Page 185 - CA Final PARAM Digital Book.

The communication of key audit matters in the The auditor may do so by presenting the matter
auditor’s report may also provide intended users more prominently than other matters in the Key
a basis to further engage with management and Audit Matters section (e.g., as the first matter) or
those charged with governance about certain by including additional information in the
matters relating to the entity, the audited description of the key audit matter to indicate the
financial statements, or the audit that was importance of the matter to users’ understanding
performed of the financial statements.

QNO Inappropriate use of EMP New Course – (SM23)
120.300 TITANIUM CNO-- SA 706.040 / SA580.020
PTD Limited is engaged in business of executing construction contracts for its clients. There are non-
current receivables outstanding in financial statements of the company as on 31st March, 2023 for `500
crore. Such amounts represent claims raised by the company on its clients relating to cost overruns
necessitated due to delays caused by clients, change in work specifications and related matters. Besides
negotiations, the company has also gone for arbitration in some of the said cases. The management of
company has considered above amounts to be fully recoverable as stated in notes to accounts.

CA. Piyush, auditor of the company, has relied only upon management representation in this regard.
Besides, he has decided to include the said matter in “Emphasis of Matter” Paragraph in audit report.

How do you view decision to include above matter in “Emphasis of Matter” Paragraph by auditor of the
company?
Answer In accordance with SA 706, Emphasis of Matter Paragraph 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 users’ understanding of the financial statements.

As per SA 706, 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: -

(a) A matter, although appropriately presented or disclosed in the financial statements, that is of such
importance that it is fundamental to users’ understanding of the financial statements or

(b) As appropriate, any other matter that is relevant to users’ understanding of the audit, the auditor’s
responsibilities or the auditor’s report.

Further, the auditor shall include an Emphasis of Matter paragraph in the auditor’s report provided the
auditor would not be required to modify the opinion in accordance with SA 705 as a result of the matter.
In the given situation, auditor has relied upon management representation letter only. He has not performed
any other audit procedures like verifying contracts with customers, status of arbitration proceedings etc.
Since management representations by themselves do not constitute sufficient appropriate evidence,
performing necessary audit procedures may lead auditor to conclude that modification in opinion is
necessary. In such circumstances, matter cannot be included in Emphasis of matter Paragraph.

Therefore, auditor should form his opinion by performing necessary audit procedures and obtaining
sufficient appropriate evidence. It is only when he concludes that modification of opinion is not required as
a result of said matter in terms of SA 705, the said matter may be included in Emphasis of Matter paragraph.

Case Study (EMP & Modification) Old Course – (N20R)
122.050
TITANIUM CNO—SA706.040
AKB Associates, a renowned audit firm in the field of CA practice for past two decades. The firm was
appointed to conduct statutory audit of Rica Ltd. an unlisted company, which is engaged in the business
of paper manufacturing. It decided to commence the audit for the recently concluded financial year. Once
after making significant progress in the audit, the auditors made the following observations:

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