Audited financial statements often travel with extra schedules: consolidating statements, a schedule of expenditures of Federal awards, detailed expense schedules, or lender-requested breakdowns. AU-C section 725, Supplementary Information in Relation to the Financial Statements as a Whole, applies when the auditor is engaged to report on whether that supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole. It is the middle step between reading other information and auditing required supplementary information.
This page paraphrases the standard. Read AU-C 725 in AICPA Professional Standards for the full text and the illustrative report wording.
When does AU-C 725 apply?
The section applies when the auditor audits financial statements and is engaged to report on supplementary information that accompanies them, whether it sits in the same document or separately. It does not apply to the information AU-C 720 covers (other information in annual reports) or the required supplementary information AU-C 730 covers (such as the management's discussion and analysis a governmental entity must present).
| Other information (AU-C 720) | Supplementary information (AU-C 725) | Required supplementary information (AU-C 730) | |
|---|---|---|---|
| What it is | Annual report content outside the financial statements | Additional analysis the entity chooses to present | Information a standard setter requires outside the basic statements |
| Auditor responsibility | Read and consider, no opinion | Procedures and an in-relation-to opinion | Limited procedures, no opinion |
| Example | Management letter, highlights | Consolidating schedule, SEFA | GASB-required schedules |
If an engagement letter says the firm will report on a schedule, AU-C 725 governs the work. See AU-C 720 for the lighter section.
What does the auditor do?
The auditor first decides whether the supplementary information is derived from, and relates directly to, the underlying accounting and other records used to prepare the financial statements. Information from outside those records, for example budget data or statistics from another system, does not fit AU-C 725 in the same way.
The procedures, in sequence:
- Inquire of management about the purpose of the supplementary information and the criteria management used to prepare it.
- Determine that the form and content are appropriate.
- Obtain an understanding of the methods of preparing the information and whether they changed from the prior period.
- Compare and reconcile the supplementary information to the underlying accounting and other records, or to the financial statements themselves.
- Inquire about significant assumptions and interpretations behind it.
- Evaluate the appropriateness and completeness of the information, and obtain written representations. See AU-C 580.
The auditor evaluates any misstatement found against materiality in relation to the financial statements as a whole. The procedures build on the audit evidence from the financial statement audit, with additional work to tie the schedule to the records.
What does the report say?
The in-relation-to opinion goes in a separate report or an added section of the auditor's report on the financial statements. It states in substance:
- the audit was conducted to form an opinion on the financial statements as a whole
- the supplementary information is presented for purposes of additional analysis and is not a required part of the financial statements
- management is responsible for the supplementary information
- it is derived from and relates directly to the underlying accounting and other records used to prepare the financial statements
- it was subjected to the audit procedures applied in the audit of the financial statements and to certain additional procedures, including comparing and reconciling it to the underlying records and the financial statements
- the auditor's opinion that the supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole
If the auditor has issued an adverse opinion or disclaimed an opinion on the financial statements, the auditor does not express an in-relation-to opinion on the supplementary information. If the supplementary information is materially misstated in relation to the financial statements, the auditor modifies the in-relation-to opinion, and the AICPA's nonauthoritative Technical Questions and Answers section 9160.37 discusses the case where the opinion on the basic financial statements is unmodified. See AU-C 705 and AU-C 700.
The single audit example
The Uniform Guidance requires an in-relation-to opinion on the schedule of expenditures of Federal awards (SEFA). The low-risk auditee test in 2 CFR 200.520 refers to the auditor's in-relation-to opinion on the SEFA being unmodified. That makes AU-C 725 a working standard in every single audit. See the SEFA glossary entry and the single audit threshold.
A worked illustration
Illustrative numbers only. A company with two subsidiaries presents a consolidating schedule of revenue as supplementary information.
| Entity | Revenue |
|---|---|
| Subsidiary A | $800,000 |
| Subsidiary B | $500,000 |
| Intercompany eliminations | ($120,000) |
| Consolidated | $1,180,000 |
The auditor recomputes $800,000 + $500,000 - $120,000 = $1,180,000, agrees consolidated revenue to the audited statements, agrees each subsidiary column to its general ledger and agrees the elimination to the intercompany ledger. If the elimination in the schedule were $100,000, the columns would no longer foot to the audited total, and the schedule would be misstated in relation to the financial statements as a whole. The auditor would ask management to correct it before the report is released, since an uncorrected misstatement forces a modified in-relation-to opinion. The intercompany elimination worksheet supports the tie-out.
Where does it go wrong?
Practice observations, not requirements of the standard:
- Schedules added after fieldwork. A supplementary schedule dropped into the draft at the last minute gets no reconciliation.
- Information not from the books. Budget comparisons or statistics from another system do not satisfy the "derived from the underlying records" test the same way.
- Report wording copied from last year without checking the schedules that actually accompany the statements.
- Opinion expressed when the statements got an adverse opinion or disclaimer.
- No representation that management is responsible for the supplementary information.
- Confusing the sections. A schedule the firm only read belongs under AU-C 720. A schedule the firm opines on belongs under AU-C 725.
Frequently asked questions
Does every schedule in the financial statement package need an AU-C 725 opinion?
No. AU-C 725 applies when the auditor is engaged to report on the supplementary information. If the firm does not report on a schedule, it is other information under AU-C 720.
Can the auditor give an opinion on supplementary information when the financial statement opinion is qualified?
AU-C 725 does not allow an in-relation-to opinion when the auditor has issued an adverse opinion or a disclaimer on the financial statements. A qualified opinion on the statements calls for judgment about the effect on the supplementary information.
Is the SEFA covered by AU-C 725?
Yes. The in-relation-to opinion on the SEFA in a single audit follows this approach.
Where does the in-relation-to paragraph go in the report?
In a separate report on the supplementary information or in a separate section of the auditor's report on the financial statements.
Sources
- AICPA, SAS No. 122 as amended, AU-C section 725, Supplementary Information in Relation to the Financial Statements as a Whole; AU-C 720 and AU-C 730 for the contrasting sections
- AICPA Technical Questions and Answers section 9160.37 (nonauthoritative)
- eCFR, 2 CFR 200.520(b): ecfr.gov
- Deloitte DART, AU-C sections 700 to 799 (AU-C 725 text and interpretations); RSM, "AICPA issues TQA on supplementary information"
Related
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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