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Australian Auditing Standards

ASA 706

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

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Approval Date: 30 June 2020

Operative Date This Australian Auditing Standards is operative for financial reporting periods ending on or after 15 July 2020

Download PDF Version

Approval Date: 30 June 2020

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

  • 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

  • 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.

Compilation Details

Auditing Standard ASA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report (as Amended)

This compilation takes into account amendments made up to and including 30 June 2020 and was prepared on 8 July 2020 by the Auditing and Assurance Standards Board (AUASB).

This compilation is not a separate Auditing Standard made by the AUASB.  Instead, it is a representation of ASA 706 (December 2015) as amended by another Auditing Standard which is listed in the Table below.

Table of Standards

Standard

Date made

Operative Date

ASA 706          [A]

1 December 2015

Financial reporting periods ending on or after 15 December 2016

ASA 2020-2      [B]

30 June 2020

Financial reporting periods ending on or after 15 July 2020

 

[A]       Federal Register of Legislation – registration number F2015L02037, 16 December 2015

[B]       Federal Register of Legislation – registration number F2020L00885, 7 July 2020

 

Table of Amendments

Paragraph affected

How affected

By … [paragraph]

Appendix 3

Amended

ASA 2020‑2 [62] and [63]

Appendix 4

Amended

ASA 2020 2 [64] and [65]

Preamble

Includes: Authority Statement, Conformity with International Standards on Auditing

Authority Statement

Auditing Standard ASA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report (as amended to 30 June 2020) is set out in paragraphs Aus 0.1 to A18 and Appendices 1 to 4.

This Auditing Standard is to be read in conjunction with ASA 101 Preamble to Australian Auditing Standards, which sets out the intentions of the AUASB on how the Australian Auditing Standards, operative for financial reporting periods commencing on or after 1 January 2010, are to be understood, interpreted and applied.  This Auditing Standard is to be read also in conjunction with ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards.

Conformity with International Standards on Auditing

This Auditing Standard conforms with International Standard on Auditing ISA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report issued by the International Auditing and Assurance Standards Board (IAASB), an independent standard‑setting board of the International Federation of Accountants (IFAC).

Paragraphs that have been added to this Auditing Standard (and do not appear in the text of the equivalent ISA) are identified with the prefix “Aus”.

The following application and other explanatory material is additional to ISA 706:

  • Paragraph Aus A8.1 refers to requirements under the Corporations Act 2001.
  • Appendix 3 comprises [Aus] Illustration 1A Example auditor’s report that conforms with the requirements of the Corporations Act 2001.
  • Appendix 4 comprises [Aus] Illustration 2A Example auditor’s report on a financial report that is not prepared under the Corporations Act 2001.

This Auditing Standard incorporates terminology and definitions used in Australia.

The equivalent requirements and related application and other explanatory material included in ISA 706 in respect of “relevant ethical requirements”, have been included in Auditing Standard, ASA 102 Compliance with Ethical Requirements when Performing Audits, Reviews and Other Assurance Engagements.  There is no international equivalent to ASA 102.

Compliance with this Auditing Standard enables compliance with ISA 706.

 

The Auditing and Assurance Standards Board (AUASB) made Auditing Standard ASA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report pursuant to section 227B of the Australian Securities and Investments Commission Act 2001 and section 336 of the Corporations Act 2001, on 1 December 2015.

This compiled version of ASA 706 incorporates subsequent amendments contained in another Auditing Standard made by the AUASB up to and including 30 June 2020 (see Compilation Details).

Application

Aus 0.1

This Auditing Standard applies to:

  1. an audit of a financial report for a financial year, or an audit of a financial report for a half‑year, in accordance with the Corporations Act 2001; and
  2. an audit of a financial report, or a complete set of financial statements, for any other purpose.

Aus 0.2

This Auditing Standard also applies, as appropriate, to an audit of other historical financial information.

Operative Date

Aus 0.3

This Auditing Standard is operative for financial reporting periods ending on or after 15 December 2016[Note: For operative dates of paragraphs changed or added by an Amending Standard, see Compilations Details.]

Introduction

Includes: Scope of this Auditing Standard, Effective Date

Scope of this Auditing Standard

1

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.

2

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)

3

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. 

4

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)

Effective Date

5

[Deleted by the AUASB.  Refer Aus 0.3]

1

See ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report.

 

2

See ASA 570 Going Concern.

 

3

See ASA 720 The Auditor’s Responsibilities Relating to Other Information.

 

Objective

6

The objective of the auditor, having formed an opinion on the financial report, is to draw users’ attention, when in the auditor’s judgement it is necessary to do so, by way of clear additional communication in the auditor’s report, to:

  1. A matter, although appropriately presented or disclosed in the financial report, that is of such importance that it is fundamental to users’ understanding of the financial report; or
  2. As appropriate, any other matter that is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.

Definitions

7

For the purposes of this Auditing Standard, the following terms have the meanings attributed below:

7(a)

Emphasis of Matter paragraph – A paragraph included in the auditor’s report that refers to a matter appropriately 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.

7(b)

Other Matter paragraph – A paragraph included in the auditor’s report that refers to a matter other than those 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.

Requirements

Includes: Emphasis of Matter Paragraphs in the Auditor’s Report, Other Matter Paragraphs in the Auditor’s Report, Communication with Those Charged with Governance

Emphasis of Matter Paragraphs in the Auditor’s Report

8

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)

9

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)

Other Matter Paragraphs in the Auditor’s Report

10

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)

11

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)

 

Communication with Those Charged with Governance

12

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)

 

4

See ASA 705 Modifications to the Opinion in the Independent Auditor’s Report.

 

Application and Other Explanatory Material

Includes: The Relationship between Emphasis of Matter Paragraphs and Key Audit Matters in the Auditor’s Report , Circumstances in Which an Emphasis of Matter Paragraph May Be Necessary , Including an Emphasis of Matter Paragraph in the Auditor’s Report , Other Matter Paragraphs in the Auditor’s Report , Placement of Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Auditor’s Report , Communication with Those Charged with Governance , List of Australian Auditing Standards Containing Requirements for Emphasis of Matter Paragraphs, List of Australian Auditing Standards Containing Requirements for Other Matter Paragraphs, Illustration of an Auditor’s Report that Includes a Key Audit Matters Section, an Emphasis of Matter Paragraph, and an Other Matter Paragraph, Illustration of an Auditor’s Report Containing a Qualified Opinion Due to a Departure from the Applicable Financial Reporting Framework and that Includes an Emphasis of Matter Paragraph

The Relationship between Emphasis of Matter Paragraphs and Key Audit Matters in the Auditor’s Report

(Ref: Para. 2, 8(b)

A1

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.

A2

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.

A3

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.

Circumstances in Which an Emphasis of Matter Paragraph May Be Necessary

(Ref: Para. 4, 8

A4

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]

A5

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. 

A6

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

Including an Emphasis of Matter Paragraph in the Auditor’s Report

(Ref: Para. 9

A7

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.

A8

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

Aus A8.1

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.

Other Matter Paragraphs in the Auditor’s Report

(Ref: Para. 10–11

Circumstances in Which an Other Matter Paragraph May Be Necessary

Relevant to Users’ Understanding of the Audit

A9

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.

A10

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

A11

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. 

A12

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

A13

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

A14

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

A15

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.

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

(Ref: Para. 9, 11

A16

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.

A17

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.

Communication with Those Charged with Governance

(Ref: Para. 12)

A18

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.

5

See ASA 260 Communication with Those Charged with Governance, paragraph 16.

6

See ASA 560 Subsequent Events, paragraphs 12(b) and 16.

7

See ASA 560, paragraph 6.

8

See ASA 570, paragraphs 22–23.

9

See ASA 260, paragraph 15.

10

See ASA 705, paragraph 13(b)(ii) for a discussion of this circumstance.

11

See ASA 700 Forming an Opinion and Reporting on a Financial Report, paragraphs 42–44.

12

For example, as required by ASA 210 Agreeing the Terms of Audit Engagements, paragraph 19 and ASA 800 Special Considerations—Audits of Financial Reports Prepared in Accordance with Special Purpose Frameworks, paragraph 14.

List of Australian Auditing Standards Containing Requirements for Emphasis of Matter Paragraphs

Appendix 1

(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 Engagementsparagraph 19(b).
  • ASA 560 Subsequent Eventsparagraphs 12(b) and 16.
  • ASA 800 Special Considerations—Audits of a Financial Report Prepared in Accordance with Special Purpose Frameworksparagraph 14.

List of Australian Auditing Standards Containing Requirements for Other Matter Paragraphs

Appendix 2

(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. 

Illustration of an Auditor’s Report that Includes a Key Audit Matters Section, an Emphasis of Matter Paragraph, and an Other Matter Paragraph

Appendix 3

Download Illustration of an Auditor’s Report that Includes a Key Audit Matters Section, an Emphasis of Matter Paragraph, and an Other Matter Paragraph.

 

Illustration of an Auditor’s Report Containing a Qualified Opinion Due to a Departure from the Applicable Financial Reporting Framework and that Includes an Emphasis of Matter Paragraph

Appendix 4

Download Illustration of an Auditor’s Report Containing a Qualified Opinion Due to a Departure from the Applicable Financial Reporting Framework and that Includes an Emphasis of Matter Paragraph

 

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