The ACFR, MD&A and required supplementary information

In this lesson you will

Describe the introductory, financial and statistical sections of an ACFR
List the schedules that make up required supplementary information
Match each part of the report to the auditor's responsibility for it
Apply the Statement 103 MD&A and budgetary comparison rules

Basic financial statements versus the ACFR

Every government that issues GAAP financial statements presents MD&A, the basic financial statements and notes, and other RSI. Many also publish an annual comprehensive financial report (ACFR), the name GASB Statement No. 98 gave to what used to be called the CAFR. An ACFR wraps the GAAP package in more material, organized in three sections:

Introductory section: letter of transmittal, organization chart, list of principal officials.
Financial section: the auditor's report, MD&A, basic financial statements and notes, RSI other than MD&A, and supplementary information such as combining statements for nonmajor funds and individual fund schedules.
Statistical section: ten-year trend and context information on financial trends, revenue capacity, debt capacity, demographic and economic data, and operating information.

MD&A

Statement 34 introduced MD&A as RSI before the basic financial statements. Statement 103, effective for fiscal years beginning after June 15, 2025, limits MD&A to five sections: Overview of the Financial Statements; Financial Summary; Detailed Analyses; Significant Capital Asset and Long-Term Financing Activity; and Currently Known Facts, Decisions, or Conditions. The detailed analyses must explain why balances and results changed, not repeat amounts or percentages. Boilerplate is to be avoided, duplication across sections is discouraged, and the focus is the primary government, with information about discretely presented component units kept distinct.

Other RSI

RSI schedules include:

Budgetary comparison for the general fund and major special revenue funds with legally adopted budgets. After Statement 103 it is presented only as RSI, with variances between original and final budget and between final budget and actual, and significant variances explained in notes to RSI.
Pension and OPEB schedules covering the 10 most recent fiscal years.
Modified approach infrastructure schedules: the assessed condition for at least the three most recent complete assessments and the estimated versus actual preservation spending for the past five periods.

Auditor responsibilities, piece by piece

Basic financial statements and notes: the auditor expresses opinions on each opinion unit.
RSI (MD&A and other RSI): under AU-C 730, the auditor applies limited procedures: inquiries of management about methods of preparation, comparison with management's responses, the basic financial statements and other knowledge obtained in the audit. The report includes a separate section on RSI. No opinion is expressed. If RSI is omitted or departs from requirements, the report says so, but the opinion on the basic financial statements is not modified for that reason.
Supplementary information (combining and individual fund statements): when the auditor is engaged to report on it, an in-relation-to opinion under AU-C 725.
Introductory and statistical sections: other information under AU-C 720. The auditor reads it and considers whether it is materially inconsistent with the financial statements or with knowledge obtained in the audit, and stays alert for material misstatements of fact.

Practical points

Agree every number in MD&A to the statements and the prior year report.
For budgetary comparisons, agree original and final budgets to the adopted budget and amendments in the minutes, and recompute the variances.
Check that pension and OPEB RSI agrees with the actuarial reports and that the years shown are measurement dates where required.
Keep the statistical section consistent with the debt and revenue notes. Lenders and rating agencies read it closely.
Agree the transmittal letter's descriptions of fund balance, debt and economic conditions to the audited amounts and MD&A. Inconsistent figures between sections force late changes.
Confirm the auditor's report lists the RSI the government presented and states whether any required RSI was omitted.
For fiscal years beginning after June 15, 2024, check the GASB 102 note disclosures for concentrations and constraints; the GASB 102 guide covers the audit approach.

Timing

RSI and the statistical section come last, after fieldwork on the basic statements is done. Build a separate deadline for them in the engagement timeline. The report's RSI section states that limited procedures were applied, and the AU-C 720 reading of the statistical section has to be finished as well, so late drafts hold up the release of the report.

Lesson 1 on the reporting model sets out the full Statement 103 change list.

Worked example

Budgetary comparison RSI for the Cedar Falls general fund

Cedar Falls (June 30 year end) adopts Statement 103 for fiscal 2026. General fund expenditures:

Original budget: $50,000,000
Final budget after two council amendments: $52,500,000
Actual on the budgetary basis: $51,200,000

Variance, original to final: 52,500,000 minus 50,000,000 = $2,500,000 increase. Variance, final to actual: 52,500,000 minus 51,200,000 = $1,300,000 under budget (favorable).

The council amended the budget for a $2,500,000 storm cleanup. The finance team deems both variances significant and explains them in the notes to RSI: the amendment funded the storm response; the $1,300,000 underspend came from vacant police positions.

Auditor steps:

Agree $50,000,000 to the adopted budget ordinance and the two amendments ($1,000,000 and $1,500,000) to council minutes.
Agree $51,200,000 to the budgetary-basis ledger and the reconciliation from budgetary basis to GAAP expenditures.
Recompute both variances.
Read the explanations for consistency with what the audit found.

Conclusion: these are AU-C 730 limited procedures. The auditor's report includes the RSI section stating limited procedures were applied and no opinion is expressed. A misstated variance does not change the opinion on the basic financial statements; if management does not correct a material departure, the auditor describes it in that section.

Self-check

Answer each question before you open the answer.

Name the three sections of an ACFR.
Show answer
Introductory, financial and statistical. Only the financial section holds the audited statements, RSI and supplementary information; the other two are other information.
Does the auditor express an opinion on MD&A?
Show answer
No. MD&A is RSI, so under AU-C 730 the auditor applies limited procedures and describes them in a separate section of the report without expressing an opinion.
What variances does Statement 103 require in budgetary comparison information?
Show answer
Original budget to final budget, and final budget to actual, with significant variances explained in notes to RSI.
What is the auditor's responsibility for the statistical section?
Show answer
It is other information under AU-C 720, so no opinion is expressed. The auditor reads it for material inconsistencies with the audited statements and stays alert for inconsistencies with audit knowledge and for material misstatements of fact.

Sources

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error