You are the partner responsible for the audit of ABC Co, for the year ended 30th April, 2014. The final audit has been completed and you have asked the audit manager to draft the audit report. The manager is aware that there is guidance for auditors relating to audit report in ISA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report. The manager has asked for your assistance in this matter.
Note: You are not required to produce draft paragraphs
Required:
i) Define an ‘Emphasis of Matter paragraph’ and explain, providing examples, the use of such a paragraph. (6 marks)
View Solution
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
ii) Define an ‘Other Matter paragraph’ and explain, providing examples, the use of such a paragraph. (4 marks)
View Solution
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.