Under AU-C 720, The Auditor's Responsibilities Relating to Other Information Included in Annual Reports, the auditor reads the other information in an entity's annual report and considers whether it is materially inconsistent with the financial statements or with what the auditor learned in the audit. The audit opinion does not cover that information, and AU-C 720 does not require evidence beyond what the opinion needs (paragraph .03). It is effective for audits of periods ending on or after December 15, 2021.
If the entity issues only financial statements and no annual report, AU-C 720 has nothing to read. When the auditor has all the other information by the report date, the audit report gets an "Other Information" section (paragraph .24). The AU-C 720 standards page gives the overview.
What counts as other information?
Other information is financial or nonfinancial information, other than the financial statements and the auditor's report on them, included in an entity's annual report (paragraph .12). Application material A13 lists examples: management commentary, a chairman's statement, a corporate governance statement, financial summaries or highlights, financial ratios, planned capital expenditures, names of officers and directors, and selected quarterly data.
A8 says these stand-alone reports are "not typically part of" the annual report, subject to law, regulation or custom: IRS Form 990, Form 5500, an annual statement filed with the NAIC, separate regulatory reports, and corporate social responsibility or sustainability reports. A9 adds that a document called an "annual report" may still not meet the definition. Supplementary information in relation to the financial statements as a whole (AU-C 725) and required supplementary information are outside AU-C 720 (paragraph .09). See AU-C 725 supplementary information.
How do you get the document?
Paragraph .13 sets up three steps at the front of the engagement:
- Through discussion with management, determine which documents make up the annual report and the planned manner and timing of issuance, and obtain management's written acknowledgment of that list.
- Arrange to receive the final version in time, if possible before the date of the auditor's report.
- If some documents will arrive after the report date, ask for a written representation that the final versions will be provided before the entity issues them.
A15 says the acknowledgment can sit in the engagement letter, an amendment, or a representation letter. A18 defines the final version, where governance approves the document, as the approved version. A21 says that for information available only on a website, the version obtained from the entity is the relevant document, and the auditor has no duty to search the website.
If the auditor learns the entity issued documents without providing the final version, paragraph .14 requires appropriate action. A25 lists obtaining the documents and performing the procedures as soon as practical, communicating with governance, and considering legal advice.
What does the auditor actually do with it?
Paragraph .16 requires the auditor to read the other information and consider whether a material inconsistency exists with the financial statements. As the basis, the auditor compares selected amounts or items in the other information that are intended to be the same as, summarize, or give detail on the financial statements.
Paragraph .17 adds that, while reading, the auditor remains alert for indications that:
- a material inconsistency exists between the other information and the auditor's knowledge from the audit; or
- a material misstatement of fact exists, or the information is otherwise misleading.
Key limits:
- Not every amount is compared (A29). Selection is judgment, with factors such as the significance of the item (a key ratio or amount), its relative size, and its sensitivity (A30).
- There is no duty to search for omitted information or to ensure completeness (paragraph .18).
- Procedures are not an assurance engagement on the other information (paragraph .07).
A31 gives example procedures: comparing numbers, comparing the words used where the other information conveys the same meaning as a disclosure, obtaining a reconciliation from management, comparing its items to both documents, and checking its arithmetic. A38 notes that, for many matters, the auditor's recollection of audit evidence and conclusions may be enough to judge consistency with audit knowledge.
What if something does not agree?
Paragraph .19: discuss with management and, if necessary, perform other procedures to conclude whether (a) the other information is materially misstated, (b) the financial statements are materially misstated, and (c) the auditor's understanding of the entity needs updating. A43 recognizes that management's explanation may show a valid difference of judgment.
If the auditor concludes the other information is materially misstated (paragraph .20), the auditor asks management to correct it. If management agrees, the auditor checks that the correction was made. If management refuses, the auditor tells governance and asks that it be corrected.
If the document was obtained before the report date and is still uncorrected, paragraph .21 requires the auditor to choose among: considering the effect on the report and telling governance how it will be addressed, withholding the report, or withdrawing where law permits. If the misstatement is found after the report date, paragraph .22 calls for procedures if corrected, or appropriate action considering legal rights and obligations if not.
If the problem is in the financial statements, or the auditor's understanding needs updating, paragraph .23 sends the auditor to the relevant AU-C sections.
What goes in the report?
When all the other information has been obtained by the report date, paragraph .24 requires a separate section headed "Other Information," or another appropriate heading, stating:
- management is responsible for the other information;
- what it is, and that it does not include the financial statements and the auditor's report;
- the opinion does not cover it and no opinion or assurance is expressed;
- the auditor's responsibility to read it and consider material inconsistency or material misstatement;
- that an uncorrected material misstatement would be described in the report; and
- if one exists, a statement that it does, with a description.
If the opinion is qualified or adverse, paragraph .25 requires the auditor to consider what that means for the statement about uncorrected misstatements. For a disclaimer, AU-C 705 paragraph .30 prohibits an Other Information section.
What must the file show?
Paragraph .26 requires documentation of the procedures performed, and the final version of the other information on which the work was done. Keep the signed acknowledgment of the document list, any representation about late documents, and the tick-and-tie of selected amounts. See audit documentation requirements.
Worked example
A nonprofit's annual report includes a letter from the board chair: "Revenue grew 18% to $12.4 million." The audited statement of activities shows $12.4 million for the year and $10.8 million for the prior year.
Growth is 12.4 / 10.8 minus 1, which is 14.8%, not 18%. The dollar amount agrees and the percentage does not. The auditor discusses it with management (paragraph .19). Management confirms the percentage was carried over from a draft budget. The auditor asks for the correction (paragraph .20) and confirms the final version says 14.8%. The file holds the final report, the comparison, the discussion and the correction. If management had refused, the auditor would have told governance and asked again.
Frequently asked questions
Do we have to wait for the annual report before dating the audit report?
No. A22 says the auditor is not precluded from dating or issuing the report without some or all of the other information. Paragraph .13c covers the representation that final versions will follow.
Is a sustainability report other information?
A8 lists sustainability reports as "not typically part of" the annual report when stand-alone, subject to law, regulation or custom.
Does AU-C 720 apply to a compilation or review?
No. It is written in the context of an audit of financial statements (paragraph .03).
Sources
- AICPA, AU-C Section 720, The Auditor's Responsibilities Relating to Other Information Included in Annual Reports (paragraphs .01 to .26, A8 to A47): https://www.aicpa-cima.com/resources/landing/aicpa-professional-standards
- AICPA, AU-C Section 705, Modifications to the Opinion in the Independent Auditor's Report (paragraph .30, no Other Information section on a disclaimer): https://www.aicpa-cima.com/resources/landing/aicpa-professional-standards
- PCAOB, AS 2710, Other Information in Documents Containing Audited Financial Statements (issuer-audit counterpart): https://pcaobus.org/oversight/standards/auditing-standards/details/AS2710
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