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 after the opinion paragraph. You need to know why and when.
This post gives you the leg up on emphasis-of-matter (EOM) paragraphs and other-matter (OM) paragraphs.
First, let’s first define the two terms.
AU-C 706.05 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.”
Now, let's take a look at sample EOM and OM paragraphs.
Here’s a sample EOM paragraph:
Emphasis of Matter
As discussed in Note X to the financial statements, the Company has elected to change its policy for determining cash equivalents in 20X 7. Our opinion is not modified with respect to that matter.
Here is a sample OM paragraph:
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 noted 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.
AU-C 706.06 and 706.07 provides guidance in reference to EOMs. The auditor should:
AU-C 706.08 provides guidance in reference to OMs. The auditor should:
Sometimes EOMs are required; here are examples:
See exhibit B of AU-C 706 for a complete listing of AU-C sections requiring EOM paragraphs.
An EOM is commonly required when a company has a change in an accounting principle (that has a material impact). AU-C 708 Consistency of Financial Statements paragraphs .07-.08 provides guidance on when the EOM is required.
The auditor also has an option to use an EOM to emphasize matters that are not required by audit standards. So, sometimes EOMs are included because they are required (e.g., going concern) and, other times, they are optional (e.g., to highlight a related party transaction).
Sometimes OMs are required; here are examples:
See exhibit C of AU-C 706 for a complete listing of AU-C sections requiring OM paragraphs.
Of course, creating your opinion is just a part of wrapping up your audits.
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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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