Scope and objectives
The auditing standards that deals with additional communication in the auditor’s report when the auditor considers it necessary to draw users’ attention to a matter that is of such importance that it is fundamental to users’ understanding of the financial statements or any other matter that is relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report. This SA 706 establishes requirements and provides guidance when the auditor determines key audit matters and communicates them in the auditor’s report.
The SA 706 defines key audit matters as those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. Matters that are determined to be key audit matters may also be, in the auditor’s judgment, fundamental to users’ understanding of the financial statements. In such cases, the auditor may wish to highlight or draw further attention to its relative importance. The SA 706 also covers circumstances in which the auditor needs to include Emphasis of Matter paragraphs or Other Matter paragraphs in the auditor’s report and provides guidelines on the form of such paragraphs.
The SA706 is effective for audits of financial statements for periods beginning on or after April 1, 2018, and the objective of the auditor is to draw users’ attention, by way of clear additional communication in the auditor’s report, to matters that are of such importance that they are fundamental to users’ understanding of the financial statements or any other matter that is relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report.
Emphasis of Matter Paragraphs in the Auditor’s Report
The use of “Emphasis of Matter” paragraphs in the auditor’s report. It is used when the auditor considers it necessary to draw attention to a matter presented or disclosed in the financial statements that is of such importance that it is fundamental to users’ understanding of the financial statements.
Examples of circumstances where the auditor may consider it necessary to include an Emphasis of Matter paragraph include uncertainties relating to future outcomes of exceptional litigation or regulatory action, significant subsequent events that occur between the date of the financial statements and the date of the auditor’s report, early application of a new accounting standard that has a material effect on the financial statements, or a major catastrophe that has had or continues to have a significant effect on the entity’s financial position.
When including an Emphasis of Matter paragraph in the auditor’s report, the auditor must include the paragraph within a separate section of the report with an appropriate heading, include a clear reference to the matter being emphasized and where relevant disclosures can be found in the financial statements, and indicate that the auditor’s opinion is not modified in respect of the matter emphasized.
The inclusion of an Emphasis of Matter paragraph does not affect the auditor’s opinion and is not a substitute for a modified opinion when required, disclosures in the financial statements, or reporting when a material uncertainty exists relating to events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern.
Other Matter Paragraphs in the Auditor’s Report
The auditor can only include an Other Matter paragraph if it is not prohibited by law or regulation and if the matter has not been determined to be a key audit matter to be communicated in the auditor’s report. If the auditor considers it necessary to communicate planning and scoping matters or other matters relating to significant risks that are not key audit matters, the auditor can use an Other Matter paragraph to do so.
The auditor may also include an Other Matter paragraph if they are unable to withdraw from an engagement due to a limitation on the scope of the audit imposed by management. In addition, if an entity prepares more than one set of financial statements using different general-purpose frameworks, the auditor may include an Other Matter paragraph in their report to refer to the fact that another set of financial statements has been prepared.
If the auditor’s report is intended solely for the use of specific parties, the auditor may consider it necessary to include an Other Matter paragraph stating that the report should not be distributed to or used by other parties.
When including an Other Matter paragraph in the auditor’s report, the auditor must include it within a separate section with an appropriate heading. The content of an Other Matter paragraph must be clearly distinct from information that is required to be presented or disclosed in the financial statements or is prohibited by law, regulation, or professional standards.
Placement of Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Auditor’s Report
The placement of Emphasis of Matter (EOM) paragraphs and Other Matter (OM) paragraphs in an auditor’s report. The placement depends on the nature of the information being communicated and the auditor’s judgment on its relative significance to intended users compared to other elements required to be reported.
For EOM paragraphs, the placement may vary depending on whether it relates to the applicable financial reporting framework, including circumstances where the financial reporting framework prescribed by law or regulation would otherwise be unacceptable. If a Key Audit Matters section is included in the report, the EOM paragraph may be presented either before or after it, and further context can be added to the EOM heading to differentiate it from individual matters in the Key Audit Matters section.
For OM paragraphs, further context can be added to the heading, such as “Other Matter – Scope of the Audit,” to differentiate it from individual matters in the Key Audit Matters section. If an OM paragraph is included to draw users’ attention to a matter relating to Other Reporting Responsibilities addressed in the auditor’s report, it may be included in the Report on Other Legal and Regulatory Requirements section.
In addition, it explains how the Key Audit Matters section, EOM paragraphs, and OM paragraphs interact when all are presented in the auditor’s report.
Communication with Those Charged with Governance
The role of an auditor in communicating with those charged with governance. The auditor is responsible for evaluating the financial statements of a company and issuing an auditor’s report that provides an opinion on whether the financial statements are fairly presented in all material respects in accordance with the applicable financial reporting framework.
Sometimes, the auditor may need to include an Emphasis of Matter or an Other Matter paragraph in the auditor’s report to draw attention to a specific matter that may affect the user’s understanding of the financial statements. For example, an Emphasis of Matter paragraph may be used to draw attention to a significant uncertainty related to the company’s ability to continue as a going concern, or to highlight a material related party transaction.
The auditor expects to include an Emphasis of Matter or an Other Matter paragraph in the auditor’s report; the auditor must communicate with those charged with governance to discuss this expectation and the wording of the certain objectives. This communication enables those charged with governance to understand the nature of the matter that the auditor intends to highlight in the report and to obtain further clarification if necessary.
Furthermore, if the inclusion of an Other Matter paragraph on a particular matter in the auditor’s report is a recurring issue in successive engagements, the auditor may determine that it is unnecessary to repeat the communication on each engagement, unless required by law or regulation. This means that if the same issue arises in subsequent years, the auditor may not need to communicate with those charged with governance again about the matter, unless there are changes in circumstances or new information that need to be communicated.
Quiz: Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
1. Which auditing standard establishes requirements and provides guidance for the inclusion of Emphasis of Matter and Other Matter paragraphs in the auditor’s report?
a) SA 705
b) SA 706
c) SA 720
d) SA 710
Answer: b)
2. How are key audit matters defined in SA 706?
a) Matters determined by management
b) Matters of least significance in the audit
c) Matters of most significance in the audit
d) Matters related to the auditor’s responsibilities
Answer: c)
3. In which circumstances would an auditor consider including an Emphasis of Matter paragraph in the auditor’s report?
a) Matters that are trivial and inconsequential
b) Matters that are fundamental to users’ understanding of the financial statements
c) Matters that are irrelevant to the audit
d) Matters that have no impact on the financial statements
Answer: b)
4. What is the purpose of including an Emphasis of Matter paragraph in the auditor’s report?
a) To modify the auditor’s opinion
b) To draw attention to matters of importance in the financial statements
c) To replace the auditor’s opinion
d) To disclose information prohibited by law
Answer: b)
5. How should an Emphasis of Matter paragraph be presented in the auditor’s report?
a) Within the auditor’s opinion section
b) Within a separate section with an appropriate heading
c) In the footnotes of the financial statements
d) Without any reference to the matter emphasized
Answer: b)
6. What is the impact of including an Emphasis of Matter paragraph on the auditor’s opinion?
a) It modifies the auditor’s opinion
b) It has no impact on the auditor’s opinion
c) It replaces the auditor’s opinion
d) It invalidates the auditor’s opinion
Answer: b)
7. When can an auditor include an Other Matter paragraph in the auditor’s report?
a) When it is prohibited by law or regulation
b) When it is a key audit matter
c) When it is irrelevant to the financial statements
d) When it is not a key audit matter
Answer: d)
8. What is the purpose of including an Other Matter paragraph in the auditor’s report?
a) To modify the auditor’s opinion
b) To provide additional communication on matters not determined to be key audit matters
c) To replace the auditor’s opinion
d) To disclose information prohibited by law
Answer: b)
9. How should an Other Matter paragraph be presented in the auditor’s report?
a) Within the auditor’s opinion section
b) Within a separate section with an appropriate heading
c) In the footnotes of the financial statements
d) Without any reference to the matter communicated
Answer: b)
10. What is the role of an auditor in communicating with those charged with governance regarding Emphasis of Matter or Other Matter paragraphs?
a) To obtain approval for including such paragraphs in the report
b) To discuss the inclusion of such paragraphs and obtain further clarification if necessary
c) To avoid communication with those charged with governance
d) To modify the auditor’s opinion based on their feedback
Answer: b)
Additional questions:
11. True or False: Emphasis of Matter paragraphs are used to modify the auditor’s opinion in the auditor’s report.
Answer: False
12. Under what circumstances may an auditor include an Emphasis of Matter paragraph in the auditor’s report? Select all that apply.
a) When there are uncertainties related to future outcomes of exceptional litigation or regulatory action.
b) When the auditor wants to highlight insignificant matters in the financial statements.
c) When there are significant subsequent events that occur between the date of the financial statements and the date of the auditor’s report.
d) When the auditor wants to replace the auditor’s opinion.
Answer: a)
13. How should an Emphasis of Matter paragraph be distinguished from other sections of the auditor’s report?
a) It should be placed at the beginning of the report.
b) It should be presented within the auditor’s opinion section.
c) It should have a clear reference to the matter emphasized and where relevant disclosures can be found in the financial statements.
d) It should not have any heading or reference to the matter emphasized.
Answer: c)
14. True or False: The inclusion of an Emphasis of Matter paragraph in the auditor’s report automatically modifies the auditor’s opinion.
Answer: True
15. When can an auditor include an Other Matter paragraph in the auditor’s report? Select all that apply.
a) When it is required by law or regulation.
b) When the matter has been determined to be a key audit matter.
c) When the auditor wants to communicate planning and scoping matters.
d) When the auditor wants to disclose unrelated information.
Answer: a)
16. What should be the content of an Other Matter paragraph in the auditor’s report?
a) Information that is required to be presented or disclosed in the financial statements.
b) Information that is prohibited by law, regulation, or professional standards.
c) Information that is distinct from what is required or prohibited.
d) Information that replaces the auditor’s opinion.
Answer: c)
17. How should an Other Matter paragraph be presented in the auditor’s report?
a) Within the auditor’s opinion section.
b) Within a separate section with an appropriate heading.
c) In a footnote at the bottom of the report.
d) Without any reference to the matter communicated.
Answer: b)
18. True or False: The placement of Emphasis of Matter paragraphs and Other Matter paragraphs in the auditor’s report depends solely on the auditor’s discretion.
Answer: True
19. How do Emphasis of Matter (EOM) paragraphs and Other Matter (OM) paragraphs interact in the auditor’s report?
a) They should always be presented together in the Key Audit Matters section.
b) They should never be included in the same report.
c) They should be placed in separate reports.
d) They can be presented in different sections based on their relative significance.
Answer: d)
20. What is the role of an auditor in communicating with those charged with governance regarding Emphasis of Matter or Other Matter paragraphs?
a) To avoid including such paragraphs in the auditor’s report.
b) To discuss the inclusion of such paragraphs and obtain further clarification if necessary.
c) To replace the auditor’s opinion based on their feedback.
d) To communicate only with external stakeholders regarding such paragraphs.
Answer: b)
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