ISA 706 – Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

2 Emphasis of Matter paragraph

If auditor concludes that a certain matter that has already been disclosed in the financial statements is of prime importance for user’s understanding and thus needs to be highlighted to draw user’s attention to that matter, auditor shall add emphasis of matter paragraph in the auditor’s report.

However, it must be remembered that this specific paragraph is about matters already communicated in the financial statements. Also auditor shall take necessary steps to ensure that matter is not materially misstated.

1. Include it immediately after opinion paragraph in the auditor’s report
2. Provide an appropriate heading. Usually a heading “Emphasis of matter paragraph” is used.
3. Highlight the reference of the location in the financial to the matter being emphasized
4. Clearly indicate that addition of this paragraph does not amount to modification of auditor’s opinion

The following examples and cases are mentioned in different International Auditing standards where emphasis of matter paragraph may be used:

1. Auditor believes that there is a need to draw user’s attention to significant uncertainty surrounding accounting estimates
2. In case new or amended audit report has been issued after the discovery of subsequent events.
3. In case material uncertainty exists surrounding the use of going concern assumption but the same has been disclosed to the satisfaction of the auditor in the financial statements.
4. In case financial statements have been prepared under two financial reporting frameworks then auditor shall include Emphasis of Matter paragraph pointing to the disclosure in respect of extent of compliance of framework
5. In case of early application of accounting standard that has pervasive effect on financial statements i.e. new accounting standard has been followed and applied before its effective date.
6. In case auditor discovered that prior period financial statements contain material misstatements and also amended audit report has not been issued but the corresponding figures have been restated and appropriate disclosures have been made in the current period financial statements.
7. In case financial statements are prepared under special purpose framework
8. An entity is facing major catastrophe and its effects are expected to propagate to future periods and it is and will significantly affect the financial position of entity.

However, it must be kept in mind that increasing use of emphasis of matter paragraph in auditor’s report impairs the effectiveness of auditor’s communication.

Also emphasizing the matter by including more information in emphasis of matter paragraph than the information disclosed or presented in the financial statements might cause misinterpretation that matter is not disclosed appropriately in the financial statements.