ASA 706

This Auditing Standard deals with additional communication in the auditor’s report when the auditor considers it necessary to:

1. Draw users’ attention to a matter or matters presented or disclosed in the financial report that are of such importance that they are fundamental to users’ understanding of the financial report; or
2. Draw users’ attention to any matter or matters other than those presented or disclosed in the financial report that are relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.

ASA 701^[1] establishes requirements and provides guidance when the auditor determines key audit matters and communicates them in the auditor’s report.  When the auditor includes a Key Audit Matters section in the auditor’s report, this Auditing Standard addresses the relationship between key audit matters and any additional communication in the auditor’s report in accordance with this Auditing Standard.  (Ref: Para. A1–A3)

ASA 570^[2]  and ASA 720^[3] establish requirements and provides guidance about communication in the auditor’s report relating to going concern and other information, respectively. 

Appendices 1 and 2 of this Auditing Standard identify Australian Auditing Standards that contain specific requirements for the auditor to include Emphasis of Matter paragraphs or Other Matter paragraphs in the auditor’s report.  In those circumstances, the requirements in this Auditing Standard regarding the form of such paragraphs apply.  (Ref: Para. A4)

[Deleted by the AUASB.  Refer Aus 0.3]

If the auditor considers it necessary to draw users’ attention to a matter presented or disclosed in the financial report that, in the auditor’s judgement, is of such importance that it is fundamental to users’ understanding of the financial report, the auditor shall include an Emphasis of Matter paragraph in the auditor’s report provided: (Ref: Para. A5–A6)

1. The auditor would not be required to modify the opinion in accordance with ASA 705^[4] as a result of the matter; and
2. When ASA 701 applies, the matter has not been determined to be a key audit matter to be communicated in the auditor’s report.  (Ref: Para. A1–A3)

When the auditor includes an Emphasis of Matter paragraph in the auditor’s report, the auditor shall:

1. Include the paragraph within a separate section of the auditor’s report with an appropriate heading that includes the term “Emphasis of Matter”;
2. Include in the paragraph a clear reference to the matter being emphasised and to where relevant disclosures that fully describe the matter can be found in the financial report.  The paragraph shall refer only to information presented or disclosed in the financial report; and
3. Indicate that the auditor’s opinion is not modified in respect of the matter emphasised.  (Ref: Para. A7–Aus A8.1, A16–A17)

If the auditor considers it necessary to communicate a matter other than those that are presented or disclosed in the financial report that, in the auditor’s judgement, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report, the auditor shall include an Other Matter paragraph in the auditor’s report, provided:

1. This is not prohibited by law or regulation; and
2. When ASA 701 applies, the matter has not been determined to be a key audit matter to be communicated in the auditor’s report.  (Ref: Para. A9–A14)

When the auditor includes an Other Matter paragraph in the auditor’s report, the auditor shall include the paragraph within a separate section with the heading “Other Matter,” or other appropriate heading.  (Ref: Para. A15–A17)

If the auditor expects to include an Emphasis of Matter or an Other Matter paragraph in the auditor’s report, the auditor shall communicate with those charged with governance regarding this expectation and the wording of this paragraph.  (Ref: Para. A18)

(Ref: Para. 2, 8(b)) 

Key audit matters are defined in ASA 701 as those matters that, in the auditor’s professional judgement, were of most significance in the audit of the financial report of the current period.  Key audit matters are selected from matters communicated with those charged with governance, which include significant findings from the audit of the financial report of the current period.^[5]  Communicating key audit matters provides additional information to intended users of the financial report to assist them in understanding those matters that, in the auditor’s professional judgement, were of most significance in the audit and may also assist them in understanding the entity and areas of significant management judgement in the audited the financial report.  When ASA 701 applies, the use of Emphasis of Matter paragraphs is not a substitute for a description of individual key audit matters.

Matters that are determined to be key audit matters in accordance with ASA 701 may also be, in the auditor’s judgement, fundamental to users’ understanding of the financial report.  In such cases, in communicating the matter as a key audit matter in accordance with ASA 701, the auditor may wish to highlight or draw further attention to its relative importance.  The auditor may do so by presenting the matter more prominently than other matters in the Key Audit Matters section (e.g., as the first matter) or by including additional information in the description of the key audit matter to indicate the importance of the matter to users’ understanding of the financial report.

There may be a matter that is not determined to be a key audit matter in accordance with ASA 701 (i.e., because it did not require significant auditor attention), but which, in the auditor’s judgement, is fundamental to users’ understanding of the financial report (e.g., a subsequent event).  If the auditor considers it necessary to draw users’ attention to such a matter, the matter is included in an Emphasis of Matter paragraph in the auditor’s report in accordance with this ASA.

(Ref: Para. 4, 8) 

Appendix 1 identifies Australian Auditing Standards that contain specific requirements for the auditor to include Emphasis of Matter paragraphs in the auditor’s report in certain circumstances.  These circumstances include:

• When the financial reporting framework prescribed by law or regulation would be unacceptable but for the fact that it is prescribed by law or regulation.
• To alert users that the financial report is prepared in accordance with a special purpose framework.
• When facts become known to the auditor after the date of the auditor’s report and the auditor provides a new or amended auditor’s report (i.e., subsequent events).^[6]

Examples of circumstances where the auditor may consider it necessary to include an Emphasis of Matter paragraph are:

• An uncertainty relating to the future outcome of exceptional litigation or regulatory action. 
• A significant subsequent event that occurs between the date of the financial report and the date of the auditor’s report.^[7] 
• Early application (where permitted) of a new accounting standard that has a material effect on the financial report.
• A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position. 

However, a widespread use of Emphasis of Matter paragraphs may diminish the effectiveness of the auditor’s communication about such matters. 

(Ref: Para. 9) 

The inclusion of an Emphasis of Matter paragraph in the auditor’s report does not affect the auditor’s opinion.  An Emphasis of Matter paragraph is not a substitute for:

1. A modified opinion in accordance with ASA 705 when required by the circumstances of a specific audit engagement;
2. Disclosures in the financial report that the applicable financial reporting framework requires management to make, or that are otherwise necessary to achieve fair presentation; or
3. Reporting in accordance with ASA 570^[8] when a material uncertainty exists relating to events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern.

Paragraphs A16–A17 provide further guidance on the placement of Emphasis of Matter paragraphs in particular circumstances.

When an auditor’s report is prepared on a financial report prepared under the Corporations Act 2001 (the Act), section 308(3B) of the Act requires that if the financial report includes additional information under paragraph 295(3)(c) (additional information included to give a true and fair view of the entity’s financial position and performance), the auditor’s report includes the auditor’s opinion on whether the additional information was necessary to give a true and fair view.

(Ref: Para. 10–11) 

Circumstances in Which an Other Matter Paragraph May Be Necessary

Relevant to Users’ Understanding of the Audit

ASA 260 requires the auditor to communicate with those charged with governance about the planned scope and timing of the audit, which includes communication about the significant risks identified by the auditor.^[9] Although matters relating to significant risks may be determined to be key audit matters, other planning and scoping matters (e.g., the planned scope of the audit, or the application of materiality in the context of the audit) are unlikely to be key audit matters because of how key audit matters are defined in ASA 701.  However, law or regulation may require the auditor to communicate about planning and scoping matters in the auditor’s report, or the auditor may consider it necessary to communicate about such matters in an Other Matter paragraph.

In the rare circumstance where the auditor is unable to withdraw from an engagement even though the possible effect of an inability to obtain sufficient appropriate audit evidence due to a limitation on the scope of the audit imposed by management is pervasive,^[10] the auditor may consider it necessary to include an Other Matter paragraph in the auditor’s report to explain why it is not possible for the auditor to withdraw from the engagement. 

Relevant to Users’ Understanding of the Auditor’s Responsibilities or the Auditor’s Report

Law, regulation or generally accepted practice in a jurisdiction may require or permit the auditor to elaborate on matters that provide further explanation of the auditor’s responsibilities in the audit of the financial report or of the auditor’s report thereon.  When the Other Matter section includes more than one matter that, in the auditor’s judgement, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report, it may be helpful to use different sub‑headings for each matter. 

An Other Matter paragraph does not deal with circumstances where the auditor has other reporting responsibilities that are in addition to the auditor’s responsibility under the Australian Auditing Standards (see Other Reporting Responsibilities section in ASA 700^[11]), or where the auditor has been asked to perform and report on additional specified procedures, or to express an opinion on specific matters.

Reporting on more than one financial report

An entity may prepare one financial report in accordance with a general purpose framework and another financial report in accordance with another general purpose framework (e.g., Australian Accounting Standards), and engage the auditor to report on both sets of the financial report.  If the auditor has determined that the frameworks are acceptable in the respective circumstances, the auditor may include an Other Matter paragraph in the auditor’s report, referring to the fact that another financial report has been prepared by the same entity in accordance with another general purpose framework and that the auditor has issued a report on that financial report.

Restriction on distribution or use of the auditor’s report

A financial report prepared for a specific purpose may be prepared in accordance with a general purpose framework because the intended users have determined that such a general purpose financial report meets their financial information needs.  Since the auditor’s report is intended for specific users, the auditor may consider it necessary in the circumstances to include an Other Matter paragraph, stating that the auditor’s report is intended solely for the intended users, and should not be distributed to or used by other parties.

Including an Other Matter Paragraph in the Auditor’s Report

The content of an Other Matter paragraph reflects clearly that such other matter is not required to be presented and disclosed in the financial report.  An Other Matter paragraph does not include information that the auditor is prohibited from providing by law, regulation or other professional standards, for example, relevant ethical standards relating to confidentiality of information.  An Other Matter paragraph also does not include information that is required to be provided by management.

(Ref: Para. 9, 11) 

The placement of an Emphasis of Matter paragraph or Other Matter paragraph in the auditor’s report depends on the nature of the information to be communicated, and the auditor’s judgement as to the relative significance of such information to intended users compared to other elements required to be reported in accordance with ASA 700.  For example:

Emphasis of Matter Paragraphs

• When the Emphasis of Matter paragraph relates to the applicable financial reporting framework, including circumstances where the auditor determines that the financial reporting framework prescribed by law or regulation would otherwise be unacceptable,^[12] the auditor may consider it necessary to place the paragraph immediately following the Basis of Opinion section to provide appropriate context to the auditor’s opinion. 
• When a Key Audit Matters section is presented in the auditor’s report, an Emphasis of Matter paragraph may be presented either directly before or after the Key Audit Matters section, based on the auditor’s judgement as to the relative significance of the information included in the Emphasis of Matter paragraph.  The auditor may also add further context to the heading “Emphasis of Matter”, such as “Emphasis of Matter–Subsequent Event”, to differentiate the Emphasis of Matter paragraph from the individual matters described in the Key Audit Matters section.

Other Matter Paragraphs

• When a Key Audit Matters section is presented in the auditor’s report and an Other Matter paragraph is also considered necessary, the auditor may add further context to the heading “Other Matter”, such as “Other Matter – Scope of the Audit”, to differentiate the Other Matter paragraph from the individual matters described in the Key Audit Matters section. 
• When an Other Matter paragraph is included to draw users’ attention to a matter relating to Other Reporting Responsibilities addressed in the auditor’s report, the paragraph may be included in the Report on Other Legal and Regulatory Requirements section. 
• When relevant to all the auditor’s responsibilities or users’ understanding of the auditor’s report, the Other Matter paragraph may be included as a separate section following the Report on the Audit of the Financial Report and the Report on Other Legal and Regulatory Requirements.

Appendix 3 is an illustration of the interaction between the Key Audit Matters section, an Emphasis of Matter paragraph and an Other Matter paragraph when all are presented in the auditor’s report.  The illustrative report in Appendix 4 includes an Emphasis of Matter paragraph in an auditor’s report for an entity other than a listed entity that contains a qualified opinion and for which key audit matters have not been communicated.

(Ref: Para. 12)

The communication required by paragraph 12 enables those charged with governance to be made aware of the nature of any specific matters that the auditor intends to highlight in the auditor’s report, and provides them with an opportunity to obtain further clarification from the auditor where necessary.  Where the inclusion of an Other Matter paragraph on a particular matter in the auditor’s report recurs on each successive engagement, the auditor may determine that it is unnecessary to repeat the communication on each engagement, unless otherwise required to do so by law or regulation.

(Ref: Para. 4, A4)

This appendix identifies paragraphs in other Australian Auditing Standards that require the auditor to include an Emphasis of Matter paragraph in the auditor’s report in certain circumstances.  The list is not a substitute for considering the requirements and related application and other explanatory material in Australian Auditing Standards.

• ASA 210 Agreeing the Terms of Audit Engagements – paragraph 19(b).
• ASA 560 Subsequent Events – paragraphs 12(b) and 16.
• ASA 800 Special Considerations—Audits of a Financial Report Prepared in Accordance with Special Purpose Frameworks – paragraph 14.

(Ref: Para. 4)

This appendix identifies paragraphs in other Australian Auditing Standards that require the auditor to include an Other Matter paragraph in the auditor’s report in certain circumstances.  The list is not a substitute for considering the requirements and related application and other explanatory material in Australian Auditing Standards. 

• ASA 560 Subsequent Events – paragraphs 12(b) and 16.
• ASA 710 Comparative Information—Corresponding Figures and Comparative Financial Reports – paragraphs 13–14, 16–17 and 19.