HKSA 706 - Emphasis of Matter Paragraphs (Condensed)

Introduction & Scope

Purpose of HKSA 706 (Revised)

HKSA 706 (Revised) deals with additional communication in the auditor's report when the auditor considers it necessary to:

• (a) Draw users' attention to matters presented or disclosed in the financial statements that are fundamental to users' understanding.
• (b) Draw users' attention to matters other than those presented or disclosed that are relevant to users' understanding of the audit, the auditor's responsibilities, or the auditor's report.

Key Relationships with Other Standards

Objectives & Definitions

Objective

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

• (a) A matter, although appropriately presented or disclosed, that is fundamental to users' understanding of the financial statements; or
• (b) Any other matter relevant to users' understanding of the audit, the auditor's responsibilities, or the auditor's report.

Definitions

Critical Distinction

Requirements for Emphasis of Matter Paragraphs

Conditions for Inclusion (Paragraph 8)

The auditor shall include an Emphasis of Matter paragraph if the auditor considers it necessary to draw users' attention to a matter presented or disclosed in the financial statements that is fundamental to users' understanding, provided:

• (a) The auditor would not be required to modify the opinion in accordance with HKSA 705 (Revised) as a result of the matter; AND
• (b) When HKSA 701 applies, the matter has not been determined to be a key audit matter to be communicated in the auditor's report.

Format Requirements (Paragraph 9)

When the auditor includes an Emphasis of Matter paragraph, the auditor shall:

• (a) Include the paragraph within a separate section with an appropriate heading that includes the term 'Emphasis of Matter';
• (b) Include a clear reference to the matter being emphasized and to where relevant disclosures can be found. The paragraph shall refer only to information presented or disclosed in the financial statements; AND
• (c) Indicate that the auditor's opinion is not modified in respect of the matter emphasized.

Circumstances Where Emphasis of Matter May Be Necessary (Paragraph A5)

Examples include:

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

What Emphasis of Matter Is NOT a Substitute For (Paragraph A7)

An Emphasis of Matter paragraph is not a substitute for:

• (a) A modified opinion in accordance with HKSA 705 (Revised) when required;
• (b) Disclosures in the financial statements that the applicable financial reporting framework requires management to make; OR
• (c) Reporting in accordance with HKSA 570 (Revised) when a material uncertainty exists relating to going concern.

Requirements for Other Matter Paragraphs

Conditions for Inclusion (Paragraph 10)

If the auditor considers it necessary to communicate a matter other than those presented or disclosed in the financial statements that 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, provided:

• (a) This is not prohibited by law or regulation; AND
• (b) When HKSA 701 applies, the matter has not been determined to be a key audit matter to be communicated in the auditor's report.

Format Requirements (Paragraph 11)

When the auditor includes an Other Matter paragraph, the auditor shall include the paragraph within a separate section with the heading 'Other Matter', or other appropriate heading.

Circumstances Where Other Matter May Be Necessary

Relevant to Users' Understanding of the Audit (Paragraph A9-A10):

• Law or regulation may require communication about planning and scoping matters
• In rare circumstances where the auditor is unable to withdraw from an engagement despite a pervasive scope limitation imposed by management

Relevant to Users' Understanding of the Auditor's Responsibilities or the Auditor's Report (Paragraph A11-A14):

• Law, regulation, or generally accepted practice may require elaboration on auditor's responsibilities
• Reporting on more than one set of financial statements (Paragraph A13)
• Restriction on distribution or use of the auditor's report (Paragraph A14)

Content Restrictions (Paragraph A15)

An Other Matter paragraph:

• Reflects clearly that such other matter is not required to be presented and disclosed in the financial statements
• Does not include information that the auditor is prohibited from providing by law, regulation, or other professional standards (e.g., ethical standards relating to confidentiality)
• Does not include information that is required to be provided by management

Relationship with Key Audit Matters

Key Principles (Paragraphs A1-A3)

1. KAMs are not a substitute for Emphasis of Matter – When HKSA 701 applies, the use of Emphasis of Matter paragraphs is not a substitute for a description of individual key audit matters.
2. Matters that are KAMs may also be fundamental – In such cases, the auditor may present the matter more prominently in the KAM section (e.g., as the first matter) or include additional information to indicate its importance.
3. Matters not determined as KAMs may still require Emphasis of Matter – A matter that did not require significant auditor attention (and therefore is not a KAM) may still be fundamental to users' understanding (e.g., a subsequent event) and should be included in an Emphasis of Matter paragraph.

Placement in the Auditor's Report

Emphasis of Matter Placement (Paragraph A16)

Other Matter Placement (Paragraph A16)

Communication with Those Charged with Governance

Requirement (Paragraph 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
• The wording of this paragraph

Purpose (Paragraph A18)

• Enables those charged with governance to be made aware of the nature of any specific matters the auditor intends to highlight
• Provides them with an opportunity to obtain further clarification from the auditor where necessary

Recurring Engagements

Where the inclusion of an Other Matter paragraph on a particular matter recurs on each successive engagement, the auditor may determine that it is unnecessary to repeat the communication on each engagement, unless otherwise required by law or regulation.

Appendices & Illustrative Examples (Appendices 1-3)

Appendices & Illustrative Examples

Appendix 1: HKSAs Requiring Emphasis of Matter Paragraphs

Appendix 2: HKSAs Requiring Other Matter Paragraphs

Illustrative Examples (from Appendix 3)