An audit firm’s exposure to litigation claims can be reduced by a number of methods.
1) Client acceptance procedures
Firms should accept only those clients that carry a low enough risk of litigation for the firm to manage, given its resources. Screening procedures should be used to identify factors that create potential exposure, for instance, a new client with going concern problems is likely to carry more risk than one without such problems.
2) Performance of audit work
Firms should make sure that all audits are carried out with professional standards and best practice, adhering to the requirements of ISAs. It is crucial in particular that proper documentation is kept, as this will be useful in the event of litigation.
3) Quality control
Firms should implement quality control procedures in line with guidance contained within ISQC1 Quality Controls for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements and ISA 220 Quality Control for an Audit of Financial Statements. This includes both firm-wide procedures and those related to individual assignments.
4) Issue of appropriate disclaimers
There is a risk of a legal duty of care arising to a third party even if the auditor is unaware of this duty. Disclaimers may be used in an attempt to restrict the auditor’s duty of care to shareholders, but there is no guarantee that they will be effective in

An Emphasis of Matter (EoM) paragraph is a paragraph in the auditor’s report that is appropriately presented or disclosed, but which is so important that special emphasis is needed for users.

An EoM is different from a modification to the auditor’s opinion. An EoM paragraph does not modify the opinion; indeed it should state clearly that this is the case. An auditor should only include an EoM if s/he has sufficient appropriate audit evidence that the matter is not materially misstated.

The EoM should provide a clear reference to the matter, and to where the appropriate disclosures and other information can be found in the financial statements.

Examples of when an EoM should be used include:

• An uncertainty relating to the future outcome of exceptional litigation
• Early application of a new accounting standard that has a pervasive effect on the financial statements.
• A major catastrophe that has had a significant effect on the entity’s financial position
• Significant going concern issues

An Other Matter (OM) paragraph has in common with the EoM the fact that it does not modify the auditor’s opinion. However, whereas the EoM refers to a matter within the financial statements, and OM refers to information that is rightly not present in the financial statements, but which is so important for users’ understanding of them that it needs to be highlighted in the auditor’s report.

Examples of situations include:

• Law, regulation or generally accepted practice may require or permit the auditor to elaborate on matters that provide further explanation of the auditor’s responsibilities or report.
• The auditor may be reporting on more than one set of financial statements (eg a set of statements prepared under national reporting framework, and a set of statements prepared under International Financial reporting standards).
• Any restriction on the distribution of the auditor’s report

The OM is thus a means for the auditor to communicate with users, and should state explicitly that the matter referred to is not required to be included in the financial statements.