Key Takeaways
- ISA 706 (Revised) governs two types of additional communication: Emphasis of Matter (EOM) paragraphs and Other Matter (OM) paragraphs. Neither modifies the auditor's opinion.
- An EOM paragraph draws attention to a matter presented or disclosed in the financial statements that is fundamental to users' understanding.
- An OM paragraph refers to a matter not in the financial statements but relevant to users' understanding of the audit, the auditor's responsibilities, or the report.
- EOM conditions: the matter does not require a modified opinion, and (when ISA 701 applies) has not been determined as a KAM.
- ISA 706 is most frequently triggered by requirements in other ISAs — ISA 560 (subsequent events), ISA 570 (going concern), ISA 710 (comparative information), and ISA 800/805.
- The auditor must communicate with those charged with governance when expecting to include either type of paragraph.
What is ISA 706 (Revised)?
ISA 706 (Revised), titled "Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report," addresses situations where the auditor wants to draw users' attention to matters beyond what the standard report communicates — without modifying the opinion.
These paragraphs serve a signposting function: they tell the reader "look at this particular matter; it is important for understanding these financial statements (EOM) or this audit (OM)." They are a tool for enhanced communication, not a halfway house for a modified opinion.
Emphasis of Matter Paragraphs
Definition
A paragraph that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's judgment, is of such importance that it is fundamental to users' understanding of the financial statements.
When to include
An EOM paragraph is appropriate when the auditor considers it necessary to draw attention to a matter that:
- Is appropriately presented or disclosed (if it were not, the auditor would consider a modified opinion under ISA 705).
- Is of such importance that it is fundamental to users' understanding.
- Does not require the opinion to be modified.
- (When ISA 701 applies) has not been determined as a KAM.
Common circumstances
Required by other ISAs. Several ISAs specifically require or contemplate EOM paragraphs in certain situations: financial statements prepared using a special purpose framework (ISA 800), when there has been a change in the applicable financial reporting framework, and certain going concern situations under the current ISA 570.
Auditor's judgment. Beyond specific ISA requirements, the auditor may use professional judgment to include an EOM paragraph. Common examples include exceptional litigation with significant uncertainty, a significant subsequent event between the reporting date and the auditor's report date, early application of a new accounting standard with material effect, and a major catastrophe that has significantly affected the entity's financial position.
Form requirements
The EOM paragraph must:
- Be in a separate section with a heading including the term "Emphasis of Matter."
- Include a clear reference to the matter being emphasised and where it is disclosed in the financial statements.
- State that the auditor's opinion is not modified in respect of the matter.
Other Matter Paragraphs
Definition
A paragraph that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor's judgment, is relevant to users' understanding of the audit, the auditor's responsibilities, or the auditor's report.
Common circumstances
Prior period audited by a predecessor auditor (ISA 710). When corresponding figures were audited by another auditor, the current auditor includes an OM paragraph identifying the predecessor, the type of opinion expressed, and the date of the predecessor's report.
Prior period not audited (ISA 710). If the comparative figures were not audited, the auditor states this in an OM paragraph.
Restriction on distribution (ISA 800/805). When financial statements are prepared for a specific purpose and the auditor wants to alert readers that they may not be suitable for other purposes.
Reporting on more than one set of financial statements. When the entity prepares financial statements under two frameworks.
EOM vs. OM — the key distinction
The distinction is simple but often confused. Ask: is the matter in the financial statements? If yes → Emphasis of Matter (it draws attention to something that management has disclosed). If no → Other Matter (it tells users something about the audit or the report that the financial statements do not address). An EOM paragraph always references a specific disclosure in the financial statements. An OM paragraph does not — it addresses audit-level information.
Relationship with KAM
When ISA 701 applies (listed entities), the interplay between KAM and EOM/OM paragraphs requires careful consideration:
- A matter cannot be both a KAM and an EOM paragraph. If the matter is determined as a KAM, the KAM description under ISA 701 takes precedence.
- If the matter warrants emphasis but is not a KAM (e.g., because it did not require significant auditor attention but is fundamental to users' understanding), an EOM paragraph remains appropriate.
- OM paragraphs can coexist with KAM — they address different things (the audit context vs. the financial statements).
- When ISA 701 does not apply (non-listed entities), EOM and OM paragraphs operate without this interaction.
ISA 706 (Revised) in Your Jurisdiction
Netherlands. COS 706 follows ISA 706 (Revised). In Dutch practice, EOM paragraphs are used for situations such as significant subsequent events, early adoption of new accounting standards (e.g., IFRS 17 transitions), and going concern matters. The AFM has noted that auditors should not use EOM paragraphs as a substitute for modifying the opinion when modification is warranted.
Germany. IDW PS 406 adapts ISA 706 (Revised). German practice uses the Hervorhebung eines Sachverhalts (emphasis of matter) and Sonstige Sachverhalte (other matters). The German long-form Prüfungsbericht already provides extensive discussion of significant matters, but the EOM/OM paragraphs in the Bestätigungsvermerk serve a distinct signposting function.
United Kingdom. ISA (UK) 706 is substantively aligned with ISA 706 (Revised). Given the UK's extended auditor reporting requirements, EOM paragraphs are less common for listed entities (where KAM and other UK-specific reporting sections often cover similar ground). For non-PIE entities, EOM paragraphs remain an important communication tool.
France. NEP 706 implements ISA 706 (Revised). French auditor's reports include an observation (similar to EOM) as a standard feature. The commissaire aux comptes frequently uses observations to draw attention to accounting policy changes, significant subsequent events, and going concern matters.
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Frequently Asked Questions
Does an Emphasis of Matter paragraph mean something is wrong?
No. An EOM paragraph explicitly states that the opinion is not modified. It draws attention to a matter that management has appropriately disclosed — the auditor is simply telling users "this matter is particularly important for understanding these financial statements."
Can EOM paragraphs be used alongside modified opinions?
Yes. An EOM paragraph can appear in an auditor's report that contains a qualified or adverse opinion, provided it addresses a different matter from the one causing the modification. For example, a qualified opinion for inventory scope limitation could coexist with an EOM paragraph about a subsequent event.
Is the auditor required to include an EOM paragraph for every significant uncertainty?
No. The auditor uses professional judgment to determine whether a matter is fundamental to users' understanding. Not every uncertainty warrants an EOM paragraph — particularly if the matter is adequately disclosed and not considered to be of such fundamental importance.
Where is the EOM paragraph placed in the report?
The placement depends on the auditor's judgment about the relative significance of the matter compared to other elements. It is typically placed after the Basis for Opinion section (and after any Material Uncertainty Related to Going Concern section and KAM section, if present).
Further Reading and Source References
- IAASB Handbook 2024 — The authoritative source for the complete ISA 706 (Revised) text, including illustrative reports with EOM and OM paragraphs.
- Appendix 1 — List of ISAs requiring EOM paragraphs in specific circumstances.
- Appendix 2 — List of ISAs requiring OM paragraphs in specific circumstances.
- ISA 700 (Revised) — The baseline report structure that EOM/OM paragraphs supplement.
- ISA 701 — KAM — the interaction with EOM paragraphs.