During the audit of STU Ltd., the auditor concludes that the financial statement is true and fair, requiring no modification. However, the notes to…

CA Intermediate · Auditing and Ethics · PYQS · January 2026
During the audit of STU Ltd., the auditor concludes that the financial statement is true and fair, requiring no modification. However, the notes to accounts disclose that a major fire occurred shortly after year end causing significant effect on entity's financial position. The disclosure is complete and no adjustment is needed, but the auditor believes that user should be specifically alerted to this important matter in his audit report. Identify the type of paragraph the auditor should include in audit report in this situation. (1 Mark) Explain its meaning and state other circumstances in which such a paragraph may be necessary. (4 Marks)

Suggested Answer and Working Notes:

In the present case there is a need to add "Emphasis of Matter Paragraph (EOM)" in the Auditor's Report as per SA 706 (Revised). Meaning of EOM- It is a paragraph included in the auditor's report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's judgment, is of such importance that it is fundamental to the users' understanding of the financial statements. Some examples of circumstances where the auditor may consider it necessary to include an Emphasis of Matter paragraph are: An uncertainty relating to the future outcome of exceptional litigation or regulatory action.A significant subsequent event that occurs between the date of the financial statements and the date of the auditor's report.Early application (where permitted) of a new accounting standard that has a material effect on the financial statements.A major catastrophe that has had, or continues to have, a significant effect on the entity's financial position.

Topics: Audit Report

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