Emphasis-of-matter, other-matter paragraphs and key audit matters

• Distinguish an emphasis-of-matter paragraph from an other-matter paragraph
• Identify the AU-C sections that require each paragraph
• Determine key audit matters using the AU-C 701.08 and .09 filter
• Explain why none of these substitutes for a modified opinion

Two paragraphs, two purposes

AU-C 706.07 defines both:

• An emphasis-of-matter (EOM) paragraph refers to a matter appropriately presented or disclosed in the financial statements that, in your judgment, is fundamental to users' understanding of the statements.
• An other-matter (OM) paragraph refers to a matter not presented or disclosed in the statements that is relevant to users' understanding of the audit, your responsibilities or your report.

The line is simple: EOM points into the statements; OM talks about something outside them.

Requirements for each

AU-C 706.08 allows an EOM paragraph only if the matter would not require a modified opinion and, when AU-C 701 applies, it has not been determined to be a key audit matter. AU-C 706.09 requires a separate section with an appropriate heading (including "Emphasis of Matter" when key audit matters are communicated), a clear reference to the matter and the note that describes it, and a statement that the opinion is not modified with respect to the matter. The paragraph refers only to information in the statements.

AU-C 706.10 and .11 set the OM rules: same key audit matter limit, a separate section headed "Other Matter" or similar.

AU-C 706.12 requires you to tell those charged with governance in advance about an expected EOM or OM paragraph and its wording.

When another section requires one

The AU-C 706 exhibits list the required cases. Common ones:

• Change in accounting principle (AU-C 708.08 and .09). EOM when the change has a material effect, in the period of change and later periods until the new principle applies to all periods presented; with full retrospective application, only in the period of change.
• Correction of a material misstatement in previously issued statements (AU-C 708.13). EOM when the statements are restated; it need not be repeated later.
• Special purpose frameworks (AU-C 800.20). EOM stating that the statements use a special purpose framework, referring to the note that describes it, and stating that it is a basis of accounting other than GAAP.
• Predecessor auditor's report not reissued (AU-C 700.57). OM describing the prior audit and opinion.
• Prior year compiled or reviewed (AU-C 700.59). OM describing the service and report date.
• Revised statements with a changed opinion (AU-C 560.16c). EOM or OM describing the previous report and the change.

Going concern is not on this list. Since SAS 134, substantial doubt goes in its own section under AU-C 570.24, not an EOM paragraph.

Discretionary EOM paragraphs are a judgment call. AU-C 706.A4 gives examples: an uncertainty about the outcome of unusually important litigation or regulatory action, a significant subsequent event, a major catastrophe with a significant effect, and significant related party transactions. AU-C 706.A5 warns that going beyond what the statements disclose raises questions about the disclosure itself. The paragraph templates show the wording.

Key audit matters (AU-C 701)

AU-C 701 applies only when you are engaged to communicate key audit matters (AU-C 701.04). The definition in AU-C 701.07: matters that, in your judgment, were of most significance in the audit of the current period, selected from matters communicated with governance.

The filter has two steps. AU-C 701.08: from matters communicated with governance, determine those that required significant auditor attention, considering higher assessed risks or significant risks, significant judgments involving estimates with high estimation uncertainty, and significant events or transactions. AU-C 701.09: of those, determine which were of most significance.

Each key audit matter, under AU-C 701.10 and .12, appears under a subheading in a "Key Audit Matters" section, refers to related disclosures, and explains why the matter was most significant and how the audit addressed it. Matters that cause a qualified opinion or substantial doubt are key audit matters by nature but are reported in their own sections, with a reference in the Key Audit Matters section (AU-C 701.14). If there are none to report, AU-C 701.15 requires a statement saying so.

The common thread

None of these paragraphs replaces a modified opinion. AU-C 706.08a and AU-C 701.11 both bar using them for a matter that requires modification. An EOM paragraph about an undisclosed problem is a disclosure deficiency, which is an AU-C 705 matter.

For more on the paragraph types, see the AU-C 706 page.

Pinecrest Senior Living, Inc.: three candidates