EMPHASIS OF A MATTER

Under PSA 706, “If the auditor considers it necessary to draw users’ attention to a matter presented or
disclosed in the financial statements that, in the auditor’s judgement, is of such importance that is
fundamental to users’ understanding of the financial statements, the auditor shall include an Emphasis of
Matter paragraph in the auditor’s report provided the auditor has obtained sufficient appropriate audit
evidence that the matter is not materially misstated in the financial statements. Such a paragraph shall
refer only to information presented or disclosed in the financial statement (Ref: Para. A1-A2)”

“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 judgement, is of such importance that it is
fundamental to users’ understanding of the financial statements”

Additional paragraph added by the auditors of King and Company:

 “King and Company were not satisfied that the company would be able to recover the $186,000
investment in its latest store”
 “The Lakeside Store had, consequently, never been able to generate the customer traffic
necessary to even come to a breakeven point”
 “The continuing failure of the shopping center made the fate of the Lakeside Store to appear quite
uncertain to King and Company”

King and Company came up with the aforementioned paragraph because of the following observations:

 The profits generated by Lakeside store may not be enough if compared with the costs it incurs
for its operations because it was stated that the shopping center had been proven to be very
unsuccessful.
 The sixth store was constructed with the funds provided by loans entailing interest payments plus
its loans from the two Richmond banks to meet its payment terms for their audio equipment
inventory.
 The failure of the shopping center to be successful also affected the company.

These uncertainties lead the audit firm to provide an additional paragraph in its audit report
regarding the potential impact on the stability, profitability, and solvency of the company, to be used
by the users of information. These facts must be objectively disclosed if considered material upon the
professional judgment of the auditor.

An auditor must make a judgment decision to determine whether or not to attach a paragraph
which explains the matter in the unqualified opinion.

With so many changes with the Lakeside’s operations and the economy erupting at inopportune
moments, we should see more than the usual amount of unqualified opinions that have additional
paragraphs and very specific wording.