CPA Exam AUD: Emphasis-of-Matter and Other-Matter Paragraphs

Emphasis-of-Matter and Other-Matter Paragraphs: CPA Exam Guide

Emphasis-of-matter (EOM) and other-matter (OM) paragraphs are additional paragraphs included in the auditor's report to draw users' attention to important matters. AU-C Section 706 (Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor's Report) governs their use. These paragraphs do not modify the auditor's opinion; they provide additional information the auditor considers important for users' understanding of the financial statements or the audit.

Emphasis-of-Matter Paragraphs

An emphasis-of-matter paragraph refers to a matter that is appropriately presented or disclosed in the financial statements and that, in the auditor's professional judgment, is of such importance that it is fundamental to users' understanding of the financial statements. The key requirements for an EOM paragraph are that it refers only to matters already presented or disclosed in the financial statements, it uses the heading "Emphasis of Matter" or another appropriate heading, it includes a clear reference to the matter being emphasized and to the note or disclosure where the matter is described, and it states that the auditor's opinion is not modified with respect to the matter emphasized.

The EOM paragraph is placed after the opinion paragraph in the audit report. Its inclusion does not change the opinion; the auditor may issue an unmodified opinion with an EOM paragraph.

When an Emphasis-of-Matter Paragraph Is Required

Certain situations require the auditor to include an EOM paragraph:

Going concern: When substantial doubt exists about the entity's ability to continue as a going concern, an EOM paragraph with a "Going Concern" heading is required (AU-C 570).
Change in accounting principle: When there is a material change in accounting principle that has a material effect on the financial statements, an EOM paragraph is required (AU-C 708).
Correction of a material misstatement in previously issued financial statements: When the financial statements are restated to correct a prior-period error, an EOM paragraph is required.
Special-purpose framework: When the financial statements are prepared using a special-purpose framework (cash basis, tax basis, regulatory basis, contractual basis, or other basis), an EOM paragraph alerting readers to the basis of accounting is required.

Optional Use of Emphasis-of-Matter Paragraphs

The auditor may also include an EOM paragraph at their discretion to draw attention to other matters the auditor deems fundamental to users' understanding of the financial statements. Examples include a significant subsequent event that is properly disclosed, an unusually significant related party transaction, a major catastrophe that had a significant effect on the entity, or significant uncertainties whose resolution depends on future events. The auditor exercises professional judgment in determining whether an optional EOM paragraph is appropriate.

Other-Matter Paragraphs

An other-matter paragraph refers to a matter that is not presented or disclosed in the financial statements but is relevant to users' understanding of the audit, the auditor's responsibilities, or the auditor's report. The OM paragraph is placed after the opinion paragraph and any EOM paragraphs, uses the heading "Other Matter" or another appropriate heading, and does not refer to matters disclosed in the financial statements (those belong in an EOM paragraph).

When an Other-Matter Paragraph Is Required or Used

Common situations where an OM paragraph is used include:

Comparative financial statements with different levels of service: When the prior-period financial statements were compiled or reviewed (a lower level of service) and the current period is audited, an OM paragraph describes the level of service performed in the prior period.
Prior-period financial statements audited by a predecessor auditor: When a predecessor auditor reported on the prior-period financial statements, the current auditor may include an OM paragraph indicating that the prior period was audited by another auditor, the type of opinion expressed, and the date of the predecessor's report.
Supplementary information: When the auditor's report covers supplementary information presented with the basic financial statements, an OM paragraph may describe the auditor's work on the supplementary information.
Required supplementary information (RSI): When the entity is required to present RSI (such as management's discussion and analysis), the auditor includes an OM paragraph describing the limited procedures performed on the RSI.

Distinction Between EOM and OM Paragraphs

The fundamental distinction is that EOM paragraphs relate to matters presented or disclosed in the financial statements, while OM paragraphs relate to matters not disclosed in the financial statements but relevant to the audit or the report. Both types do not modify the opinion. An EOM paragraph says "look at this important thing in the financial statements." An OM paragraph says "here is something you should know about this audit or report that is not in the financial statements."

Relationship to Modified Opinions

EOM and OM paragraphs are not substitutes for modified opinions. If the financial statements are materially misstated, the auditor issues a qualified or adverse opinion, not an unmodified opinion with an EOM paragraph. If the auditor cannot obtain sufficient evidence, the auditor issues a qualified opinion or disclaimer, not an unmodified opinion with an OM paragraph. EOM and OM paragraphs are used when the opinion itself does not need modification but additional information is important for users.

Exam Tips for EOM and OM Paragraphs

EOM paragraphs relate to matters in the financial statements; OM paragraphs relate to matters outside the financial statements.
Neither type modifies the audit opinion.
Going concern, change in accounting principle, and restatements require EOM paragraphs.
Prior-period audited by a predecessor and different levels of service for comparative periods use OM paragraphs.
EOM paragraphs must state that the opinion is not modified with respect to the emphasized matter.