Emphasis of Matter & Other Matter Paragraphs: SAS 134

By Charles Hall | Accounting and Auditing

Apr 25

Do you know what you need to know about emphasis of matter and other matter paragraphs? Sometimes auditors elect to or are required to add an extra paragraph. You need to know why and when and how. This article provides information about emphasis of matter (EOM) paragraphs and other matter (OM) paragraphs. (This article is based on AU-C 706, Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor’s Report. See my prior EOM and OM article if you have not adopted SAS 134, 137, 140 and 141.)

emphasis of matter

Definitions

First, let’s first define the two terms.

AU-C 706.07 provides the following definitions:

Emphasis-of-matter paragraph. A paragraph included in the auditor’s report that is required by GAAS, or is included at the auditor's discretion, and that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's professional 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 is required by GAAS, or is included at the auditor's discretion, and that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor's professional judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report.

Notice that an EOM refers to “a matter appropriately presented or disclosed in the financial statements,” while an OM refers to “a matter other than those presented or disclosed in the financial statements.” So, EOMs are used in relation to information included in the financial statements, and OMs are used in reference to information outside the financial statements.

Now, let us take a look at sample EOM and OM paragraphs.

Sample Emphasis of Matter Paragraph

Here’s a sample EOM paragraph:

Emphasis of Matter

As discussed in Note X to the financial statements, subsequent to the date of the financial statements, there was flood damage to the Company’s inventory facilities. Our opinion is not modified with respect to that matter.

Sample Other Matter Paragraph

Here is a sample OM paragraph:

Other Matter

In our report dated April 18, 20X5, we expressed a qualified opinion since the Company’s main office had a material unrecognized impairment loss. As disclosed in Note 12, the Company has now recognized the impairment in conformity with accounting principles generally accepted in the United States of America. Accordingly, our present opinion on the restated 20X4 financial statements, as presented herein, is different from that expressed in our previous report.

You also need to know the presentation requirements for EOM and OM paragraphs.

Presentation Requirements for an Emphasis of Matter

The purpose of the EOM is to draw attention to information contained in the financial statements.

AU-C 706.08 and 706.09 provides EOM guidance. These paragraphs tell you how and when to provide an EOM paragraph.

How to Present an Emphasis of Matter

The auditor should:

  • Refer only to information presented or disclosed in the financial statements
  • Include the paragraph in a separate part of the auditor’s report with a heading (such as Emphasis of Matter)
  • Include in the heading Emphasis of Matter when key audit matters are communicated in the report
  • Include a clear reference to the matter being emphasized and the location of relevant disclosures
  • State that the auditor’s opinion is not modified with respect to the matter emphasized

The EOM can be located just after the Basis for Opinion paragraph unless there is a key audit matters section. If there is a key audit matter section, the EOM can be placed after the Basis for Opinion paragraph or after the Key Audit Matters section. (AU-C 706.A14 does not specify placement of the EOM or OM. It says placement depends on the auditor’s judgment about the significance of the information compared to other elements of the report.)

So, when should an EOM be provided?

When to Present an Emphasis of Matter Paragraph

The auditor presents an EOM when he or she believes the information is fundamental to a user’s understanding of the financial statements. But the auditor can only provide an EOM when (1) the auditor is not qualifying the opinion because of the matter, and (2) when the matter is not a key audit matter. EOMs are sometimes required by audit standards.

Exhibit B of AU-C 706, “List of AU-C Sections Containing Requirements for Emphasis-of-Matter Paragraphs” provides information about audit standards requiring an EOM. Those include:

  • AU-C 560.16c, Subsequent Events and Subsequently Discovered Facts
  • AU-C 708.08-.09 and 708.11-.13, Consistency of Financial Statements

See Exhibit B of AU-C 706 for the full list.

Now let us look at other matter paragraph requirements.

Presentation Requirements for an Other Matter

An OM is used to highlight information external to the financial statements, usually regarding the auditor’s actions, responsibilities, or report. In other words, an OM addresses information not included in the financial statements or notes.

AU-C 706.10 provides OM guidance.

The auditor should:

  • Include the paragraph within a separate part of the auditor’s report with the heading Other Matter or other appropriate wording
  • Not include an OM for an issue that is a key audit matter (such information is reported in the key audit matter section)

How to Present an Other Matter

AU-C 706.A14 does not specify where the OM is to be placed in the auditor’s report, saying the placement “depends on the nature of the information” and “the auditors judgement.” Nevertheless, see AU-C 706.A14 for guidance, especially if there are key audit matters, or legal or regulatory requirements. AU-C 706.A17 shows the OM paragraph following Key Audit Matters paragraph in Illustration 2. (The order in this illustration is Basis of Opinion, Emphasis of Matter, Key Audit Matters, and Other Matter. So, if there are no Emphasis of Matter or Key Audit Matter paragraphs, the OM could—based on this illustration—follow the Basis of Opinion paragraph.)

When to Present an Other Matter Paragraph

Auditors can elect to provide an OM paragraph to provide information about the audit, including the auditor’s responsibilities and report. However, there are instances where such a paragraph is required. Exhibit C of AU-C 706, “List of AU-C Sections Containing Requirements for Other-Matter Paragraphs” provides information about auditing standards that require an OM. Those include:

  • AU-C 700.55-.56 and .58-59, Forming an Opinion and Reporting on Financial Statements
  • AU-C 800.20, Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks

See exhibit C of AU-C 706 for the full list.

Simple Summary

Use EOMs and OMs to highlight important matters

SAS 134 amends the EOM and OM requirements

EOMs refer to matters presented or disclosed in the financial statements

OMs refer to a matter other than those presented or disclosed in the financial statements

EOMs and OMs are—in certain situations—required by audit standards

An EOM should refer to the note that describes the issue; include the heading “Emphasis of a Matter” or other appropriate heading

An OM should include the heading “Other Matter” or other appropriate heading

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About the Author

Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.

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