An auditor is auditing the financial statements of a nonissuer. The auditor identifies a material misstatement in the prior year's financial statements that was not corrected. The current year's financial statements are presented in comparative form. Management has restated the prior year statements to correct the error. How should the auditor report on the prior year statements?

Answer options:

Issue a qualified opinion on the prior year statements.

Express an unmodified opinion on the restated prior year statements and include an emphasis-of-matter paragraph describing the restatement.

Express an unmodified opinion with no additional paragraphs.

Issue an other-matter paragraph referencing the predecessor auditor.

How to approach this question

Restatement of Prior Year: 1. Fix the numbers. 2. Fix the Opinion (to Unmodified). 3. Add Emphasis Paragraph ('Hey, we changed our mind about last year').

Full Answer

B.Express an unmodified opinion on the restated prior year statements and include an emphasis-of-matter paragraph describing the restatement.✓ Correct

When prior period financial statements are restated to correct a material misstatement, the auditor should express an unmodified opinion on the restated statements and include an emphasis-of-matter paragraph (or explanatory paragraph for issuers) disclosing that the previously issued financial statements have been restated for the correction of a misstatement.

Common mistakes

Thinking a restatement requires a Qualified opinion. Restatement FIXES the error, so the opinion is clean.

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