Emphasis of matter paragraph in Maltese statutory audit reports : an analysis

Abstract

PURPOSE: This study explores the use of the EOM paragraph by local auditors between 2010 and 2014. The main objectives are to ascertain the regulatory framework relating to the EOM paragraph, assess the nature and frequency of use of this paragraph, and determine whether it is in consonance with the applicable auditing standards. DESIGN: A sequential mixed methods design was adopted for this research project. The first part involved an analysis of 1,885 audit reports of a random sample of 377 companies. Those which had an EOM paragraph were taken up for further research and the main quantitative findings were used to develop the interview schedule for the second part of the study. Twelve semi-structured interviews were conducted with auditors from Big Four and non-Big Four audit firms, as well as sole practitioners. FINDINGS: Local auditors thought that the auditing standards pertaining to the EOM section of the audit report were adequate. An increase in the use of this section was noted although the rate of usage decreased over the five-year period from 19.1% in 2010 to 15.9% in 2014. Despite the decreasing trend, the proportion of the EOM paragraphs highlighting GC issues increased when compared to previous periods. This is thought to be due to the very few GC qualifications issued locally, as auditors are more inclined to use an EOM paragraph instead of qualifying the audit opinion. A notable difference in the use of the EOM paragraph was also observed between the different types of auditors. In addition, various elements of departure from the applicable auditing standards were identified, ranging from incorrect headings and incomplete wording, to the wrong positioning of the paragraph in the audit report. CONCLUSION: Notwithstanding the decrease in the use of the EOM section from 2010 to 2014, it is still being overused by local auditors. Auditors should assess the circumstances of each case individually to determine whether the inclusion of an EOM paragraph is necessary or sufficient, as required by the standards. This applies particularly to the smaller audit firms and sole practitioners which have less strict methodologies and controls than Big Four audit firms. VALUE: Despite the QAU’s efforts to encourage proper use of the EOM paragraph, this study’s findings indicate that there is still the need for continuous emphasis on the importance for auditors to be ISA-knowledgeable and informed on the latest developments within the profession.