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Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

Introduction

Scope of this SA
  1. This Standard on Auditing (SA) deals with additional communication in the auditor’s report when the auditor considers it necessary to:
    1. Draw users’ attention to a matter or matters presented or disclosed in the financial statements that are of such importance that they are fundamental to users’ understanding of the financial statements; or
    2. Draw users’ attention to any matter or matters other than those presented or disclosed in the financial statements that are relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.
  2. SA 7011 establishes requirements and provides guidance when the auditor determines key audit matters and communicates them in the auditor’s report. When the auditor includes a Key Audit Matters section in the auditor’s report, this SA addresses the relationship between key audit matters and any additional communication in the auditor’s report in accordance with this SA. (Ref: Para. A1– A3)
  3. SA 570(Revised)2 and SA 720(Revised)3 establish requirements and provide guidance about communication in the auditor’s report relating to going concern and other information, respectively.
  4. Appendices 1 and 2 identify SAs that contain specific requirements for the auditor to include Emphasis of Matter paragraphs or Other Matter paragraphs in the auditor’s report. In those circumstances, the requirements in this SA regarding the form of such paragraphs apply. (Ref: Para. A4)
Effective Date
  1. This SA is effective for audits of financial statements for periods beginning on or after April 1, 2018.
Objective
  1. The objective of the auditor, having formed an opinion on the financial statements, is to draw users’ attention, when in the auditor’s judgment it is necessary to do so, by way of clear additional communication in the auditor’s report, to:1 SA 701, Communicating Key Audit Matters in the Independent Auditor’s Report.

2 SA 570 (Revised), Going Concern.

3 SA 720 (Revised), The Auditor’s Responsibilities Relating to Other Information.

  1. A matter, although appropriately presented or disclosed in the financial statements, that is of such importance that it is fundamental to users’ understanding of the financial statements; or
  2. As appropriate, any other matter that is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.
Definitions
  1. For purposes of the SAs, the following terms have the meanings attributed below:
    1. Emphasis of Matter paragraph – A paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements.

Other Matter paragraph – A paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.

Requirements

Emphasis of Matter Paragraphs in the Auditor’s Report
  1. If the auditor considers it necessary to draw users’ attention to a matter presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements, the auditor shall include an Emphasis of Matter paragraph in the auditor’s report provided: (Ref: Para. A5–A6)
    1. The auditor would not be required to modify the opinion in accordance with SA 705 (Revised)4 as a result of the matter; and
    2. When SA 701 applies, the matter has not been determined to be a key audit matter to be communicated in the auditor’s report. (Ref: Para. A1–A3)
  2. When the auditor includes an Emphasis of Matter paragraph in the auditor’s report, the auditor shall:
    1. Include the paragraph within a separate section of the auditor’s report with an appropriate heading that includes the term “Emphasis of Matter”;
    2. Include in the paragraph a clear reference to the matter being emphasized
    3. 4 SA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report.

and to where relevant disclosures that fully describe the matter can be found in the financial statements. The paragraph shall refer only to information presented or disclosed in the financial statements; and

  1. Indicate that the auditor’s opinion is not modified in respect of the matter emphasized. (Ref: Para. A7–A8, A16–A17)
Other Matter Paragraphs in the Auditor’s Report
  1. If the auditor considers it necessary to communicate a matter other than those that are presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report, the auditor shall include an Other Matter paragraph in the auditor’s report, provided:
    1. This is not prohibited by law or regulation; and
    2. When SA 701 applies, the matter has not been determined to be a key audit matter to be communicated in the auditor’s report. (Ref: Para. A9– A14)
  2. When the auditor includes an Other Matter paragraph in the auditor’s report, the auditor shall include the paragraph within a separate section with the heading “Other Matter,” or other appropriate heading. (Ref: Para. A15–A17)
Communication with Those Charged with Governance
  1. If the auditor expects to include an Emphasis of Matter or an Other Matter paragraph in the auditor’s report, the auditor shall communicate with those charged with governance regarding this expectation and the wording of this paragraph. (Ref: Para. A18)
Application and Other Explanatory Material
The Relationship between Emphasis of Matter Paragraphs and Key Audit Matters in the Auditor’s Report (Ref: Para. 2, 8(b))

A1. Key audit matters are defined in SA 701 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. Key audit matters are selected from matters communicated with those charged with governance, which include significant findings from the audit of the financial statements of the current period.5 Communicating key audit matters provides additional information to 5 SA 260 (Revised), Communication with Those Charged with Governance, paragraph 16. 

intended users of the financial statements to assist them in understanding those matters that, in the auditor’s professional judgment, were of most significance in the audit and may also assist them in understanding the entity and areas of significant management judgment in the audited financial statements. When SA 701 applies, the use of Emphasis of Matter paragraphs is not a substitute for a description of individual key audit matters.

A2. Matters that are determined to be key audit matters in accordance with SA 701 may also be, in the auditor’s judgment, fundamental to users’ understanding of the financial statements. In such cases, in communicating the matter as a key audit matter in accordance with SA 701, the auditor may wish to highlight or draw further attention to its relative importance. The auditor may do so by presenting the matter more prominently than other matters in the Key Audit Matters section (e.g., as the first matter) or by including additional information in the description of the key audit matter to indicate the importance of the matter to users’ understanding of the financial statements.

A3. There may be a matter that is not determined to be a key audit matter in accordance with SA 701 (i.e., because it did not require significant auditor attention), but which, in the auditor’s judgment, is fundamental to users’ understanding of the financial statements (e.g., a subsequent event). If the auditor considers it necessary to draw users’ attention to such a matter, the matter is included in an Emphasis of Matter paragraph in the auditor’s report in accordance with this SA.

Circumstances in Which an Emphasis of Matter Paragraph May Be Necessary (Ref: Para. 4, 8)

A4. Appendix 1 identifies SAs that contain specific requirements for the auditor to include Emphasis of Matter paragraphs in the auditor’s report in certain circumstances. These circumstances include:

  • When a financial reporting framework prescribed by law or regulation would be unacceptable but for the fact that it is prescribed by law or regulation.
  • To alert users that the financial statements are prepared in accordance with a special purpose framework.
  • When facts become known to the auditor after the date of the auditor’s report and the auditor provides a new or amended auditor’s report (i.e., subsequent events).6

A5.  Examples of circumstances where the auditor may consider it necessary

6 SA 560, Subsequent Events, paragraphs 12(b) and 16.

to include an Emphasis of Matter paragraph are:

  • An uncertainty relating to the future outcome of exceptional litigation or regulatory action.
  • A significant subsequent event that occurs between the date of the financial statements and the date of the auditor’s report.7
  • Early application (where permitted) of a new accounting standard that has a material effect on the financial statements.
  • A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position.

A6. However, a widespread use of Emphasis of Matter paragraphs may diminish the effectiveness of the auditor’s communication about such matters.

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