AU-C section 720, The Auditor's Responsibilities Relating to Other Information Included in Annual Reports, covers what the auditor of a nonissuer does when an annual report contains financial and nonfinancial information besides the audited financial statements and the auditor's report. SAS No. 137 revised the section. It applies to audits of financial statements for periods ending on or after December 15, 2021 (the effective date was deferred by SAS 141 from an earlier date).
This page paraphrases the standard. Read AU-C 720 in AICPA Professional Standards before relying on any point here.
What is the objective of AU-C 720?
The auditor's objectives are, after reading the other information, to consider whether a material inconsistency exists between the other information and the financial statements, or between the other information and the auditor's knowledge obtained in the audit, to respond appropriately when the auditor identifies that such material inconsistencies appear to exist or when the auditor otherwise becomes aware that other information appears to be materially misstated, and to report in accordance with the section.
What counts as other information and an annual report?
Other information is financial or nonfinancial information, other than the financial statements and the auditor's report, included in an entity's annual report.
An annual report is a document, or combination of documents, prepared typically on an annual basis by management or those charged with governance, in accordance with law, regulation or custom, the purpose of which is to provide owners or similar stakeholders with information on the entity's operations and the entity's financial results and financial position as set out in the financial statements.
Typical other information in a private company annual report includes a letter from management, highlights, a discussion of operations, nonfinancial statistics, and in a not-for-profit setting a program narrative. A document is an annual report only if it meets that definition, so a standalone set of financial statements, a covenant compliance package or a tax return would usually not qualify. Judge each case against the definition. Where there is no annual report and no other information, the section does not apply and the report has no Other Information section.
AU-C 720 does not apply to supplementary information covered by AU-C 725 or required supplementary information covered by AU-C 730. Those sections have their own requirements.
What does the auditor do before the report date?
- Determine which documents make up the annual report. Through discussion with management, determine which documents comprise the annual report and the planned manner and timing of issuing them, and obtain management's written acknowledgment of that.
- Make arrangements to obtain the documents. Make appropriate arrangements with management to obtain the final version of the documents, in a timely manner and, if possible, before the date of the auditor's report. If some will not be available until after the report date, request a written representation that the final version will be provided when available and before issuance.
- Read and consider. Read the other information and consider whether there is a material inconsistency between it and the financial statements. In doing so, consider whether the other information agrees or reconciles to the financial statements by comparing selected amounts to them, and consider the other information against the auditor's knowledge from the audit.
- Stay alert. While reading, remain alert for indications of a material inconsistency with the auditor's knowledge from the audit, or of a material misstatement of fact or other information that is otherwise misleading. The auditor is not responsible for searching for omitted information or for its completeness.
The depth is reading and considering. The auditor does not test the other information as an audit, and expresses no opinion or assurance on it. Where the other information includes figures drawn from the financial statements, the auditor checks that those figures match. For other statements, the auditor asks whether they conflict with what the audit showed, for example a statement that no customer exceeds 10% of revenue when the file shows otherwise.
What happens if there is a material inconsistency?
If the auditor identifies a material inconsistency, or becomes aware that the other information appears to be materially misstated, the auditor discusses it with management and, if necessary, performs other procedures to conclude whether a material misstatement of the other information exists, whether the financial statements need revision, or whether the auditor's understanding of the entity needs updating.
| Where the problem is | If management corrects | If management does not correct |
|---|---|---|
| Other information needs revising | Auditor determines the correction was made | Communicate with those charged with governance and request the correction. If the other information was obtained before the report date and is still uncorrected, the auditor considers the implications for the report (describing the misstatement in the Other Information section), withholds the report, or withdraws where possible |
| Financial statements need revising | Respond under the other relevant AU-C sections, such as AU-C 560 | Respond under the other relevant AU-C sections, which can mean modifying the opinion under AU-C 705 |
| The auditor's understanding of the entity needs updating | The auditor revises the risk assessment | Not applicable |
If a material misstatement is found in other information obtained after the report date, the auditor performs the necessary procedures if it is corrected. If it is not corrected after communicating with those charged with governance, the auditor takes appropriate action, considering the auditor's legal rights and obligations, to seek to have the misstatement brought to the attention of anyone holding the financial statements and report. Legal advice is common practice here. See AU-C 560.
What does the report say?
At the date of the auditor's report, when the auditor has obtained all the other information (the documents agreed with management and acknowledged in writing), the report includes a separate section with the heading "Other Information" or another appropriate heading. The section states, in summary:
- that management is responsible for the other information
- the other information identified, which comprises the other information in the annual report, excluding the financial statements and the auditor's report
- that the opinion on the financial statements does not cover the other information and the auditor does not express an opinion or any form of assurance on it
- the auditor's responsibility to read the other information and consider whether a material inconsistency exists with the financial statements, or whether it otherwise appears to be materially misstated
- that if the auditor concludes an uncorrected material misstatement of the other information exists, the auditor is required to describe it in the report
- if the auditor has concluded that an uncorrected material misstatement exists, a statement to that effect and a description of it
The standard's reporting requirement is tied to the auditor having obtained all the other information at the report date. For documents that arrive later, the requirements are the written representation and the actions after the report date described above. Its position follows the illustrations in AU-C 720. When the opinion is qualified or adverse, the auditor also considers what that means for the misstatement statement. See AU-C 700 and the independent auditor's report example.
Written representations and communication
The auditor requests a representation from management where the final other information is not available at the report date. See AU-C 580. The auditor communicates with those charged with governance about the auditor's responsibilities relating to other information, and about the results of the work on it. AU-C 260 covers that communication. The engagement letter may also acknowledge the auditor's responsibilities for other information expected after the report date. See the audit engagement letter template.
What must be documented?
The file should show the procedures performed on the other information, the documents identified, the conclusion, and any communications. Where the other information arrived late, document the date it was received and the work performed. See AU-C 230 audit documentation.
Common weaknesses in other-information files
Practice checks, not requirements of the standard. Gaps to avoid:
- Annual report issued before the auditor read it
- No inquiry of management about whether an annual report exists
- Other Information section missing when one is required (all other information obtained by the report date)
- Other Information section included when the client has no annual report
- Selected amounts not compared with the financial statements
- Late other information with no representation obtained
Related
- AU-C 700 forming an opinion and reporting
- AU-C 705 modifications to the opinion
- AU-C 560 subsequent events
- AU-C 580 written representations
- Independent auditor's report example
- Nonprofit audit requirements
Sources
- AICPA, AU-C Section 720, The Auditor's Responsibilities Relating to Other Information Included in Annual Reports, as revised by SAS No. 137 (periods ending on or after December 15, 2021, after deferral by SAS No. 141)
- AICPA, AU-C Sections 725 and 730
- AICPA, AU-C Sections 560 and 580
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AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error