AU-C 706: Emphasis-of-Matter and Other-Matter Paragraphs

An independent auditor’s report provides an opinion on whether a company’s financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. This report follows an extensive audit process where the auditor examines evidence, assesses accounting principles used by management, and evaluates the overall financial statement presentation. The report is a communication tool for users like investors and creditors, offering a professional judgment on the reliability of the financial information. Its standardized structure and content are designed to enhance the confidence that users can place in the financial statements.

The Role of Emphasis-of-Matter Paragraphs

An Emphasis-of-Matter (EOM) paragraph is a component an auditor can include in the audit report to draw attention to a particular issue. Its purpose is to highlight a matter that is already appropriately presented or disclosed within the company’s financial statements. The auditor includes this paragraph when, in their professional judgment, the matter is so important that it is fundamental to a user’s understanding of the financial statements. The guidelines for these paragraphs are detailed in auditing standard AU-C 706.

For example, if a company is facing exceptional litigation where the future outcome is highly uncertain, an auditor might use an EOM paragraph. This directs the reader to the specific note in the financial statements that discusses the lawsuit, ensuring the user is aware of a potentially material event. Another instance is a major catastrophe that has a significant effect on the company’s financial position. Significant transactions with related parties can also trigger the use of an EOM paragraph if the transactions are unusually large or outside the normal course of business.

The Purpose of Other-Matter Paragraphs

An Other-Matter (OM) paragraph serves a different function, referring to a matter other than those presented or disclosed in the financial statements. An auditor includes it when the information is relevant to a user’s understanding of the audit, the auditor’s responsibilities, or the report itself. This is the primary distinction from an EOM paragraph, which points to information already within the financial statements.

Auditors use OM paragraphs to provide important context about the audit engagement. For instance, an auditor may be required to include an OM paragraph to state that the audit report is intended only for specific users, such as a parent company or a regulator. Another common use is to address supplementary information that is presented alongside the audited financial statements, clarifying the auditor’s responsibilities regarding that extra information. These paragraphs are also used in situations involving predecessor auditors, stating that the prior period’s financial statements were audited by another auditor and describing the type of opinion expressed.

Clarifying the Auditor’s Opinion

The inclusion of an Emphasis-of-Matter or an Other-Matter paragraph does not change the auditor’s fundamental conclusion on the financial statements. It is not a modification, qualification, or downgrade of the audit opinion. If the auditor has concluded that the financial statements are presented fairly, the opinion will be “unmodified,” and the presence of an EOM or OM paragraph does not alter that conclusion.

Think of the main audit opinion as the final grade on a test, while an EOM or OM paragraph is like a note from the teacher pointing out a complex question or explaining the conditions under which the test was taken. The grade itself remains unchanged. The additional notes simply provide a more complete picture for the person reviewing the results.

Therefore, a user of an audit report should view these paragraphs as signposts directing their attention, not as red flags questioning the integrity of the financial statements. The auditor’s opinion is stated separately, and the paragraph will explicitly state that the opinion is not modified.

Presentation in the Auditor’s Report

The placement of these paragraphs within the audit report is guided by professional standards and the auditor’s professional judgment. An EOM paragraph typically follows the “Basis for Opinion” paragraph. However, if the report also includes a “Key Audit Matters” section, the EOM paragraph may be placed either directly after the “Basis for Opinion” section or after the “Key Audit Matters” section.

Specific headings are mandatory to clearly identify these paragraphs for the reader. The paragraph must be titled “Emphasis of Matter” or “Other Matter,” respectively. This distinct labeling prevents any confusion with other sections of the report, such as the opinion itself or the basis for that opinion.

The content of an EOM paragraph must clearly identify the matter being emphasized and include a direct reference to the specific note or disclosure where the reader can find a full description. This cross-reference is a feature that guides the user to the relevant information prepared by management. For an OM paragraph, the content should clearly describe the matter the auditor is communicating. Since it pertains to issues outside the financial statements, it will not contain a reference to a disclosure note, and the language is designed to be clear and concise.