Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

When should an auditor add an emphasis-of-matter paragraph without affecting the unmodified opinion?

1. When management's future estimates are unreasonable.

2. When the auditor reports only on the balance sheet.

3. When there is doubt about the entity's ability to continue as a going concern.

4. When certain transactions can't be tested due to record retention policies.

The correct answer is: When there is doubt about the entity's ability to continue as a going concern.

An emphasis-of-matter paragraph is added to an auditor's report to highlight a matter that is, in the auditor's judgment, of such importance that it is fundamental to users' understanding of the financial statements. Importantly, this addition does not modify the auditor's opinion on the financial statements. When considering situations for adding such a paragraph, the matter of the entity's ability to continue as a going concern is a critical area. If there is doubt about an entity's ability to continue as a going concern, it is essential for the auditor to communicate this concern to the users of the financial statements. The inclusion of an emphasis-of-matter paragraph in this context serves to alert users to significant risks that may affect future operations, without implying that the financial statements are misstated. In contrast, other choices either do not meet the criteria for an emphasis-of-matter paragraph or refer to situations that might warrant a modified opinion, such as unreasonable estimates or limitations on the scope of the audit due to record retention. These issues could suggest that the financial statements may not be presented fairly in accordance with generally accepted accounting principles (GAAP), which would result in a modified opinion rather than just an emphasis-of-matter paragraph.