 Hello and welcome to this session. This is Professor Farhad in which we will discuss emphasis of matter or matters and other matters paragraph those paragraph could be listed as part of the auditor's report as Auditing students as CPA students. We need to understand what each one is and be able to list some examples in case you are giving Multiple choice questions on the exam able to answer. What is emphasis of a matter? What's other matters paragraph starting with emphasis of matters? I'm going to abbreviate is EOM. What is EOM? This paragraph is used when the auditor wants to emphasize They want to raise attention to specific matter regarding. Please notice. I highlighted the financial statements and the notes. I highlighted this in yellow on purpose to Raise your attention that emphasis of a matter is for kind of gets an irony It's to raise attention and this is why I highlighted this in yellow When we have something emphasis of a matter it deals with something on the financial statements and on the notes Simply put it's additional communication when considered necessary Now when considered necessary, maybe the auditor's discretion or professional judgment believe That emphasis is necessary. That could be one case where it's kind of an equal optional But the auditor thinks it's required and under certain circumstances Emphasis of matters is required So I'm gonna have to show you some examples when it's basically I'm gonna put in quote optional Optional means based on the auditor's judgment based on the other auditors discretion And we will discuss cases where it's necessary. It's required It's a must to have an emphasis of matter paragraph Simply put either or the purpose of this paragraph is to draw the user's attention to matters or matters Presented again. Notice. I am I am drawing your attention that though that information that we talk about in the EOM It's already presented or disclosed in the notes of the financial statements and it's necessary To fundamentally not necessarily to fundamentally understand the financial statements and simply what are the financial statements? We are looking at the basic financial statements balance sheet income statement cash flow statements of stockholders equity and the notes So anything when we say EOM EOM deals with stuff either in the notes disclosure or Stuff issues on the financial statements simply put we are highlighting notice. I'm highlighting in yellow I'm waving my hands here Basically, we're highlighting what we need to highlight in that EOM But that highlight refers back to something in the financial statements or in the notes You might be asking why does he keep repeating himself? You're gonna see why because I need to differentiate EOM from simply OM other matters Okay, now bear in mind EOM emphasis of matter is not the key orating matters. Those are not the camps Also cannot be used We we can't have an EOM if the opinion is something other than modified means clean opinion So EOM emphasis of matter is used when we have a clean opinion So that does not change. We are still giving a clean opinion. We don't change our opinion We could have an unqualified. I'm sorry unmodified since we are discussing a ICPA report unmodified clean opinion and add that emphasis of a matter It's not part of the opinion because the opinion still clean and it's a separate paragraph after the opinion titled Emphasis of matter. So this is the background information that you need to know what is emphasis of a matter is now We're gonna talk about other matters other matters. It's pretty straightforward Refer to matters notice now I am drawing your attention not presented or disclosed in the financial statements and the notes and now you understand Why I kept highlighting Presented or disclosed in the financial statements Presented and disclosed in the financial statements because when I got to other matters when you have a paragraph called other matters When you read it that other matters don't deal with anything that's on the notes or the financial statements So what are we discussing here? It deals with auditors responsibilities related to laws and regulation. So something other than Dealing with financial statements and notes of the financial statements an example will be the auditors responsibility What are the auditors responsibility? That's not in the financial statements. That's not in the notes of the financial statements The best way to illustrate this concept is to actually look at some examples of EOM Before we look at examples of EOM, I would like to share public opinion about my company farhat-lectures.com Farhat Accounting Lectures is a supplemental educational tool That's gonna help you with your CPA exam preparation as well as your accounting courses My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles My accounting courses are aligned with your accounting courses broken down by chapter and topics My resources consist of lectures, multiple choice questions, true-false questions as well as exercises Go ahead start your free trial today. No obligation. No credit card required I'm gonna start by looking at emphasis of matters that are considered optional Again, what I mean by optional is that it's based on the auditor's discretion The auditor thinks we should emphasize this point and the emphasis of matter paragraph One is related party transaction. Now, when we have related party transaction We're gonna have a note for example note 13 and under note 13 We're gonna have related party transaction and we're gonna talk about our related party transactions and when you see the notes Lecture, you will see what I mean by this. Simply put we talk for example 60% of our sales is to a related party 30% of our customers are related party so on and so forth. That's fine. It's in the notes Although it's in the notes. We think it's important to emphasize this matter in the report Therefore under emphasis of a matter paragraph. We talk about related party transaction To material or important event occurring after the balance sheet date We could have a major fire a natural disaster major funding event affecting the financial statements. Well, guess what? They're not they are affecting something in the financial statements. Therefore what we do we want to emphasize We want to emphasize those events. We put them in that paragraph It could be a major catastrophe that has occurred or continue to have a significant influence on the entity's financial numbers We discussed that as well any pending or regulatory action or litigation We also we can emphasize this. This could be in the notes Although it's in the notes. We still emphasize it because we believe it's important I want to emphasize one more topic that's optional and that's substantial doubt So we need to understand how substantial doubt is an optional disclosure as an EOM if there was or there is a substantial doubt about the company as a going concern and The management have a plan to address and alleviate the issue simply put There is a going concern but based on the evidence collected by the auditor the auditor believes The company has a plan in place to take care of the substantial doubt under those circumstances The auditor may emphasize the relate the related disclosure and an EOM now Remember if there's a substantial doubt that will be a disclosure in the notes Discussing the substantial doubt if the auditor believe the substantial doubt is Addressing the issue they may emphasize this point in an EOM now bear in mind This is different than the substantial doubt about the entity's ability to continue as a going concern which is required under a separate paragraph when that Substantial doubt exists. So this could be an optional if the auditor believes based on the evidence collected The management has a plan in place to alleviate that issue Could be other matters as well anything that's in the notes or the financial statements And we would like to emphasize for its importance highlight. We can put in that paragraph now. We have required Emphasis of matters. What are some required? Well, let's talk about the required part We might have to have an additional explanatory paragraph or Explanation of matters affecting the consistency. What do we mean by consistency? Consistency means using the same accounting Method from period to period to conserve Comparability so if you are using a different method from the prior year if you're using FIFO versus LIFO or Completed contract versus Percentage of completion method. Those are different accounting method if that's the case you are not being consistent You're violating comparability in a sense that the financial statements are not comparable under those circumstances Let me show you some examples. For example, if you have a change in accounting principle You change from FIFO to LIFO not an estimates bear in mind not an estimate. That's consistency changes an accounting principle Error correction involving accounting principle. You made a mistake not the mathematical mistake a mistake in applying accounting principle And now you're changing that's gonna violate consistency Change in reporting entities before you are not consolidating certain entities. Now you are consolidating entities Now this is not a change in company strategy like you have a new research and development project or new product line When you have those changes, especially what we're emphasizing here is changing an accounting principle and changing in reporting entities under those circumstances The auditor is required in a sense to emphasize why because it's important because if you are using a different method last year Let's assume year one. You were using FIFO and year two you move to LIFO. Well Basically, you are not consistent and the financial statements are not really comparable Tell the users that tell the users just I want to draw your attention that that's the case. So this is what we mean by Changes in accounting principle or errors involving accounting principle under those circumstances you will explain Also, if you have a just a justified departure from gap Remember if you just if you depart from gap, you have two options either you qualify or you could you give an adverse opinion Guess what? You could have it. You could have a justified departure. You're just fine from gap, but the auditor thinks it's okay It's acceptable. We're not even gonna give you a qualified opinion. We're gonna give you unqualified opinion However, we're gonna explain an emphasis of matter that that situation existed that deviation exist We want you to be aware of it. Never the last we are still giving you an unqualified opinion So if you are departing from gap Guess what? We have to explain that departure unqualified opinion Still apply. We're not gonna give you an adverse We're not gonna give you a qualified, but we have to explain so under those circumstances EOM is required if you are if we are using if we are preparing financial statements using special purpose framework We have to emphasize this because we want to let the users that we're not for example We're not using up or using something other than gap So we want you to be aware of this also what is required EOM is change an opinion from the preceding year What does that mean? Let's assume in the prior year you had a different opinion unmodified opinion And for some reason you change now the opinion to unmodified under those circumstances you have to explain Think about it for comparability purposes if you're looking at the report and you're saying the prior year now is unmodified And if somebody looked actually at the prior year and they saw something else. Well, they're gonna be confused So under those circumstances you are required to explain The difference between the two years you maybe have other what other ones But those are usually the major one that are covered on the CPA exam as well as your and in your auditing course As discuss and note whatever note the financial statements And the financial to the financial statements the company has elected to change its policy for determining cash equivalent in 20 x 8 So simply put the company change the way they account for cash equivalent and We're telling you this because we believe it's important that you know our opinion is not modified with respect to that matter So remember EOM you are still giving a clean in unmodified Opinion at the end of this recording I'm gonna tell you to do what now go to far hot lectures and work MCQs through false That's gonna help you understand this topic better. Good luck study hard Invest in yourself and stay safe