ISA 706 (Revised)
Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report
1Objective and scope
ISA 706 (Revised) deals with additional communication in the auditor's report when the auditor considers it necessary to draw users' attention to a matter or matters presented or disclosed in the financial statements that are of such importance that they are fundamental to users' understanding of the financial statements (an Emphasis of Matter paragraph), or to a matter or matters other than those presented or disclosed in the financial statements that are relevant to users' understanding of the audit, the auditor's responsibilities or the auditor's report (an Other Matter paragraph). Neither paragraph modifies the opinion, and neither is a substitute for a modification under ISA 705, for disclosures the framework requires management to make, or for reporting under ISA 570 on going concern. ISA 701 governs the relationship with key audit matters: a matter that is a key audit matter is reported there, not as an Emphasis of Matter.
The objective is, having formed an opinion on the financial statements, to draw users' attention, when in the auditor's judgement it is necessary to do so by way of clear additional communication in the auditor's report, to a matter appropriately presented or disclosed in the financial statements that is fundamental to users' understanding of them, or, as appropriate, to any other matter relevant to users' understanding of the audit, the auditor's responsibilities or the report.
2Key definitions
3Requirements
Emphasis of Matter paragraphs
If the auditor considers it necessary to draw users' attention to a matter presented or disclosed in the financial statements that is fundamental to their understanding, the auditor includes an Emphasis of Matter paragraph provided that the auditor would not be required to modify the opinion under ISA 705 as a result of the matter, and, where ISA 701 applies, the matter has not been determined to be a key audit matter. The paragraph is included in a separate section with the heading 'Emphasis of Matter' or another appropriate heading; it contains a clear reference to the matter being emphasised and to where the relevant disclosures that fully describe the matter can be found in the financial statements, refers only to information presented or disclosed in the statements, and indicates that the auditor's opinion is not modified in respect of the matter emphasised.
- Circumstances where an Emphasis of Matter may be necessary: an uncertainty relating to the future outcome of exceptional litigation or regulatory action; a significant subsequent event between the date of the financial statements and the date of the report; early application, where permitted, of a new accounting standard that has a material effect; a major catastrophe that has had, or continues to have, a significant effect on the entity's financial position; a financial reporting framework prescribed by law that would otherwise be unacceptable, and the report on it; financial statements prepared on a basis other than going concern where that basis is appropriate and adequately disclosed; and, under ISA 560, a revised set of financial statements or a note describing an amendment after issue.
- The paragraph must not describe the matter itself in more detail than needed to point users to the disclosure; the entity's disclosure carries the description. Widespread use of Emphasis of Matter paragraphs diminishes their effectiveness, so they are reserved for what is genuinely fundamental.
- A material uncertainty related to going concern is reported in its own section under ISA 570, not as an Emphasis of Matter paragraph.
Other Matter paragraphs
If the auditor considers it necessary to communicate a matter other than those presented or disclosed in the financial statements that is relevant to users' understanding of the audit, the auditor's responsibilities or the auditor's report, the auditor includes an Other Matter paragraph, provided this is not prohibited by law or regulation and, where ISA 701 applies, the matter has not been determined to be a key audit matter. It is presented in a separate section headed 'Other Matter' or another appropriate heading, and it does not include information that the auditor is prohibited from providing by law, regulation or professional standards (confidentiality), or information that management is required to provide.
- Relevant to users' understanding of the audit: where the auditor is unable to withdraw from an engagement despite a management-imposed limitation with pervasive effect (an explanation of why withdrawal was not possible), or where law or regulation permits the auditor to elaborate on responsibilities.
- Relevant to users' understanding of the auditor's responsibilities or the report: where the prior period financial statements were audited by a predecessor auditor (ISA 710) or were not audited; where the auditor reports on more than one set of financial statements prepared under different frameworks; or where the report is restricted in its distribution or use (special purpose statements under ISA 800).
- Where the auditor has reporting responsibilities in addition to the ISA report, an Other Matter paragraph is not used for them: they go in the 'Report on Other Legal and Regulatory Requirements' section.
Placement
| Paragraph | Where it sits in the report |
|---|---|
| Emphasis of Matter | Immediately after the Basis for Opinion section (or after the Material Uncertainty Related to Going Concern section if there is one). Where there is a Key Audit Matters section, it may be placed before or after it depending on the relative significance of the information, and its heading may say 'Emphasis of Matter' to distinguish it. |
| Other Matter | After the Key Audit Matters section where relevant to understanding those matters; otherwise, where relevant to the audit or the report, after Key Audit Matters or at the end of the report; and where relevant to other reporting responsibilities, in the Report on Other Legal and Regulatory Requirements section or as a separate section after both reports. |
4Documentation and reporting
If the auditor expects to include an Emphasis of Matter or Other Matter paragraph, the auditor communicates with those charged with governance regarding this expectation and the proposed wording (ISA 260). The file records the judgement that the matter is fundamental to users' understanding (or relevant to the audit or report), that it does not require a modification, that it is not a key audit matter, the cross-reference to the disclosure, and the communication with those charged with governance. The paragraph appears in the report under its own heading and always states that the opinion is not modified; a paragraph that is drafted to hedge an opinion, or to disclose something management should have disclosed, is a misuse of ISA 706 and the correct response is a modification under ISA 705.
Emphasis of Matter, drafted
Emphasis of Matter: We draw attention to Note 32 to the financial statements, which describes the uncertainty related to the outcome of the lawsuit filed against the Company by the Kenya Revenue Authority in respect of transfer pricing adjustments for the years 20X1 to 20X3. Our opinion is not modified in respect of this matter.
Contrast: if Note 32 were absent or inadequate, the correct response would be a qualified or adverse opinion for inadequate disclosure, not an Emphasis of Matter paragraph describing the lawsuit.
5Examinable focus
What KASNEB tests
The distinction between an Emphasis of Matter paragraph, an Other Matter paragraph, a key audit matter, a material uncertainty related to going concern and a modified opinion is the whole exam value of this standard: be ready to state for each where it sits, what it refers to, whether the opinion is affected and when it is used, and to apply the choice to a scenario (a disclosed lawsuit, a fire after year end, a predecessor auditor, a management limitation the auditor could not withdraw from). Candidates lose marks by treating an Emphasis of Matter as a 'soft qualification': it is only ever used for a matter adequately disclosed, and it explicitly says the opinion is not modified. Know the placement rules and the requirement to communicate the wording to those charged with governance.