Question

Analyse and explain how the following situation would affect the audit report for the financial year ended 30 June 2020.

The client company, Rainbow Ltd, has capitalised a research and development expenditure of $2,450,000. However, to be able to realise the value of the capitalised expenditure, additional funding is required to continue the project development activities. It’s uncertain that the client is able to obtain this additional funding. The auditors believe that the information is adequately disclosed by the client in the footnote of the financial report. The capitalised expenditure represents 6% of reported net profit for the 2020 financial year.

Answer 1

Emphasis of Matter paragraph – 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 user's understanding of the financial statements.

As in the question, the uncertainty of client to obtain additional funding is adequately disclosed as the footnote in the financial statement but as it is of signicant value (6% of reported net profit), the auditor shall refer to the matter in the Emphasis of Matter paragraph as it is fundamental to user's understanding of the financial statements.