Emphasis of Matter, Other Matter and Key Audit Matters

A lender rings to say the accounts are qualified. They are not. The report has an extra paragraph, a clean opinion, and a sentence at the end of that paragraph saying so.

Three constructs get confused, and only one of them touches the opinion.

The three, defined

Construct	What it refers to	Effect on the opinion
Emphasis of Matter	A matter appropriately presented or disclosed in the financial statements that is fundamental to users understanding	None
Other Matter	A matter other than those presented or disclosed, relevant to users understanding of the audit, the auditor’s responsibilities or the report	None
Key Audit Matter	A matter that, in the auditor’s professional judgement, was of most significance in the audit of the current period	None
Modification	A material misstatement, or an inability to obtain sufficient appropriate evidence	Qualified, adverse or disclaimer

Only the last row changes the opinion. The first three are communication.

Emphasis of Matter is not a modification

The definition is paragraph 7(a) of ISA 706 (Revised): a paragraph that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgement, is of such importance that it is fundamental to users understanding.

Two words carry the weight. Appropriately — the matter is already correctly in the accounts. Fundamental — it deserves to be pointed at.

Paragraph 8 then restricts its use to cases where:

• the auditor would not be required to modify the opinion as a result of the matter; and
• when ISA 701 applies, the matter has not been determined to be a key audit matter.

The first condition is the whole point. Emphasis is not a softer alternative to a qualification. Where ISA 705 (Revised) requires a modification, it is required.

MIA’s Illustration 9 in AAPG 1 shows the Malaysian wording — a fire in the company’s production facilities disclosed as a subsequent event, ending: Our opinion is not modified in respect of this matter. That sentence is in the paragraph so that a reader cannot mistake it for a qualification.

Key audit matters apply to listed entities

Paragraph 5 of ISA 701 states the scope: audits of complete sets of general purpose financial statements of listed entities, plus circumstances where the auditor otherwise decides to communicate key audit matters, plus where law or regulation requires it.

MIA records the same position in AAPG 1, which notes that communication of key audit matters will be required for the audits of complete sets of general purpose financial statements of listed entities, and provides only a placeholder rather than sample matters.

The practical consequence for most readers: a private Sdn Bhd auditor’s report has no Key Audit Matters section, and its absence is not a defect. If you are comparing a Bursa-listed report against your own, that difference is scope, not quality.

Paragraph 4 of ISA 701 sets four things a key audit matter is not: a substitute for required disclosures, a substitute for a modified opinion where one is required, a substitute for reporting a material uncertainty under ISA 570 (Revised), or a separate opinion on individual matters.

How the three interact

When ISA 701 applies, paragraph A1 of ISA 706 (Revised) is explicit: the use of Emphasis of Matter paragraphs is not a substitute for a description of individual key audit matters. An auditor cannot bundle three key audit matters into one emphasis paragraph.

Paragraph A3 covers the reverse case. A matter may not be a key audit matter — because it did not require significant auditor attention — yet still be fundamental to users understanding. That is exactly when an Emphasis of Matter is right.

On placement, paragraph A16 leaves the Emphasis of Matter paragraph either directly before or after the Key Audit Matters section, on the auditor’s judgement about relative significance.

Going concern is separate again. Where a material uncertainty exists and is adequately disclosed, ISA 570 (Revised) requires a dedicated section headed Material Uncertainty Related to Going Concern — not an Emphasis of Matter, and not a key audit matter.

Common mistakes

• Calling an Emphasis of Matter a qualification on a facility application or in a data room summary.
• Asking the auditor for an emphasis paragraph instead of a qualification. Paragraph 8(a) forecloses it.
• Reading the absence of key audit matters as a weaker audit. ISA 701 applies to listed entities.
• Treating a going concern material uncertainty as an Emphasis of Matter. It has its own heading and its own standard.
• Assuming an Other Matter paragraph concerns the numbers. By definition it concerns something not presented or disclosed in them.

What’s next

Once the extra paragraphs make sense, the rest of the report can be read field-by-field — which is how a lender or a buyer diligences one in five minutes.