Definition
Emphasis of Matter
An “Emphasis of Matter” paragraph was previously an optional paragraph in an auditor’s report. It was included when an auditor believed that information included in the financial statements was sufficiently disclosed but drew attention to important matters to ensure such topics were not overlooked by the financial statement users. The intention behind this paragraph was to highlight critical information without altering the overall audit opinion. It emphasized transparency and clarity in the auditor’s communication with stakeholders. However, in May 1993, the Auditing Practices Board (APB) issued a new Statement of Auditing Standards (SAS) that revoked the option for including an emphasis-of-matter paragraph.
Examples
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Significant Uncertainty: Suppose a company was involved in litigation with potentially significant financial implications. Though fully disclosed in the notes to the financial statements, the auditor might have included an emphasis of matter paragraph to ensure users understood the significance of this uncertainty.
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Significant Subsequent Event: If a major event occurred after the balance sheet date (e.g., a natural disaster impacting the company’s operations), the auditor may have highlighted this through an emphasis of matter despite it being adequately disclosed in the financial statements.
Frequently Asked Questions (FAQs)
What was the primary purpose of an emphasis of matter paragraph in an auditor’s report?
The primary purpose was to draw the attention of the reader to significant matters presented or disclosed in the financial statements that were crucial for the reader’s understanding but did not affect the auditor’s overall opinion on the statements.
Is the emphasis of matter paragraph still used in modern auditing standards?
No, the use of an emphasis-of-matter paragraph was withdrawn by the Auditing Practices Board in 1993 through a new Statement of Auditing Standards.
Who decides if an emphasis of matter should be included in the audit report?
When it was an option, the inclusion of an emphasis-of-matter paragraph was at the discretion of the auditor, based on their professional judgment of the significance of the matter to the understanding of the financial statements.
Does drawing attention to a specific matter imply there might be errors or misstatements in the financial statements?
No, the inclusion of an emphasis-of-matter paragraph indicated that the issue was important but did not reflect errors or misstatements in the financial statements.
How were matters significant enough to warrant an emphasis of matter paragraph communicated after the change in guidelines?
After the withdrawal of the emphasis-of-matter paragraph option, significant matters are typically communicated through other means such as enhanced disclosures in the financial statements or through other forms of auditor commentary.
Related Terms
- Statement of Auditing Standards (SAS): Guidelines issued by professional auditing bodies that set the professional standards for auditors.
- Auditor’s Report: A formal opinion, or disclaimer thereof, issued by an auditor as a result of an audit or evaluation performed on a legal entity’s financial statements.
- Financial Statements: Records that provide an overview of a company’s financial condition, performance, and changes in financial position, consisting of the balance sheet, income statement, and cash flow statement.
- Auditing Practices Board (APB): The body responsible for issuing standards and guidance for auditing in the UK. Its functions have since been absorbed by the Financial Reporting Council (FRC).
Online References
- IFAC International Standards on Auditing (ISAs)
- Financial Reporting Council (FRC)
- AICPA Auditing Standards
Suggested Books for Further Studies
- Wiley Practitioner’s Guide to GAAS 2021: Covering all SASs, SSAEs, SSARSs, and Interpretations by Joanne M. Flood
- Auditing and Assurance Services: An Integrated Approach by Alvin A. Arens, Randal J. Elder, Mark Beasley
- Auditing For Dummies by Maire Loughran
- ISA 700 (Revised) Forming an Opinion and Reporting on Financial Statements: Revised and Redrafted by IAASB
Accounting Basics: “Emphasis of Matter” Fundamentals Quiz
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