How auditors use emphasis-of-matter, other-matter, and explanatory paragraphs without necessarily modifying the audit opinion.
Additional report paragraphs can draw attention to important matters without changing the audit opinion. The AUD exam tests whether the matter is already presented or disclosed in the financial statements, whether it relates instead to the audit or auditor’s responsibilities, and whether the underlying issue is properly handled. If the financial statements are materially misstated, explanatory language is not a substitute for modifying the opinion.
For nonissuers, the common categories are emphasis-of-matter and other-matter paragraphs. For issuers, PCAOB reporting uses explanatory language for certain matters. The labels differ, but the reporting logic is similar: add clarity only after deciding whether the opinion itself needs modification.
flowchart TD
A["Matter affects report communication"] --> B{"Presented or disclosed in financial statements?"}
B -- "Yes" --> C["Emphasis-of-matter or issuer explanatory language"]
B -- "No" --> D{"Relevant to audit, auditor responsibility, or report users?"}
D -- "Yes" --> E["Other-matter paragraph"]
D -- "No" --> F["No additional paragraph solely for that matter"]
C --> G{"Disclosure adequate and framework followed?"}
G -- "Yes" --> H["Opinion not modified solely for emphasis"]
G -- "No" --> I["Modify opinion if material"]
An emphasis-of-matter paragraph for a nonissuer draws attention to a matter that is appropriately presented or disclosed in the financial statements and is fundamental to users’ understanding. It does not modify the opinion.
| EOM feature | Meaning |
|---|---|
| Matter is in the financial statements | The paragraph points to an existing note or presentation |
| Matter is fundamental | Users need attention directed to it |
| Opinion is not modified solely for EOM | The underlying accounting and disclosure are adequate |
| Paragraph has a clear heading | The report identifies the emphasis separately |
| Paragraph references the related note | Users can locate the full disclosure |
Common examples include substantial doubt about going concern when adequately disclosed, a major subsequent event, a significant uncertainty, or a justified change in accounting principle that materially affects comparability.
An other-matter paragraph for a nonissuer refers to a matter other than one 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.
| Other-matter use | Why it is not EOM |
|---|---|
| Prior-period financial statements audited by a predecessor auditor | The matter concerns report context and prior auditor responsibility |
| Restriction on report use | The matter concerns who should use the report |
| Required supplementary information procedures | The matter concerns the auditor’s responsibility for accompanying information |
| Supplementary information opinion context | The matter concerns information outside the basic financial statements |
| Unaudited comparative information | The matter concerns the level of service on another period |
The distinction is practical: emphasis-of-matter points into the audited financial statements; other-matter explains something about the audit, auditor responsibility, report use, or accompanying information.
Issuer reports under PCAOB standards use explanatory language for certain circumstances. The exact terminology differs from nonissuer reports, so candidates should recognize the issue rather than memorize only one label.
| Matter | Typical reporting effect |
|---|---|
| Substantial doubt about going concern | Explanatory paragraph when conditions are met |
| Change in accounting principle affecting consistency | Explanatory language when properly accounted for and disclosed |
| Other auditor involvement | Reference when the principal auditor divides responsibility |
| Material weakness in ICFR report | ICFR reporting effect when auditing internal control |
| Comparative reporting complications | Additional language depending on facts |
Critical audit matters in issuer reports are a separate reporting concept. They communicate matters arising from the audit that involved especially challenging, subjective, or complex auditor judgment; they do not replace opinion modification or explanatory paragraphs.
Additional paragraphs do not cure a material misstatement. If the financial statements omit a required disclosure, misstate a policy, or fail to follow the applicable framework, the auditor evaluates qualified or adverse opinion effects. If evidence is missing, the auditor evaluates qualified or disclaimer effects. Only after the opinion question is resolved should the auditor decide whether emphasis, other-matter, or explanatory language is appropriate.
| Situation | Correct reporting logic |
|---|---|
| Going concern uncertainty is adequately disclosed | Add emphasis or explanatory language as required; opinion may remain unmodified |
| Going concern disclosure is materially inadequate | Modify the opinion for inadequate disclosure |
| Accounting principle change is justified and disclosed | Add emphasis or explanatory language for consistency, when required |
| Accounting principle change is not in accordance with the framework | Modify the opinion for misstatement |
| Prior-period audit was performed by a predecessor | Other-matter or predecessor reference may be appropriate |
Placement depends on the applicable standard and report structure, but the paragraph should be clearly identified and placed where users will understand its relationship to the opinion. The paragraph normally references the relevant financial statement note for emphasis matters and states that the auditor’s opinion is not modified with respect to the matter when appropriate.
Wording should be neutral. The paragraph should not introduce new financial statement disclosures that management failed to provide. If disclosure is required, management should revise the financial statements; the auditor should not use an emphasis paragraph as a substitute footnote.
Do not modify the opinion solely because an emphasis-of-matter paragraph is included. EOM draws attention; it does not by itself change the opinion.
Do not use EOM for a matter not presented or disclosed in the financial statements. That is usually other-matter territory if it is relevant to users’ understanding of the audit or report.
Do not use other-matter language to hide a financial statement misstatement. Material framework departures require opinion modification.
Do not confuse issuer critical audit matters with nonissuer emphasis-of-matter paragraphs. They serve different reporting purposes.