What is the Emphasis of Matter?

The audit report is a statement that includes the auditors’ opinion related to a subject matter. This report usually consists of the opinion paragraph and the basis for the opinion paragraph as the primary areas. Both of these help auditors provide their opinion of whether a client’s financial statements are free from material misstatements. Similarly, it includes their conclusion of if these statements present a true and fair view.

The audit report also includes the responsibilities of management and the board of directors for the financial statements. Similarly, it consists of the auditors’ responsibilities for the audit of these financial statements. Audit reports also contain a report on other legal and regulatory requirements. However, audit reports will also include other areas, including the emphasis of matter paragraph.

What is the Emphasis of Matter paragraph?

Audit reports usually focus on whether the financial statements present a true and fair view and are free from material misstatements. When auditors provide an unqualified or qualified report, users only emphasize the opinion. Sometimes, however, auditors may also want users to focus on other areas in the financial statements. These areas do not have to contain issues. However, they may be significant enough to warrant users’ attention.

The emphasis of matter paragraph refers to a paragraph in the audit report that is typically referred to as a matter that is adequately presented or disclosed in the financial statements. However, this emphasis matter is fundamental to users’ understanding of the financial statements in the auditor’s judgment. The primary International Standard on Auditing that relates to this paragraph is ISA 706 (Revised).

ISA 706 (Revised) states that the auditor’s objective is to draw users’ attention in the audit report to the following.

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

However, auditors must use their professional judgment to determine if it is necessary to do so. Similarly, they must use a clear additional communication in the auditor’s report for it. This communication comes in the form of an emphasis of matter paragraph in the auditor’s report. This paragraph does not qualify the auditor’s opinion. However, it does modify the auditor’s report.

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What are the requirements for the Emphasis of Matter paragraph?

ISA 706 (Revised) provides guidance on the requirements for the emphasis of matter paragraph. This standard states that if auditors consider it necessary to draw users’ attention to a matter presented or disclosed in the financial statements, they must use this paragraph. However, this matter must be of such importance that it is fundamental to users’ understanding of the auditor’s opinion.

In accordance with ISA 706 (Revised), auditors must use the emphasis of matter paragraph while keeping the following factors in view.

a). The auditors would not be required to modify the opinion in accordance with ISA 705 (Revised) as a result of this matter.

b). When ISA 701 applies, the matter has not been determined to be a key audit matter that auditors must communicate in the auditor’s report.

In essence, the two requirements above require auditors to use the emphasis of matter paragraph only when other standards don’t apply. Firstly, auditors must not use this paragraph for matters that will require their audit opinion to change. Secondly, the matters in the emphasis of matter paragraph must not be fall under the Key Audit Matters paragraph.

What must auditors consider when including an Emphasis of Matter paragraph?

ISA 706 (Revised) requires auditors to consider the following factors when presenting an emphasis of matter paragraph.

a). Include the paragraph within a separate section of the auditor’s report with an appropriate heading that includes the term “Emphasis of Matter”.

b). Indicate that the auditor’s opinion is not modified in respect of the matter emphasized.

c). Include in the paragraph a clear reference to the emphasized matter. Similarly, it must mention where users can find the relevant disclosures in the financial statements. The paragraph must only refer to the information presented or disclosed in the financial statements.

Source: ISA 706 (Revised) – Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Auditor’s Report

All of the above requirements are straightforward. The first clause relates to a clear paragraph’s presentation on their auditor’s report with a clear heading. The second clause emphasizes the emphasis of the matter paragraph, mentioning that it does not modify the auditors’ opinion. This clause is crucial in avoiding any confusion.

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The last clause relates to the areas on which auditors emphasize. As mentioned, the paragraph must include a clear reference to those areas. Similarly, these areas must be a part of the financial statements. Auditors cannot provide an obscure reference or emphasize matters that aren’t a part of the financial statements.

What can auditors include in the Emphasis of Matter paragraph?

There are several areas that auditors can include in the emphasis of matter paragraph. Some of these areas come from the guidance provided by the auditing standards. Some others, in contrast, generate from examples from an actual emphasis of paragraphs. Nonetheless, auditors can use the emphasis of matter paragraph for the following reasons.

  • Auditors believe that there is a need to draw users’ attention to significant uncertainty relating to accounting policies or estimates.
  • Auditors discover subsequent events that may affect the users after they conclude their audit work.
  • There is a material uncertainty revolving around the company’s going concern. However, the financial statements must include a disclosure about it.
  • The management has adopted or used new accounted standards before their applicable date.
  • The auditors discover material misstatements in the prior period’s financial statements that the management has corrected. However, in the previous period auditors have not issued an amended audit report.
  • The management has prepared the financial statements under a special purpose framework.
  • The company faces a substantial disaster, the effects of which will propagate to future periods. These effects can significantly affect the company’s financial position or performance.

As mentioned, auditors must ensure these matters are a part of the financial statements. If the management does not include them or disclose them in those statements, they will not be a part of the emphasis of matter paragraph.

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Conclusion

The emphasis of matter paragraph is a section included in the audit report. It draws users’ conclusions to significant matters that are fundamental to their understanding of the financial statements. This paragraph must only contain matters that the management has already disclosed in their financial statements. However, there are several requirements that it must meet, as mentioned above.

Reference

  • ISA 706 – Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Auditor’s Report [Source]
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