Emphasis of matter or Other Matter paragraph Audit Report

Summary

This lecture by Professor Forehead focuses on the 'Emphasis of Matter' (EOM) and 'Other Matters' paragraphs in an auditor's report. EOM is used to highlight important matters in the financial statements or notes, either at the auditor's discretion or when required. Examples of EOM include related party transactions, significant post-balance sheet events, and substantial doubt about going concern. 'Other Matters' deals with issues outside the financial statements, like auditor responsibilities. The session also distinguishes between optional and required EOM disclosures, with a focus on changes in accounting principles, departures from GAAP, and consistency in financial reporting.

Takeaways

• 😀 EOM (Emphasis of Matter) is used to draw attention to specific matters in the financial statements or notes without modifying the auditor's opinion.
• 😀 EOM is optional, based on the auditor's discretion, and is used when the auditor feels it’s necessary to highlight certain issues, like related party transactions or significant post-balance sheet events.
• 😀 EOM is required when there are changes in accounting principles (e.g., FIFO to LIFO) or reporting entities, as well as when there is a justified departure from GAAP.
• 😀 The EOM paragraph is used only in a clean, unmodified opinion audit report and does not alter the overall opinion of the financial statements.
• 😀 EOM paragraphs are placed after the opinion paragraph in the audit report, with the auditor still providing a clean opinion despite the emphasis.
• 😀 The 'Other Matters' paragraph is used to highlight issues unrelated to the financial statements, such as the auditor’s responsibilities in relation to laws or regulations.
• 😀 EOM can emphasize matters like substantial doubt about going concern if the company has a plan in place to address it, even though it’s disclosed in the notes.
• 😀 Key Audit Matters (CAMs) are different from EOMs, and EOM should not be confused with CAMs in audit reports.
• 😀 The auditor must explain if there’s a change in opinion compared to the prior year, ensuring the comparability of financial statements between periods.
• 😀 While optional EOMs highlight matters already disclosed in the financial statements or notes, required EOMs highlight significant issues like changes in accounting principles, error corrections, or GAAP departures.

Q & A

What is the purpose of the Emphasis of Matter (EOM) paragraph in an auditor's report?

The purpose of the EOM paragraph is to emphasize specific matters related to the financial statements or the notes that the auditor believes are important for users to understand, without changing the auditor's opinion.

Under what circumstances is an Emphasis of Matter (EOM) paragraph optional?

An EOM paragraph is optional when the auditor believes it is necessary to draw attention to specific matters, such as related party transactions, major events occurring after the balance sheet date, or substantial doubt about the company’s ability to continue as a going concern. The decision is based on the auditor's professional judgment.

What are some examples of situations where an EOM paragraph would be required?

EOM is required when there is a change in accounting principles, errors involving accounting principles, a justified departure from GAAP, or when using a special purpose framework for preparing financial statements.

How does the Emphasis of Matter (EOM) paragraph differ from Other Matters paragraphs?

EOM paragraphs deal with matters that are already presented or disclosed in the financial statements or the notes, and the auditor emphasizes their importance. In contrast, Other Matters paragraphs refer to matters not disclosed in the financial statements or notes, such as the auditor’s responsibility regarding laws and regulations.

Can an Emphasis of Matter (EOM) paragraph be used when the auditor's opinion is anything other than modified?

No, an EOM paragraph can only be used when the auditor provides an unmodified (clean) opinion. It cannot be used if the auditor has issued a modified opinion, such as a qualified or adverse opinion.

What should be done if there is a change in the auditor's opinion compared to the previous year?

If the auditor’s opinion changes from the previous year, the auditor is required to explain this change in the report, so users can understand why the opinions differ and maintain comparability between years.

What does 'consistency' mean in the context of an Emphasis of Matter (EOM) paragraph?

In auditing, consistency refers to using the same accounting methods from one period to another to ensure comparability. If there is a change in accounting principles or reporting entities, the auditor must emphasize this in an EOM paragraph because it affects the comparability of the financial statements.

What is a 'justified departure from GAAP,' and when is it relevant for an Emphasis of Matter (EOM) paragraph?

A justified departure from GAAP occurs when a company departs from Generally Accepted Accounting Principles (GAAP) but the auditor believes the departure is acceptable. The auditor would issue an unmodified opinion but include an EOM to explain the departure to the users.

What does it mean if there is substantial doubt about a company's ability to continue as a going concern, and how should it be disclosed?

Substantial doubt about a company’s ability to continue as a going concern means there are concerns that the company may not be able to continue operations in the near future. If the management has a plan to address the doubt, the auditor may highlight this in an optional EOM paragraph, but if there is a significant doubt without a clear plan, it would require a separate paragraph in the audit report.

How does the Emphasis of Matter (EOM) paragraph relate to the overall opinion in an audit report?

The EOM paragraph does not affect the auditor's opinion. It is used to draw attention to specific matters but does not change the overall unmodified (clean) opinion. The opinion remains clean unless the auditor decides to modify it based on other findings.