ISAs – Summaries and Application Guide ISA 706
ISA 706
EMPHASIS OF MATTER AND
OTHER MATTER PARAGRAPHS
LO # LEARNING OBJECTIVE REQUIREMENTS APPLICATION
LO 1 INTRODUCTION, OBJECTIVE AND DEFINITION 1–7 A1– A4
LO 2 EMPHASIS OF MATTER PARAGRAPHS 8–9 A5– A8
LO 3 OTHER MATTER PARAGRAPHS 10 – 11 A9– A17
LO 4 COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE 12 A18
Appendix ILLUSTRATIONS
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ISAs – Summaries and Application Guide ISA 706
LO 1: INTRODUCTION, OBJECTIVE AND DEFINITION:
Sometimes auditor faces some matters, which do not require modifications in opinion but are
important for users to know. Auditor can ADD following paragraphs to communicate them to users:
Material Uncertainty related to Going Concern
Emphasis of Matter
Other Matter
In this ISA, we will discuss Emphasis of Matter and Other Matter paragraphs.
Emphasis of Matter Paragraph:
Emphasis of Matter Paragraph is included in audit report if auditor considers it necessary to draw
users’ attention to a disclosure in financial statement, which is fundamental to users’
understanding of the financial statements, provided:
The auditor is NOT required to modify his opinion because of the matter, and
Matter is not a key audit matter.
Other Matter Paragraph:
Other Matter Paragraph is included in audit report if auditor considers it necessary to communicate
a matter which is not required to be disclosed in financial statements but is relevant to users’
understanding of the audit, auditor’s report or auditor’s responsibilities, provided:
Communication is not prohibited by law, and
Matter is not a key audit matter.
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ISAs – Summaries and Application Guide ISA 706
LO 2: EMPHASIS OF MATTER PARAGRAPHS:
Examples of Situations/ Circumstance when EOM is included in Audit Report: (not complete list)
1. If there is material uncertainty relating to the exceptional litigation or regulatory action.
2. A significant subsequent event occurs (e.g. a fire after the year destroying production facilities). ISA 560
3. If financial statements are re-issued ISA 560, or corresponding figures are re-stated. ISA 710
4. When a major disaster significantly affects entity’s financial position.
5. Early application (when permitted) of a new accounting standard that has a material effect
on financial statements.
6. Where a financial reporting framework is unacceptable but is required by law or regulation.
ISA 210
7. When Special Purpose Framework is used by management. ISA 800
Exam Tips
Excessive use of EOM paragraph, and excessive disclosures should be avoided.
Placement:
Placement depends on nature of matter, and significance of the matter.
It is placed after basis of opinion section, and usually before Key Audit Matter.
Presentation of EOM Paragraph in Auditor’s Report:
This paragraph is presented as a separate section. Auditor may add further context to the heading
e.g. Emphasis of Matter - Subsequent Event.
This paragraph shall state:
a clear description of the matter being emphasized.
reference to the notes in financial statements which fully describes the matter.
that auditor’s opinion is not modified in respect of this matter.
Example: Exceptional litigation adequately disclosed
We draw your attention to Note X of the financial statements, which describe the uncertainty
related to the outcome of the lawsuit filed against the company by XYZ Company. Our opinion is
not modified in respect of this matter.
If a matter is a Key Audit Matter as well as fundamental for users understanding of F/S:
Auditor shall communicate such matter as a Key Audit Matter, but prominently e.g.:
by presenting the matter more prominently than other KAMs (e.g. as the first matter), or
by including additional information in description of KAM
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ISAs – Summaries and Application Guide ISA 706
LO 3: OTHER MATTER PARAGRAPHS:
Examples of Situations/ Circumstance when OM is included in Audit Report:
1. When financial statements of prior period were not audited or were audited by another
auditor. ISA 510
2. If auditor is engaged to express opinion on two sets of financial statements (e.g. entity prepared
one set of F/S under IFRS and other set under national framework and auditor is engaged to report on both set
of F/S). ISA 800 Series
3. If auditor is required to express opinion on two periods (e.g. in case of comparative financial
statements), and current opinion is different from that expressed in last year*. ISA 710
4. When auditor restricts distribution of auditor’s report (usually General Purpose F/S are not
restricted, but Special Purpose F/S may be restricted).
5. When auditor is required by law to elaborate auditor’s responsibilities (e.g. planning and
scoping matters).
6. If there is scope limitation imposed by management whose effect is pervasive and it is not
possible/practicable to withdraw from engagement. ISA 705
* Note that this case is different from cases of Additional Audits (covered in ISA 800 Series) in which
period is same but subject matters are different.
Placement:
If other matter relates to understanding of audit of financial statements, it shall be included
within the part “Report on Audit of Financial Statements”, usually after Key Audit Matter.
In other cases, it shall be included within the part “Report on Other Legal and Regulatory
Requirements”, or as a separate paragraph after this part.
Presentation of Other Matter Paragraph in Auditor’s Report:
This paragraph is presented as a separate section. Auditor may add further context to the heading
e.g. Other Matter – Scope of Audit.
Example of Draft:
Example: Previous Year’s Financial Statements audited by another auditor
“The financial statements of ABC Company for the year ended December 31, 20X0 were audited by another
auditor who expressed an unmodified opinion on those statements on March 31, 20X1.”
LO 4: COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE:
Same as in ISA 705.
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ISAs – Summaries and Application Guide ISA 706
APPENDIX: ILLUSTRATIONS:
Examples of Emphasis of Matter Paragraph in Other ISAs:
Standard Example
Subsequent event (i.e. Fire) destroyed assets after the balance sheet date, disclosed as
subsequent event:
ISA 706
Emphasis of Matter:
(Appendix 3)
We draw attention to Note X of the financial statements, which describes the effects of a fire in the
Company’s production facilities. Our opinion is not modified in respect of this matter.
Financial statements are prepared on special purpose framework:
Emphasis of Matter – Basis of Accounting
ISA 800 We draw attention to Note X to the financial statements, which describes the basis of accounting. The
(Illustration 3) financial statements are prepared to assist the Company to meet the requirements of Regulator DEF.
As a result, the financial statements may not be suitable for another purpose. Our opinion is not
modified in respect of this matter.
Financial statements are prepared on special purpose framework (compliance)*:
Emphasis of Matter – Basis of Accounting and Restriction on Distribution
We draw attention to Note X to the financial statements, which describes the basis of accounting. The
financial statements are prepared to assist the partners of the Partnership in preparing their
individual income tax returns. As a result, the financial statements may not be suitable for another
ISA 800
purpose.
(Illustration 2)
Our report is intended solely for the Partnership and its partners and should not be distributed to
parties other than the Partnership or its partners.
Our opinion is not modified in respect of this matter.
Examples of Other Matter Paragraph in Other ISAs:
Standard Example
Company issued separate set of financial statements:
Other Matter
ISA 800
The Company has prepared a separate set of financial statements for the year ended December 31,
(Illustration 3)
20X1 in accordance with International Financial Reporting Standards on which we issued a separate
auditor’s report to the shareholders of the Company dated March 31, 20X2.
Exam Tips
1. Every important element of audit report (i.e. Modified Opinion, Emphasis of Matter Paragraph, Going Concern
Paragraph, Key Audit Matter) has its own situations. No situation is to be misclassified, or duplicated (except in
case when books of accounts are not available, or there is pervasive scope limitation by management).
2. Usually, distribution of audit report is restricted in Special Purpose Framework, but not in General Purpose
Framework.