Modification Through Additional Paragraphs

Types of additional paragraph

Having formed their opinion there are circumstances where the auditor must also draw the users attention to additional matters that are significant to their understanding of the financial statements. These circumstances are categorised as follows:

• matters already presented/disclosed in the financial statements that are fundamental to understanding the financial statements. These are presented in "emphasis of matter" paragraphs; and
• other matters relevant to either understanding the audit, the auditor's responsibilities or the audit report. These are presented in "other matter" paragraphs.

Emphasis of matter paragraphs

These are presented immediately after the opinion paragraph. It is important to note that they have do not affect the audit opinion, nor are they a substitute for one.

These paragraphs simply draw the readers' attention to a note already disclosed in the financial statements. The matters referred to have to be fundamental to the readers' understanding of the financial statements. Widespread use of them would diminish their effectiveness.

Examples of where it may be necessary to add an emphasis of matter paragraph include:

• an uncertainty relating to the future outcome of exceptional litigation or regulatory action;
• early application of a new accounting standards that has a pervasive effect on the financial statements;
• a major catastrophe that has had, or continues to have, a significant effect on the entity's financial position.

Other matter paragraphs

Circumstances where these may be necessary include:

• when a pervasive inability to obtain sufficient appropriate evidence is imposed by management (e.g. denying the auditor access to books and records) but the auditor is unable to withdraw from the engagement due to legal restrictions;
• when national laws/regulations require, or permit, the auditor to elaborate on their responsibilities;
• when the client issues another set of financial statements (e.g. one according to IFRS and one according to UK GAAP) and the auditor has also issued a report on those financial statements;
• when a set of financial statements is prepared for a specific purpose and user group and the users have determined that a general purpose framework meets their financial information needs; and
• if there is a material inconsistency between the audited financial statements and the 'other information' contained in the annual report (such as the Chairman's Report).

Illustration of an emphasis of matter paragraph

Emphasis of Matter

We draw attention to Note X to the financial statements. The Company is the defendant in a lawsuit alleging infringement of certain patent rights and claiming royalties and punitive damages. The Company has filed a counter action, and preliminary hearings and discovery proceedings on both actions are in progress. The ultimate outcome of the matter cannot presently be determined, and no provision for any liability that may result has been made in the financial statements. Our opinion is not qualified in respect of this matter.

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Tags:	emphasis of matter;other matter