The pass rate for the AUD section of the CPA Exam consistently hovers near 48%. The points that sink a score from 74 to 72 are not usually lost on complex calculations. They are lost on judgment calls, like knowing when to add an Emphasis-of-Matter paragraph versus incorrectly modifying the entire audit opinion for an issue that was already handled correctly.
An Emphasis-of-Matter (EOM) paragraph highlights a matter already disclosed in the financial statements that is fundamental to user understanding. An Other-Matter (OM) paragraph discusses something outside the financial statements that is relevant to the audit or the report. Neither modifies the audit opinion itself.
Key facts
- Governing Standard (Nonissuers)
- AU-C Section 706, Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor's Report.
- Governing Standard (Issuers)
- PCAOB AS 3101, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion.
- Effect on Opinion
- Neither paragraph type modifies the auditor's opinion. They are added to unmodified opinion reports.
- Core Distinction
- EOMs refer to matters in the financial statements; OMs refer to matters outside the financial statements.
- Usage
- Can be required (e.g., going concern uncertainty) or discretionary based on auditor judgment.
- Placement
- EOM and Critical Audit Matter (CAM) paragraphs are placed immediately after the Basis for Opinion section.
The AICPA reports the cumulative AUD pass rate was 47.93% in 2023 (AICPA), a statistic that proves nearly half of candidates are tripped up by topics that test professional judgment over rote memorization.
When to Use Emphasis-of-Matter vs. Other-Matter Paragraphs
These paragraphs are your tools for adding critical context to an audit report without changing the unmodified (clean) opinion. They are the auditor's way of saying, "My opinion is clean, but you absolutely must pay attention to this specific point." They signal transparency, not a problem with the audit.
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The exam will give you a scenario and force you to decide:
- Does this issue affect the audit opinion?
- If not, does it require extra communication?
- If so, is the subject matter inside the financial statements (EOM) or outside (OM)?
For a complete overview of how these topics fit into the exam, see VoraPrep's guide on the AUD exam structure and content.
The Official Rules: Distinguishing AICPA and PCAOB Standards
Your judgment must be anchored in the official standards. For nonissuers (private companies), you'll follow AICPA standards, primarily AU-C 706. For issuers (public companies), you'll apply PCAOB standards.
Emphasis-of-Matter (EOM) Paragraph (Nonissuers)
An EOM paragraph draws attention to a matter that is appropriately presented or disclosed in the financial statements and is fundamental to the user's understanding.
Common Examples:- A major catastrophe with a significant effect on financial position.
- Unusually important subsequent events (like the example below).
- A justified change in accounting principle that has a material effect.
Other-Matter (OM) Paragraph (Nonissuers)
An OM paragraph refers to a matter other than those presented or disclosed in the financial statements. It provides context about the audit, the auditor's responsibilities, or the report itself.
Common Examples:- Restricting the use of the auditor's report to specific parties.
- Prior period financial statements were audited by a predecessor auditor whose report is not reissued.
- The auditor's report covers supplementary information in addition to the basic financial statements.
The Most Important Distinction: Required vs. Discretionary Paragraphs
The exam will test whether you know when these paragraphs are a choice versus a requirement.
Issuer Rules: Critical Audit Matters (CAMs) and EOMs
For public companies, the PCAOB requires the communication of Critical Audit Matters (CAMs). A CAM is a matter that was communicated to the audit committee and that:
- Relates to accounts or disclosures material to the financial statements.
- Involved especially challenging, subjective, or complex auditor judgment.
A common misconception is that CAMs replaced EOM paragraphs for issuers. This is incorrect.
An issuer's audit report must include CAMs. However, the PCAOB standards still permit the use of an EOM paragraph in the same report. In fact, an EOM paragraph is still required for an issuer when there is substantial doubt about the entity's ability to continue as a going concern and disclosures are adequate.
Here is a quick comparison to keep the rules straight:
| Feature | Emphasis-of-Matter (EOM) | Other-Matter (OM) | Critical Audit Matter (CAM) |
|---|---|---|---|
| Applies to | Nonissuers (AICPA) & Issuers (PCAOB) | Nonissuers (AICPA) | Issuers (PCAOB) only |
| Subject | A matter disclosed in the financial statements. | A matter NOT in the financial statements. | A matter involving complex auditor judgment. |
| Purpose | Add emphasis to a fundamental disclosure. | Provide context about the audit or report. | Communicate areas of high audit risk/judgment. |
| Placement | After Basis for Opinion | After Opinion & EOM | After Basis for Opinion |
| Required? | Required for going concern; otherwise discretionary. | Only when specific circumstances exist. | Required for every issuer audit. |
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Worked Example with Step-by-Step Solution
Let's walk through a typical exam question that tests judgment.
Management has appropriately described the event and the estimated financial impact in Note 15 to the financial statements. The loss does not affect the 2026 financial statements directly but is a significant non-adjusting subsequent event. You have concluded that an unmodified opinion is appropriate.
What is the most appropriate action regarding the audit report?
This scenario is a classic test of your ability to separate bad news for the company from bad accounting by the company.
Step 1: Analyze the event and its accounting treatment.
The fire is a non-adjusting subsequent event. The company correctly followed GAAP by not adjusting the 2026 financials but disclosing the event in the notes. Because the accounting and disclosure are appropriate, there is no basis for modifying the audit opinion.Step 2: Eliminate the clearly incorrect answers.
Answer (A) is the primary trap for unprepared candidates. You do not qualify an opinion because a bad thing happened. You qualify an opinion for a GAAP departure or a scope limitation. Management followed GAAP perfectly. (A) is wrong.Answer (B) is tempting but incorrect. While the opinion is unmodified, the destruction of a primary warehouse is so significant that it is fundamental to understanding the company's financial position and future prospects. While not strictly required by AU-C 706, a professional auditor would exercise judgment to highlight it. Issuing a standard report without mentioning it would be an incomplete communication.
Step 3: Differentiate between EOM and OM paragraphs.
This is the final decision point. Does the paragraph refer to something inside or outside the financial statements?- An Other-Matter paragraph (C) is for matters not presented or disclosed in the financial statements.
- An Emphasis-of-Matter paragraph (D) is for matters already presented or disclosed.
The fire and its $5 million estimated loss are described in Note 15. The information is inside the financial statements (the notes are an integral part). Therefore, an EOM paragraph is the correct tool.
Step 4: Confirm the final answer.
The correct action is to issue an unmodified opinion and add a discretionary Emphasis-of-Matter paragraph that directs the reader's attention to Note 15. This meets all the criteria: the matter is fundamental, it is appropriately disclosed, and it does not warrant a modified opinion.The correct answer is (D).
This logical process is exactly how you need to think on exam day. VoraPrep's adaptive learning engine contains thousands of scenario-based questions to sharpen this exact skill. Try VoraPrep's free CPA practice questions and feel the difference.
Practice Questions: Test Yourself
Here are a few exam-style MCQs. Focus on the why behind each answer.
Question 1:
Apex Auditors is finalizing the audit of Innovate Corp., a publicly traded technology company. The audit team spent significant time on the valuation of intangible assets acquired in a recent business combination, which required complex modeling and subjective assumptions. This was communicated to the audit committee. Under PCAOB standards, how should this be reflected in the audit report?Explanation: The correct answer is C. Innovate Corp. is an issuer, so PCAOB standards apply. The valuation involved "complex modeling and subjective assumptions," which is the exact definition of a Critical Audit Matter (CAM). CAMs are required for issuer audits to communicate such areas to investors.
Question 2:
Maria is the lead auditor for Chronos Inc., a nonissuer. During the audit, Maria notes that Chronos changed its method of accounting for inventory from LIFO to FIFO. The change is justified and has been applied retrospectively, with all disclosures required by GAAP included in the financial statements. Maria agrees with the change and the disclosures. The audit report should include:Explanation: The correct answer is D. A justified change in accounting principle that is properly disclosed is a classic example of a matter that, while not a GAAP departure, is fundamental to a user's understanding of comparability. Since the matter is fully disclosed within the financial statements, a discretionary Emphasis-of-Matter paragraph is the appropriate way to highlight it.
Question 3:
Pike & Associates, CPAs, is conducting an audit of the financial statements of Innovate Corp., a nonissuer, for the year ended December 31, 2026. The prior year's financial statements were audited by a different firm, whose report is not being presented. Pike's audit report on the 2026 financial statements should include:Explanation: The correct answer is D. The fact that a predecessor auditor audited the prior period is relevant to the user's understanding of the current audit, but it is not information contained within the 2026 financial statements themselves. Therefore, an Other-Matter paragraph is required under AU-C 706 to disclose this fact.
VoraPrep has over 9,500 practice questions, including dozens covering these specific audit reporting nuances. Our adaptive engine will target your weak spots until you master the judgment required to pass.
Study Tips and Exam-Day Strategy
- Create a Decision Tree: Don't just memorize the table. Draw a flowchart. Start with: "Is there a matter for additional communication?" -> "Does it affect the opinion?" -> "No." -> "Is the matter disclosed in the F/S?" -> "Yes." -> EOM. -> "No." -> OM. This builds the thinking process.
- Focus on the "Why": For every practice question, force yourself to state the "why." "This is an EOM because the going concern issue is disclosed in Note 8." "This is an OM because the predecessor auditor is not part of the financial statements."
- Connect to Required Communications: These paragraphs are often linked to matters discussed with the audit committee. Reviewing our guide on required communications with those charged with governance will provide valuable context, especially for understanding CAMs.
On exam day, when you see a scenario about a subsequent event, a change in accounting principle, or a predecessor auditor, your mind should immediately go to the EOM/OM/CAM framework.