SAS Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

(1) Addresses circumstances when the auditor considers it necessary or is required to include additional communications in the auditor’s report that are not modifications to the auditor’s opinion.

(2) Uses the terms emphasis of matter and other matter paragraphs in the auditor’s report. The SAS describes an emphasis of matter as a paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements.

(3) Describes an other matter paragraph as a paragraph included in the auditor’s report 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.

(4) Change from current practice

(a) The number and nature of paragraphs included in the auditor’s report that address matters appropriately presented or disclosed in the financial statements (emphasis of matters) and matters other than those presented or disclosed in the financial statements (other matters) is not expected to change from current practice.

2. Changes from Existing Standards

a) Forming an Opinion and Reporting on Financial Statements

(1) Most significant changes to extant standards:

(a) A requirement to describe management’s responsibility for the preparation and fair presentation of the financial statements in more detail than what was required in extant AU section 508.

(b) The description includes an explanation that management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework, and that this responsibility includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

(c) The ASB believes that this addition to the auditor’s report will communicate more clearly the responsibilities of management for the preparation of the financial statements.

(d) The SAS requires the use of headings throughout the auditor’s report to clearly distinguish each section of the report.

b) Modifications to the Opinion in the Independent Auditor’s Report

No significant changes exist from extant standards.

c) Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

(1) Most significant changes to extant standards if the proposed standard was issued.

(a) Paragraph .11 of extant AU section 508 indicates that certain circumstances, although not affecting the auditor's unqualified opinion, may require that the auditor add an explanatory paragraph (or other explanatory language) to the standard report. The auditor may add an explanatory paragraph to emphasize a matter regarding the financial statements. As described in paragraph .19 of AU section 508, emphasis paragraphs are never required; they may be added solely at the auditor's discretion.

(b) Uses the terms emphasis of matter and other matter paragraphs.

(i) The SAS describes an emphasis of matter as a paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements. The SAS describes an other matter paragraph as a paragraph included in the auditor’s report 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.

(ii) Under the SAS, an emphasis of matter paragraph would refer to any paragraph added to the auditor’s report that relates to a matter that is appropriately presented or disclosed in the financial statements. Some of these paragraphs would be required by certain SASs, whereas others would be added at the discretion of the auditor, consistent with current practice.

(iii) All such paragraphs would be considered emphasis of matter paragraphs because they are intended to draw users’ attention to a particular matter.

(iv) The concept of an “explanatory paragraph” would no longer be included in U.S. generally accepted auditing standards (GAAS). Instead, additional communications in the auditor’s report would be labeled as either “emphasis of matter” or “other matter” paragraphs.

(c) The SAS, consistent with ISA 706, requires an emphasis of matter or other matter paragraph to always follow the opinion paragraph and be included in a separate section of the auditor’s report under the section heading “Emphasis of Matter” or “Other Matter.”