Emphasis of matter or Other Matter paragraph Audit Report

Summary

In this informative session led by Professor Farhat, the focus is on two essential aspects of an audit report: the Emphasis of Matter (EOM) and Other Matters paragraphs. EOM is used by auditors to draw attention to significant issues already presented in the financial statements or notes, while Other Matters relate to the auditor's responsibilities outside the notes or financial statements. The session differentiates between optional and required EOMs, including related party transactions and changes in accounting principles, emphasizing that both types aim to clarify crucial financial insights without affecting the auditor's opinion, ensuring clarity and consistency for the report users.

Highlights

• Professor Farhat explores the importance of Emphasis of Matter in audit reports, highlighting its role in drawing attention to critical financial disclosures. 🕵️‍♂️
• The session distinguishes between EOM and Other Matters, making it clear that EOMs pertain to disclosed notes, while Other Matters do not. 📝
• Farhat uses relatable examples to explain when EOMs might be deemed necessary, such as significant related party transactions. 💼
• Explains the instances requiring mandatory EOMs, like changes in accounting principles, ensuring report users understand financial consistency and comparability. 📊
• Stresses the importance of reviewing multiple choice questions and true/false quizzes available on Farhat Lectures to better grasp audit report details. 📚

Key Takeaways

• Emphasis of Matter (EOM) paragraphs bring attention to important financial disclosures without altering a clean audit opinion. 📑
• Other Matters paragraphs address auditor responsibilities not covered in the financial statements or notes. 🔍
• Optional EOMs include related party transactions and significant post-balance sheet events, based on auditor discretion. 💡
• Required EOM scenarios involve changes in accounting principles and justified departures from GAAP. 📈
• Understanding the roles of EOM and Other Matters is crucial for CPA and auditing students. 🎓

Overview

Professor Farhat guides accounting students through the nuanced landscape of Emphasis of Matter paragraphs, a crucial component of audit reports designed to emphasize significant aspects already disclosed within financial statements. Using relatable illustrations, he explains how auditors exercise judgment in deciding when these paragraphs are necessary, reinforcing their purpose in ensuring clarity without altering the clean audit opinion.

The distinction between Emphasis of Matter (EOM) and Other Matters paragraphs forms a significant part of this session, as Professor Farhat meticulously outlines scenarios that warrant each type. While EOM focuses on highlighting disclosed issues, Other Matters reference the broader responsibilities of an auditor, opening a comprehensive understanding of their roles beyond the financial notes.

Engaging examples underscore the reasons for optional and required Emphasis of Matter paragraphs, from highlighting substantial related party transactions to noting significant changes in accounting principles. These insights stress the importance for future CPAs and accountants to master these concepts, securing their ability to maintain transparency and consistency in reporting.

Chapters

• 00:00 - 00:30: Introduction to Emphasis of Matter and Other Matter Paragraphs This chapter introduces the concepts of 'Emphasis of Matter' and 'Other Matter' paragraphs, which are important components of an auditor's report. These are essential topics for auditing and CPA students to understand as they could appear in multiple-choice questions on exams. The session, led by Professor Forehead, begins with a focus on the definition and examples of an 'Emphasis of Matter' paragraph.
• 00:30 - 03:00: Understanding EOM (Emphasis of Matter) Paragraphs This chapter explains the concept of EOM, which stands for Emphasis of Matter. EOM paragraphs are used by auditors to draw attention to specific issues in the financial statements and the notes. The emphasis is highlighted explicitly, often for irony, to ensure the issue is noticed by the reader. In the example given, the emphasis is indicated by highlighting in yellow.
• 05:00 - 08:00: Examples of Optional Emphasis of Matter Paragraphs The chapter on 'Examples of Optional Emphasis of Matter Paragraphs' discusses when it might be necessary to include an emphasis of matter paragraph in financial statements and accompanying notes. These paragraphs are considered 'optional' but may be required based on the auditor's professional judgment or certain specific situations. The necessity of including such paragraphs can stem from the auditor's discretion or certain mandated circumstances, making it both optional yet sometimes obligatory. Examples of these situations where emphasis is recommended or required will be discussed further.
• 10:00 - 12:00: Required Emphasis of Matter Paragraphs This chapter focuses on Required Emphasis of Matter Paragraphs in auditing reports. It clarifies that while some emphasis of matter (EOM) paragraphs can be included at the auditor's discretion, there are specific circumstances where it is necessary and mandatory to include them. The purpose of such paragraphs is to highlight important issues or information for the users of the audit report. The chapter aims to make the reader aware of when these paragraphs are essential and how they function in directing attention to significant data within the financial statements.
• 12:30 - 13:00: Conclusion and Study Tips The chapter titled 'Conclusion and Study Tips' focuses on the essential elements of understanding financial statements. It highlights the importance of notes in the financial statements for comprehensive comprehension. Key financial documents discussed include the balance sheet, income statement, cash flow statements, and the statement of stockholders' equity. The acronym EOM is mentioned as related to either notes or issues in financial statements. The section appears to emphasize the crucial role that notes play in interpreting the financial data presented.

Emphasis of matter or Other Matter paragraph Audit Report Transcription

• 00:00 - 00:30 hello and welcome to this session this is professor forehead in which we will discuss emphasis of matter or matters and other matters paragraph those paragraph could be listed as part of the auditor's report as auditing students as cpa students we need to understand what each one is and be able to list some examples in case you are giving multiple choice questions on the exam able to answer what is emphasis of a matter what's other matters paragraph starting with emphasis of matter so i'm going to
• 00:30 - 01:00 abbreviate as eom what is eom this paragraph is used when the auditor wants to emphasize they want to raise attention to specific matter regarding please notice i highlighted the financial statements and the notes i highlighted this in yellow on purpose two raise your attention that emphasis of a matter is for kind of it's an irony it's to raise attention and this is why i highlighted this in yellow when we have something emphasis of a matter it deals
• 01:00 - 01:30 with something on the financial statements and on the notes simply put its additional communication when considered necessary now when considered necessary maybe the auditor's discretion or professional judgment believe that emphasis is necessary that could be one case where it's kind of in a quote optional but the auditor thinks it's required and under certain circumstances emphasis of matters is required so i'm going to have to show you some examples when it's
• 01:30 - 02:00 basically i'm going to put in quote optional optional means based on the auditor's judgment based on the auditor's discretion and we will discuss cases where it's necessary it's required it's a must to have an emphasis of matter paragraph simply put either or the purpose of this paragraph is to draw the user's attention to matters or matters presented again notice i am i am drawing your attention that that information that we talk about in the eom
• 02:00 - 02:30 it's already presented or disclosed in the notes of the financial statements and it's necessary to fundamentally not necessarily to fundamentally understand the financial statements and simply what are the financial statements we are looking at the basic financial statements balance sheet income statement cash flow statements of stockholders equity and the notes so anything when we say eom eom deals with stuff either in the notes disclosure or stuff issues on the financial statements simply put we are
• 02:30 - 03:00 highlighting notice i'm highlighting in yellow i'm waving my hands here basically we're highlighting what we need to highlight in that eom but that highlight refers back to something in the financial statements or in the notes you might be asking why does he keep repeating himself you're going to see why because i need to differentiate eom from simplyom other matters okay now bear in mind eom emphasis of matter is not the key auditing matters those are not the cams also cannot be used we we can't have an
• 03:00 - 03:30 eom if the opinion is something other than modified means clean opinion so eom emphasis of matter is used when we have a clean opinion so that does not change we are still given a clean opinion we don't change our opinion we could have an unqualified i'm sorry unmodified since we are discussing a aicpa report unmodified clean opinion and add that emphasis of a matter it's not part of the opinion because the opinion is still clean and it's a separate paragraph after the
• 03:30 - 04:00 opinion titled emphasis of matter so this is the background information that you need to know what is emphasis of a matter is now we're going to talk about other matters other matters is pretty straightforward refer to matters notice now i'm i am drawing your attention not presented or disclosed in the financial statements and the notes and now you understand why i kept highlighting presented or disclosed in the financial statements presented and disclosed in the financial statements because when i got to other matters when you have a
• 04:00 - 04:30 paragraph called other matters when you read it that other matters don't deal with anything that's on the notes or the financial statements so what are we discussing here it deals with auditors responsibilities related to laws and regulation so something other than dealing with financial statements and notes of the financial statements an example would be the auditor's responsibility what are the auditors responsibility that's not in the financial statements that's not in the notes of the financial statements the best way to illustrate this concept is
• 04:30 - 05:00 to actually look at some examples of eom before we look at examples of eom i would like to share public opinion about my company farhat lectures.com forehead accounting lectures is a supplemental educational tool that's going to help you with your cpa exam preparation as well as your accounting courses my cpa material is aligned with your cpa review course such as becker roger wiley gleam miles my accounting courses are aligned with your accounting
• 05:00 - 05:30 courses broken down by chapter and topics my resources consist of lectures multiple choice questions true false questions as well as exercises go ahead start your free trial today no obligation no credit card required i'm gonna start by looking at emphasis of matters that are considered optional again what i mean by optional is that it's based on the auditor's discretion the auditor thinks we should emphasize this point in the emphasis of matter paragraph one
• 05:30 - 06:00 is really related party transaction now when we have related party transaction we're gonna have a note for example note 13 and under note 13 we're going to have related party transaction and we're going to talk about our related party transactions and when you see the notes lecture you will see what i mean by this simply put we talked for example 60 of our sales is to a related party uh 30 percent of our customers are related parties so on and so forth that's fine it's in the notes although it's in the notes we think it's important to emphasize
• 06:00 - 06:30 this matter in the report therefore under emphasis of a matter paragraph we talk about related party transaction two material or important event occurring after the balance sheet date we could have a major fire a natural disaster major funding event affecting the financial statements well guess what they're not they are affecting something in the financial statements therefore what we do we want to emphasize we want to emphasize those events we put them in that paragraph it could be a major catastrophe that has occurred or continued to have a
• 06:30 - 07:00 significant influence on on the entity's financial numbers we discussed that as well any pending or regulatory action or litigation we also we can emphasize this this could be in the notes although it's in the notes we still emphasize it because we believe it's important i want to emphasize one more topic that's optional and that's substantial doubt so we need to understand how substantial doubt is an optional disclosure as an eom if there was or there is a substantial
• 07:00 - 07:30 doubt about the company as a growing concern and the management have a plan to address and alleviate the issue simply put there is a going concern but based on the evidence collected by the auditor the auditor believes the company has a plan in place to take care of the substantial doubt under those circumstances the auditor may emphasize to relate the related disclosure in an eom now remember if there's a substantial doubt there will be a disclosure in the notes discussing the substantial doubt if the auditor
• 07:30 - 08:00 believed the substantial doubt is addressing the issue they may emphasize this point in an eom now bear in mind this is different than the substantial doubt about the entity's ability to continue as a going concern which is required under a separate paragraph when that substantial doubt exists so this could be an optional if the auditor believes based on the evidence collected the management has a plan in place to alleviate that issue
• 08:00 - 08:30 could be other matters as well anything that's in the notes or the financial statements and we would like to emphasize for its importance highlight we can put in that paragraph now we have required emphasis of matters what are some required well let's talk about the required part we might have to have an additional explanatory paragraph or explanation of matters affecting the consistency what do we mean by consistency consisting means using the same accounting method from period to period to conserve
• 08:30 - 09:00 comparability so if you are using a different method from the prior year if you're using fifo versus lifo or completed contract versus percentage of completion method those are different accounting method if that's the case you are not being consistent you're violating comparability in the sense that the financial statements are not comparable under those circumstances let me show you some examples for example if you have a change in accounting principle you change from fifo to lifo not in estimates bear in mind not an estimate that's consistency changes in accounting
• 09:00 - 09:30 principle error correction involving accounting principle you made a mistake not a mathematical mistake a mistake in applying accounting principle and now you're changing that's going to violate consistency change in reporting entities before you are not consolidating certain entities now you are consolidating entities now this is not a change in company strategy like you have a new research and development project or new product line when you have those changes especially what we're emphasizing here is changing an accounting principle and
• 09:30 - 10:00 changing and reporting entities under those circumstances the auditor is required in a sense to emphasize why because it's important because if you are using a different method last year let's assume year one you were using fifo and year two you moved to lifo well basically you are not consistent and the financial statements are not really comparable tell the users that tell the users just i want to draw your attention that that's the case so this is what we mean
• 10:00 - 10:30 by changes in accounting principle or errors involving accounting principle under those circumstances you will explain also if you have a just a justified departure from gaap remember if you ju if you depart from gaap you have two options either you qualify or you could you give an adverse opinion guess what you could have you could have a justified departure you're justifying from gaap but the auditor thinks it's okay it's acceptable we're not even gonna give you a qualified opinion we're gonna give you unqualified opinion however we're gonna explain an emphasis
• 10:30 - 11:00 of matter that that situation existed that deviation exists we want you to be aware of it nevertheless we are still giving you an unqualified opinion so if you are departing from gaap guess what we have to explain that departure unqualified opinion still apply we're not going to give you an adverse we're not going to give you a qualified but we have to explain so under those circumstances eom is required if you are if we are using if
• 11:00 - 11:30 we are preparing financial statements using special purpose framework we have to emphasize this because we want to let the users that we are not for example were not using gap or using something other than gaap so we want you to be aware of this also what is required eom is change in opinion from the preceding year what does that mean let's assume in the prior year you had a different opinion unmodified opinion and for some reason you changed now the opinion to unmodified under those circumstances you have to explain
• 11:30 - 12:00 think about it for comparability purposes if you're looking at the report and you're saying the prior year now is unmodified and if somebody looked actually at the prior year and they saw something else well they're going to be confused so under those circumstances you are required to explain the difference between the two years you maybe have other other ones but those are usually the major one that are covered on the cpa exam as well as your in in your auditing course as discuss and note whatever note the financial statements uh and the
• 12:00 - 12:30 financial to the financial statements the company has elected to change its policy for determining cash equivalent in 20 x 8. so simply put the company change the way they account for cash equivalent and we're telling you this because we believe it's important that you know our opinion is not modified with respect to that matter so remember eom you are still giving a clean unmodified opinion at the end of this recording i'm going to tell you to do what now go to farhat lectures and work mcqs true false that's going to help you understand this
• 12:30 - 13:00 topic better good luck study hard invest in yourself and stay safe