets and discharge its liabilities in the
normal course of business.
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The firm is not a going concern in Sri Lanka, because it has to be shut down.
2) A nationalised refinery is in cash flows problems but the government of the country provided a guarantee
to the refinery to help it out with all payments.
3) A bank is in serious financial troubles and the government is not willing to bail it out. The Board of
Directors has passed a resolution to liquidate the business.
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5) The entity X is making continuous losses over the years and as a result its net assets are deteriorating with
net current liability position. The parent entity has provided a letter of financial support that it will render all
necessary financial assistance for next 12 months to allow the entity X to continue in business without
curtailing any of its major operations.
The entity X is a going concern despite its poor financial performance and position.
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6) Sri Lankan Airlines has recorded a loss of LKR 28,930 Mn in 2017 (2016 – LKR 12,622 Mn) with an accumulated loss of LKR
169,755 Mn (2016 – LKR 141,080 Mn). Further, the Company has a net current liability position of LKR 99,328 Mn (2016 – LKR
73,433 Mn) with a net liability position of LKR 115,767 Mn (2016 – LKR 87,781 Mn).
The entity is a going concern despite its poor financial performance and position due to following mitigating actions as per
the management assessment of entity’s ability to continue as a going concern.
● Restructuring process initiated by the BoDs in 2015 over five key areas, namely,
◊ Restructuring of the route network
◊ Restructuring of the aircraft fleet
◊ Restructuring of the overheads
◊ Restructuring of the debt (re-capitalisation)
◊ Restructuring of the organisational structure
● Confirmation given by the GOSL by a way of Cabinet approval dated 18 July 2017 to extend the required financial
support to the Company to continue its operations as “Going Concern” until the proposed restructuring process is complete
[Letter of financial support from GOSL].
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Management’s assessment of the entity’s ability to continue as a going concern involves making a judgement, at
a particular point in time, about inherently uncertain future outcomes of events or conditions. Factors to
consider:
The degree of uncertainty associated with the outcome of an event or condition increases significantly the
further into the future an event or condition or the outcome occurs;
The size and complexity of the entity, nature & condition of its business and the degree to which it is affected
by external factors; and
Any judgment about the future is based on information available at the time at which the judgement is made.
Subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the
time they were made.
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• The assessment should cover 12 months period from the end of financial period.
• When an entity does not prepare its financial statements on a going concern basis it
shall disclose the fact together with the basis on which it prepared the financial
statements and the reason why the entity is not regarded as a going concern.
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Requirements
Risk Assessment Procedures and Related Activities
Events and Conditions that may cast doubt about Going Concern Assumption (Individually or collectively)
Inability to obtain financing for essential new product development or other essential
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Requirements
Risk Assessment Procedures and Related Activities
Events and Conditions that may cast doubt about Going Concern Assumption (Individually or collectively)
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Requirements
Risk Assessment Procedures and Related Activities
Events and Conditions that may cast doubt about Going Concern Assumption (Individually or collectively)
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Based on the audit evidence obtained, the auditor shall conclude whether, in the auditor’s
judgement, a material uncertainty exists related to events or conditions that, individually or
collectively, may cast significant doubt on the entity’s ability to continue as a going concern. A
material uncertainty exists when the magnitude of its potential impact and likelihood of occurrence
is such that, in the auditor’s judgment, appropriate disclosure of the nature and implications of the
uncertainty is necessary.
A material uncertainty is one relating to events or conditions that may cast significant doubt on the
entity’s ability to continue as a going concern and that may, therefore, indicate that it may be
unable to realise its assets and discharge its liabilities in the normal course of business.
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Implications when events or conditions have been Identified that may cast doubt
over an entity’s ability to continue as a going concern
If the financial statements have been prepared using the going concern basis of
accounting but, in the auditor’s judgment, management’s use of the going concern
basis of accounting in the preparation of the financial statements is inappropriate,
the auditor shall express an adverse opinion regardless of whether or not the
financial statements include disclosure of the inappropriateness of management’s
use of the going concern basis of accounting.
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If adequate disclosure about the material uncertainty is made in the financial statements, the auditor
shall express an unmodified opinion and the auditor’s report shall include a separate section under the
heading “Material Uncertainty Related to Going Concern” to:
a) Draw attention to the note in the financial statements that discloses the relevant matters; and
b) State that these events or conditions indicate that a material uncertainty exists that may cast
significant doubt on the entity’s ability to continue as a going concern and that the auditor’s
opinion is not modified in respect of the matter.
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Example – unmodified audit opinion but material uncertainty exists in relation to going concern
and the disclosures are adequate
Opinion
We have audited the financial statements of ABC Company (the Company), which comprise the
statement of financial position as at 31 March 2018, and the statement of comprehensive income,
statement of changes in equity and statement of cash flows for the year then ended, and notes to the
financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying financial statements present fairly, in all material respects, the
financial position of the Company as at 31 March 2018, and its financial performance and its cash
flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs).
We draw attention to Note 6 in the financial statements, which indicates that the Company incurred a net loss
of $125,000 during the year ended 31 March 2018 and, as of that date, the Company’s current liabilities
exceeded its total assets by $106,000. As stated in Note 6, these events or conditions, along with other
matters as set forth in Note 6, indicate that a material uncertainty exists that may cast significant doubt on
the Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit
of the financial statements of the current period. These matters were addressed in the context of our audit of
the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate
opinion on these matters. In addition to the matter described in the Material Uncertainty Related to Going
Concern section, we have determined the matters described below to be the key audit matters to be
communicated in our report.
[Description of each key audit matter in accordance with ISA 701]
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a) Express
A Qualified Opinion [Disclosure in the Financial Statements is Inadequate] or
An Adverse Opinion [Disclosure in the Financial Statements Omit the Required Disclosure Relating to a
Material Uncertainty],
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Qualified Opinion
We have audited the financial statements of ABC Company (the Company), which comprise the
statement of financial position as at 31 March 2018, and the statement of comprehensive income,
statement of changes in equity and statement of cash flows for the year then ended, and notes to
the financial statements, including a summary of significant accounting policies.
In our opinion, except for the incomplete disclosure of the information referred to in the Basis for
Qualified Opinion section of our report, the accompanying financial statements present fairly, in all
material respects (or give a true and fair view of), the financial position of the Company as at 31
March 2018, and (of) its financial performance and its cash flows for the year then ended in
accordance with International Financial Reporting Standards (IFRSs).
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Audit Reporting When Auditor Concluded that a Material Uncertainty Exists and Disclosure in the Financial
Statements Is Inadequate. The Financial Statements Are Materially Misstated Due to Inadequate Disclosure
As discussed in Note yy, the Company’s financing arrangements expire and amounts outstanding are payable on 31
December 2016. The Company has been unable to conclude re-negotiations or obtain replacement financing. This
situation indicates that a material uncertainty exists that may cast significant doubt on the Company’s ability to
continue as a going concern. The financial statements do not adequately disclose this matter.
We conducted our audit in accordance with International Standards on Auditing (ISAs). …………….
Key audit matters are those matters that, ……………….. on these matters. In addition to the matter described in
the Basis for Qualified Opinion section, we have determined the matters described below to be the key audit
matters to be communicated in our report.
[Description of each key audit matter in accordance with ISA 701]
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Adverse Opinion
We have audited the consolidated financial statements of ABC Company and its subsidiaries (the Group), which comprise the consolidated statement
of financial position as at 31 March 2018, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and
consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements,
including a summary of significant accounting policies.
In our opinion, because of the omission of the information mentioned in the Basis for Adverse Opinion section of our report, the accompanying
financial statements do not present fairly (or do not give a true and fair view of), the financial position of the Company as at 31 March 2018, and of its
financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs).
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Audit Reporting When Auditor Concluded that a Material Uncertainty Exists and Disclosure in the Financial
Statements Omit the Required Disclosure Relating to a Material Uncertainty
When the auditor expresses a qualified or adverse opinion, the requirement to communicate
other KAM is still relevant and hence will still apply.
When the auditor issues an adverse opinion it means that the financial statements do not give
a true and fair view (or present fairly) because the auditor has concluded that misstatements,
individually and in aggregate, are both material and pervasive to the financial statements.
Depending on the significance of the matter(s) which has resulted in the auditor expressing an
adverse audit opinion, the auditor might determine that no other matters are KAM. In this
situation, the auditor will deal with the matter(s) in accordance with applicable ISAs and include
a reference to the Basis for Qualified/Adverse Opinion or the Material Uncertainty Related to
Going Concern section(s) in the KAM section of the report.
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EoM paragraph immediately after the opinion Auditor must include a separate section under the
paragraph with reference to relevant disclosure in heading “Material Uncertainty Related to GC”
the F/S. Need to emphasize that the opinion is not immediately after “Basis of Opinion” paragraph but
qualified before KAM
Modify opinion in line with ISA 705 (Revised) Modifications to the Opinion in the
Independent Auditor’s Report (Qualified or Adverse Opinion)
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Going Concern
• Adverse opinion
Is the going concern assumption still • A description of this circumstance in the Basis for Adverse
appropriate? No Opinion section
• Reference to the basis for Adverse Opinion in “KAM” Section
Yes
• Unmodified opinion
Does a material uncertainty exist? • Report as KAM –”Close Call”
No
Yes
• Qualified or Adverse 0pinion as appropriate
Is there adequate financial reporting • A description of this circumstance in the Basis for
disclosure? No Qualified / Adverse Opinion section
• Reference to the basis for Qualified/Adverse Opinion in
the KAM section
Yes
• Unmodified opinion
• Material Uncertainty Related to Going Concern paragraph
• Reference in KAM section
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Any Questions?
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Thank You
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