Emphasis of matter is a type of paragraph in an auditors' report on financial statements. Such a paragraph is added to indicate a matter which is disclosed appropriately in the notes forming part of the financial statements that the auditor considers is fundamental to the users' understanding of the financial statements.[1] Show
An emphasis of matter paragraph indicates that the auditor's opinion is not modified with respect to the matter emphasized. Under the framework of the International Standards on Auditing (ISA), the emphasis of matter paragraph is placed after the opinion paragraph (and, consequently, towards the end of the report), in the auditor's report.[2] References[edit]
Do you know what you need to know about emphasis of matter and other matter paragraphs? Sometimes auditors elect to or are required to add an extra paragraph after the opinion paragraph. You need to know why and when. (This article was written prior to the amendments made by SAS numbers 134, 137, 140, and 141. Those amendments are effective for periods ending on or after December 15, 2021. See my new article regarding the amended guidance for emphasis of matter and other matter paragraphs.) This post gives you the leg up on emphasis of matter (EOM) paragraphs and other matter (OM) paragraphs. DefinitionsFirst, let’s first define the two terms. AU-C 706.05 provides the following definitions: Emphasis-of-matter paragraph. A paragraph included in the auditor's report that is required by GAAS, or is included at the auditor's discretion, and that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's professional judgment, is of such importance that it is fundamental to users' understanding of the financial statements. Other-matter paragraph. A paragraph included in the auditor's report that is required by GAAS, or is included at the auditor's discretion, and that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor's professional judgment, is relevant to users' understanding of the audit, the auditor's responsibilities, or the auditor's report. Notice that an EOM refers to “a matter appropriately presented or disclosed in the financial statements,” while an OM refers to “a matter other than those presented or disclosed in the financial statements.” Now, let's take a look at sample EOM and OM paragraphs. Sample Emphasis of Matter ParagraphHere’s a sample EOM paragraph: Emphasis of Matter As discussed in Note X to the financial statements, the Company has elected to change its policy for determining cash equivalents in 20X 7. Our opinion is not modified with respect to that matter. Sample Other Matter ParagraphHere is a sample OM paragraph: Other Matter In our report dated April 18, 20X5, we expressed a qualified opinion since the Company’s main office had a material unrecognized impairment loss. As noted in Note 12, the Company has now recognized the impairment in conformity with accounting principles generally accepted in the United States of America. Accordingly, our present opinion on the restated 20X4 financial statements, as presented herein, is different from that expressed in our previous report. You also need to know the presentation requirements for EOM and OM paragraphs. Presentation Requirements for an EOMAU-C 706.06 and 706.07 provides guidance in reference to EOMs. The auditor should:
Presentation Requirements for an OMAU-C 706.08 provides guidance in reference to OMs. The auditor should:
AU-C Sections Requiring EOMsSometimes EOMs are required; here are examples:
See exhibit B of AU-C 706 for a complete listing of AU-C sections requiring EOM paragraphs. An EOM is commonly required when a company has a change in an accounting principle (that has a material impact). AU-C 708 Consistency of Financial Statements paragraphs .07-.08 provides guidance on when the EOM is required. The auditor also has an option to use an EOM to emphasize matters that are not required by audit standards. So, sometimes EOMs are included because they are required (e.g., going concern) and, other times, they are optional (e.g., to highlight a related party transaction). AU-C Sections Requiring OMsSometimes OMs are required; here are examples:
See exhibit C of AU-C 706 for a complete listing of AU-C sections requiring OM paragraphs. Simple Summary
Of course, creating your opinion is just a part of wrapping up your audits. Where is emphasis of matter paragraph?(a) 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 users' understanding of the financial statements.
When would an auditor use an emphasis of matter paragraph?Emphasis of Matter paragraph may be included in auditor's report when: Auditor believes that there is a need to draw user's attention to significant uncertainty surrounding accounting estimates. In case new or amended audit report has been issued after the discovery of subsequent events.
Where is the key audit matters paragraph?Key audit matters are selected from matters communicated with those charged with governance. 1 Paragraph . 30 of section 705, Modifications to the Opinion in the Independent Auditor's Report.
How should the emphasis of matter and other matter paragraphs be presented in the auditor's report?Include the EOM immediately after the opinion paragraph in the auditor's report. Use the heading “Emphasis of Matter” or other appropriate heading. Include a clear reference to the matter being emphasized and to where relevant disclosures that describe the matter can be found.
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