What is an emphasis of matter paragraph?
ISA 706.8 sets two conditions for including an EOM paragraph. The matter must be appropriately presented or disclosed in the financial statements, and the auditor must judge it fundamental to users' understanding. If either condition fails, the EOM is the wrong tool.
The first condition catches a recurring mistake. If the client's disclosure is inadequate, the auditor should evaluate whether an opinion modification under ISA 705 applies instead. An EOM paragraph cannot fix a disclosure problem. It can only highlight a disclosure that already works. ISA 706.9 requires the paragraph to include a clear reference to the relevant note and an explicit statement that the opinion is not modified in respect of this matter.
What counts as "fundamental" is professional judgment, not a checklist. ISA 706.A1–A3 list examples: a significant uncertainty relating to pending litigation, early adoption of a new accounting standard with pervasive effects, a major catastrophe affecting the client's financial position, or a material going concern uncertainty. The common thread is that the matter, while properly disclosed, might not receive the weight it deserves from a reader scanning the financial statements without direction from the auditor.
Key Points
- An EOM paragraph does not change the audit opinion in any way.
- It applies only when the matter is already adequately disclosed in the financial statements.
- Inspectors flag cases where the EOM substitutes for fixing an inadequate disclosure.
- On listed entity audits, including a matter as a KAM does not remove the EOM requirement.
Why it matters in practice
Practitioners sometimes include an EOM paragraph for a matter that is not adequately disclosed, using it as a workaround instead of requiring the client to fix the disclosure. ISA 706.8(a) is explicit: the matter must be appropriately presented or disclosed. If it is not, the auditor should consider whether ISA 705 applies. The EOM paragraph is not a substitute for a qualification.
On listed entity engagements, teams occasionally drop the EOM paragraph once they have included the same matter as a key audit matter. ISA 706.A8 clarifies that including a matter as a KAM does not replace the requirement for an EOM when ISA 706.8 conditions are met.
Worked example: Gruber Einzelhandel GmbH
Client: Austrian retail chain, FY2024, revenue €78M, IFRS reporter. A fire destroyed the client's largest distribution centre in November 2024. Note 22 discloses €11.4M in property damage, estimated business interruption losses of €3.2M, an insurance receivable of €9.8M recognised under IFRS 9, and remaining uncertainty around the final settlement amount.
Assess whether the disclosure is adequate: The engagement team reviewed Note 22 against IAS 1.125 and IAS 37.84–85. The note covers the nature of the event, the carrying amount of destroyed assets, the recognised receivable, and the remaining settlement uncertainty. Conclusion: disclosure is adequate.
Evaluate whether the matter is fundamental: The destroyed centre handled 38% of total distribution volume. The combined financial impact (€14.6M gross, €4.8M net of the recognised insurance receivable) represents 6.2% of total assets. The settlement uncertainty is material.
Draft the EOM paragraph: The paragraph references Note 22, describes the fire and its financial effects, states the uncertainty around the insurance settlement, and confirms the opinion is not modified in respect of this matter. The EOM is defensible because it meets both conditions in ISA 706.8 and the file documents the judgment behind each condition separately.
Emphasis of matter vs Other Matter paragraph
The distinction is binary. An EOM paragraph draws attention to a matter presented or disclosed in the financial statements. An Other Matter paragraph addresses something not in the financial statements but relevant to users' understanding of the audit or the auditor's report.
The practical test: if you can point to a specific note or disclosure that contains the matter, it belongs in an EOM paragraph. If not, it belongs in an Other Matter paragraph. Both leave the audit opinion unmodified. Common EOM triggers include pending litigation, catastrophic events, and going concern uncertainty. Common Other Matter triggers include predecessor auditor disclosures, restricted distribution, and supplementary information outside the scope of the opinion.
Key standard references
- ISA 706.6–9: Requirements for including an emphasis of matter paragraph in the auditor's report.
- ISA 706.A1–A3: Examples of matters that may warrant an EOM paragraph.
- ISA 706.A8: Clarification that a KAM does not replace an EOM when ISA 706.8 conditions are met.
- ISA 705: Modified opinions – applies when the matter cannot be addressed by an EOM alone.
- ISA 570.A29: Going concern as a frequent trigger for an EOM paragraph.
Related terms
Related reading
Frequently asked questions
What is the difference between an emphasis of matter paragraph and a key audit matter?
An EOM paragraph draws users' attention to a disclosed matter that is fundamental to their understanding of the financial statements. A KAM explains why a matter was significant in the audit and how the auditor addressed it. The two serve different purposes and can coexist in the same report under ISA 706.A8.
When is an emphasis of matter paragraph inappropriate?
An EOM paragraph is inappropriate when the matter it would highlight is not adequately presented or disclosed in the financial statements. If the disclosure is inadequate, the auditor should evaluate whether a modified opinion under ISA 705 is required instead. The EOM cannot fix a disclosure problem.