EOM and OM Paragraphs in the Auditor's Report

Introduction

In our previous lesson, we established the fundamental distinction between an Emphasis of Matter (EOM) paragraph and an Other Matter (OM) paragraph. We focused on when and why to use them, concluding that EOM paragraphs highlight crucial information already in the financial statements, while OM paragraphs provide context about the audit or the auditor's report itself.

Today, we address the next critical step: the execution. This lesson is designed to help you master the precise technical language required by ICAI, a challenge you've mentioned. Our learning outcome is to describe the placement and required wording for EOM and OM paragraphs in the auditor's report. We will move from the conceptual 'what' to the practical 'how', breaking down the specific drafting rules and layout within the audit report as prescribed by SA 706.

Part 1: Required Wording for an Emphasis of Matter (EOM) Paragraph

When drafting an EOM paragraph, precision is key. It's not just about conveying the message, but about adhering to the structure laid out in the Standards on Auditing. There are three non-negotiable components you must include.

Let's watch a short video that clearly explains these drafting requirements.

As the video explained, when including an EOM paragraph, SA 706 requires you to follow a specific structure. Think of it as a three-part checklist for your exam answer:

1. A Separate Section and Heading: The paragraph must be in its own section of the report under the heading "Emphasis of Matter". While you can add context to the heading (e.g., "Emphasis of Matter – Effects of a Fire"), the term "Emphasis of Matter" is mandatory.

2. Clear Reference to the Disclosure: The paragraph must:

   • Clearly identify the matter being emphasized.
   • Refer the reader to the exact location in the financial statements where the full disclosure can be found (e.g., "We draw attention to Note X of the financial statements..."). This connects your report directly to management's disclosures.

3. Statement of Unmodified Opinion: The paragraph must explicitly state that the auditor's opinion is not modified in respect of the matter. The standard wording is: "Our opinion is not modified in respect of this matter." This is a critical sentence that prevents users from misinterpreting the EOM as a qualification.

Here's an example from the TaxGuru article that puts it all together, illustrating these three elements perfectly:

Emphasis of Matter
We draw attention to Note W in the financial statements, which describes the effects of the recent natural disaster that significantly affected the company’s operations and financial performance. As stated in Note W, the disaster caused substantial damage to the company’s facilities and disrupted its operations for several months. Our opinion is not modified in respect of this matter.

Part 2: Required Wording for an Other Matter (OM) Paragraph

The rules for an OM paragraph are slightly more flexible, but the core objective is to provide clarity about the audit or the report.

Key drafting requirements for an OM paragraph include:

1. A Separate Section and Heading: The paragraph must be in a separate section. The heading is typically "Other Matter", but SA 706 allows for "other appropriate heading." This flexibility lets you be more descriptive if needed, for instance, "Other Matter – Scope of the Audit."

2. Clear Description of the Matter: The paragraph should clearly explain the matter you are communicating. Since this information is not in the financial statements, your description is the only source of information for the user. It must be self-explanatory.

Let's look at two classic examples discussed in the video by CA Rishabh Jain. These are frequently tested scenarios.

Based on the video and SA 706, here is how you would draft an OM paragraph for one of those common situations:

Scenario: The prior year's financial statements were audited by a different auditor.

Other Matter
The financial statements of the Company for the year ended March 31, 20X0, were audited by another auditor who expressed an unmodified opinion on those statements on June 15, 20X0.

Notice how the paragraph is factual, concise, and provides crucial context for a user reading the comparative figures in the current year's financial statements.

Part 3: Placement in the Auditor's Report

Knowing what to write is half the battle; knowing where to put it is the other half. The placement of EOM and OM paragraphs is a matter of professional judgment, guided by the goal of effective communication.

The official text of SA 706 provides the most authoritative guidance on this.

Let's summarize the key placement rules from that reading:

Placement of an EOM Paragraph

• Default Position: The placement depends on the auditor's judgment of the matter's significance.
• Interaction with Basis for Opinion: If the EOM relates to the financial reporting framework itself (a very specific situation, e.g., under SA 800), it might be placed immediately after the Basis for Opinion section.
• Interaction with Key Audit Matters (KAM): When the report includes a KAM section (mandatory for listed entities), the EOM paragraph can be placed either immediately before or immediately after the Key Audit Matters section. This is a critical point to remember for exams. The auditor decides based on the perceived importance of the EOM relative to the KAMs.

Placement of an OM Paragraph

• Interaction with Other Reporting: If the OM paragraph relates to the auditor's other reporting duties (e.g., under the Companies Act), it may be included within the "Report on Other Legal and Regulatory Requirements" section.
• General Placement: If the OM paragraph is relevant to the audit as a whole, it is typically included as a separate section after the "Report on the Audit of the Financial Statements" and the "Report on Other Legal and Regulatory Requirements."

Seeing it All Together: An Illustrative Report

The best way to solidify your understanding of placement and wording is to see a complete audit report. The appendix of SA 706 provides a perfect illustration.

This illustrative report is an invaluable study tool. It shows a classic EOM for a fire (subsequent event) and a classic OM for a predecessor auditor, demonstrating exactly how to draft them and where they fit in a complex report.

Conclusion

Mastering SA 706 is about understanding both the 'why' and the 'how'. Today, we focused squarely on the 'how', giving you the technical tools to construct your exam answers with precision.

Key Takeaways:

• EOM Wording: Must have the heading "Emphasis of Matter," refer to the specific note in the financial statements, and state that the opinion is not modified.
• OM Wording: Uses the heading "Other Matter" (or similar) and clearly explains a matter relevant to the audit that is not in the financial statements.
• EOM Placement: Placed before or after the KAM section, based on professional judgment.
• OM Placement: Often placed after the KAM section or within the "Other Legal and Regulatory Requirements" section if relevant.
• The Golden Rule: Always refer back to the structure in the illustrative reports from the SAs. This is the blueprint for a perfect answer.

Preview of the Next Lesson

We have now thoroughly covered how auditors communicate additional context through EOM and OM paragraphs. The example of the OM paragraph referencing a "predecessor auditor" provides a perfect bridge to our next topic.

In the next lesson, we will begin Module 10 by addressing the learning outcome: "Distinguish between 'corresponding figures' and 'comparative financial statements' and explain the auditor's responsibilities for each under SA 710." This will build directly on our understanding of how prior period information is handled in the current year's audit report.