COVID-19 and how to report an emphasis of matter
6 August 2020: Coronavirus may lead to situations where an auditor considers including an emphasis of matter paragraph in the auditor’s report. The Audit and Assurance Faculty has produced a guide explaining how such paragraphs should be used.
In the current environment, uncertainties may have arisen that lead an auditor to conclude that a matter disclosed in the financial statements is so fundamental to the users’ understanding that an emphasis of matter should be included in the auditor’s report.
An emphasis of matter paragraph refers to a matter presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements. Its inclusion does not modify the audit opinion.
While coronavirus may lead to situations where an auditor considers including an emphasis of matter paragraph in the auditor’s report, even in the current unprecedented circumstances, inclusion in auditors’ reports is not expected to be widespread and will occur only when the matter is considered to be ‘fundamental’.
Auditors should remember that the ‘fundamental’ (to users’ understanding) test is a high hurdle. Firms will need to be prepared to justify that decision with reference to the particular circumstances of each entity. Excessive use of emphasis of matter paragraphs may diminish the effectiveness of the auditor’s communication about important matters.
Emphasis of matter paragraphs refer to a matter ’appropriately' presented or disclosed in the financial statements. If a matter is not appropriately presented or disclosed, then other changes to the audit report will need to be considered instead. It is important to note that emphasis of matter paragraphs are no longer used to draw attention to material uncertainties relating to going concern: these are disclosed in a separate section of the audit report.
The full Know-How guide, How to report an emphasis of matter under COVID-19: a guide for auditors, discusses some situations in the coronavirus environment which may lead an auditor to include an emphasis of matter paragraph. These include where:
- external valuers, such as property surveyors, have included material valuation uncertainty clauses in their reports on asset valuations;
- the financial statements are prepared on a basis other than going concern;
- a subsequent events disclosure has been included to reference COVID-19; or
- there is uncertainty over the outcome of litigation.
However, the existence of these situations alone may not justify inclusion of an emphasis of matter paragraph. Auditors are encouraged to document clearly why they consider the matter to be fundamental to the user’s understanding of the financial statements.
The guide also takes readers through a flowchart of the process around considering whether to include an emphasis of matter paragraph, provides references to the relevant International Standards on Auditing (ISAs) as applicable in the UK, and shows how an emphasis of matter paragraph should be constructed.
One of the key questions for auditors required to report on key audit matters (KAMs) is how an emphasis of matter paragraph interacts with KAMs. This is also explained in the guide, along with references to the relevant ISAs.