Emphasis-of-Matter Paragraphs (Nonissuers)

Definition and Purpose

An emphasis-of-matter paragraph is included in the auditor's report to highlight matters fundamental to users’ understanding of the financial statements. These paragraphs refer to matters disclosed in the financial statements and do not modify the auditor's opinion.

Report Requirements

1. Include the heading "Emphasis-of-Matter."

2. Describe the matter and its disclosure location.

3. Indicate that the auditor's opinion is not modified.

Usage

1. Required:

    - Material changes in accounting principles or reporting entities.

    - Subsequent changes in audit opinion.

    - Use of a special purpose framework.

2. Optional:

    - Significant uncertainties (e.g., litigation outcomes).

    - Major catastrophes.

    - Substantial doubt about going concern, if alleviated and disclosed.

Other-Matter Paragraphs (Nonissuers)

Definition and Purpose

These paragraphs address matters not disclosed in the financial statements but are relevant to understanding the audit.

Report Requirements

1. Include the heading "Other-Matter."

2. Use discretion or address GAAS requirements, but not for key audit matters.

Usage

1. Required:

    - Restricting use of the report.

    - Reporting on comparative financial statements with differing audit statuses.

    - Highlighting reliance on prior auditors' reports.

2. Optional:

    - Scope limitations imposed by management.

    - Reporting on multiple sets of financial statements prepared under different frameworks.

Explanatory Paragraphs (Issuers)

Definition and Purpose

Used when required by PCAOB standards to emphasize matters disclosed in the financial statements. Their inclusion does not modify the audit opinion.

Report Requirements

1. Provide an appropriate heading.

2. Place after the opinion paragraph in unqualified reports.

Usage

1. Required:

    - Substantial doubt about going concern.

    - Material changes in accounting principles or corrections.

    - Inconsistencies or omissions in supplementary information.

2. Optional:

    - Highlight significant matters relevant to the financial statements.

Other Audit Considerations

Consistency

Auditor's reports imply consistent application of accounting principles unless explicitly stated otherwise. Changes in principles or corrections of errors require evaluation for:

1. Acceptability of the new principle.

2. Proper disclosure and justification.

Effects on Audit Reports

- Immaterial changes: No mention required.

- Material changes: Include an emphasis-of-matter or explanatory paragraph.

Summary