AU 558: Required Supplementary Information
AU-C 730: Required Supplementary Information
AU EFFECTIVE DATE AND APPLICABILITY
| Original Pronouncement |
Statement on Auditing Standards (SAS) 120. |
| Effective Date |
These standards currently are effective. |
| Applicability |
Audits of financial statements that are required to be accompanied by certain supplementary information. |
AU-C EFFECTIVE DATE AND SUMMARY OF CHANGES
To address practice issues, SAS No. 120, Required Supplementary Information, was one of the clarified standards issued before SAS No. 122. It was issued in February 2010 and is effective for audits of financial statements for periods beginning on or after December 15, 2010.
SAS No. 120 was codified in AU 558 when issued, but was moved to AU-C 730 with the issuance of SAS No. 122. Some conforming changes were made in specific paragraphs and footnotes due to the issuance of SAS No. 122, but no substantive changes were made.
AU DEFINITIONS OF TERMS
Applicable financial reporting framework. The financial reporting framework that has been adopted by management for the preparation of its financial statements.
Basic financial statements. Financial statements that are presented in accordance with an applicable financial reporting framework established by a designated accounting standard setter.
Designated accounting standard setter. A body designated by the American Institute of Certified Public Accountants (AICPA) council to establish GAAS, which are the Financial Accounting Standards Board (FASB), the Governmental Accounting Standards Board (GASB), the Federal Accounting Standards Advisory Board (FASAB), and the International Accounting Standards Board (IASB).
Required supplementary information. Additional reporting required by a designated accounting standard setter that accompanies an entity’s basic financial statements. The designated accounting standard setter considers this supplementary information to be essential for placing the basic financial statements in an appropriate context.
AU-C DEFINITIONS OF TERMS
Source: AU-C 730.04
Applicable financial reporting framework. The financial reporting framework adopted by management and, when appropriate, those charged with governance in the preparation and fair presentation of the financial statements that is acceptable in view of the nature of the entity and the objective of the financial statements, or that is required by law or regulation.
Basic financial statements. Financial statements presented in accordance with an applicable financial reporting framework as established by a designated accounting standards setter, excluding required supplementary information.
Designated accounting standards setter. A body designated by the Council of the AICPA to promulgate generally accepted accounting principles (GAAP) pursuant to Rule 202, Compliance with Standards (ET sec. 202 par. .01), and Rule 203, Accounting Principles (ET sec. 203 par. .01) of the AICPA Code of Professional Conduct.
Prescribed guidelines. The authoritative guidelines established by the designated accounting standards setter for the methods of measurement and presentation of the required supplementary information.
Required supplementary information. Information that a designated accounting standards setter requires to accompany an entity’s basic financial statements. Required supplementary information is not part of the basic financial statements; however, a designated accounting standards setter considers the information to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. In addition, authoritative guidelines for the methods of measurement and presentation of the information have been established.
OBJECTIVES OF AU SECTION 558
An accounting standard setter may require that certain information accompany an entity’s financial statements. This section addresses the auditor’s responsibility to perform certain procedures in order to communicate whether some or all of the supplementary information has not been presented in accordance with the guidelines promulgated by the accounting standard setter, or when material modifications should be made to the supplementary information.
OBJECTIVES OF AU-C SECTION 730
AU-C 730.03 states that:
. . . the objectives of the auditor when a designated accounting standards setter requires information to accompany an entity’s basic financial statements are to perform specified procedures in order to
a. describe, in the auditor’s report, whether required supplementary information is presented and
b. communicate therein when some or all of the required supplementary information has not been presented in accordance with guidelines established by a designated accounting standards setter or when the auditor has identified material modifications that should be made to the required supplementary information for it to be in accordance with guidelines established by the designated accounting standards setter.
FUNDAMENTAL REQUIREMENTS
Procedures
The auditor should apply these procedures to required supplementary information:
1. Preparation methods. Make inquiries regarding the preparation of supplementary information. This should include whether the information is being measured and presented in accordance with specific guidelines, whether these methods have changed and the reasons for doing so, and whether there were any significant assumptions underlying these methods.
2. Consistency review. Compare the information for consistency with the responses to the inquiries in step 1, as well as to the basic financial statements and other knowledge obtained during the basic financial statements audit.
3. Written representations. Obtain written representations from management that it acknowledges its responsibility for the required supplementary information, that the information is measured and presented in accordance with specific guidelines, whether these methods have changed and the reasons for doing so, and regarding any significant assumptions underlying these methods.
NOTE: If the auditor cannot complete these procedures due to significant difficulties in dealing with management, then inform those charged with governance.
Reporting on Supplementary Information
Include an explanatory paragraph in the auditor’s report, after the opinion paragraph that refers to the supplementary information. This paragraph should explain the following items, as applicable:
1. The required supplementary information is included, and the auditor has applied the procedures noted above. If so, state that the applicable financial reporting framework requires that the supplementary information be presented to supplement the basic financial statements. Also, state that such information, although not a part of the basic financial statements, is required by the designated accounting standard setter, which considers it to be an essential part of financial reporting for placing the context. Further, state that the auditor has applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to the auditor’s inquiries, the basic financial statements, and other knowledge the auditor obtained during the audit of the basic financial statements. Finally, state that the auditor does not express an opinion or provide any assurance on the information, because the limited procedures do not provide the auditor with sufficient evidence to express an opinion or provide any assurance.
2. The required supplementary information is omitted. If so, state that management has omitted the information that is required to be presented by the designated accounting standard setter. Also, state that such missing information, although not a part of the basic financial statements is required by the designated accounting standard setter, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Finally, state that the auditor’s opinion on the basic financial statements is not affected by the missing information.
3. Some required supplementary information is missing and some is presented in accordance with the guidelines. If so, state that management has omitted information that the designated accounting standard setter requires be presented to supplement the basic financial statements. Also state that such missing information, although not a part of the basic financial statements, is required by the designated accounting standard setter, which considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Finally, state that the auditor’s opinion on the basic financial statements is not affected by the missing information.
4. There are material departures from the guidelines. If so, state that although the auditor’s opinion on the basic financial statements is not affected, there are material departures from the guidelines (and describe the material departures).
5. The auditor was unable to complete the procedures noted above. If so, state that the auditor was unable to apply certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States, and state the reasons. Also state that the auditor does not express an opinion or provide any assurance on the information.
6. The auditor has unresolved doubts about whether the supplementary information is presented in accordance with the guidelines. If so, state that although the auditor’s opinion on the basic financial statements is not affected, the results of the limited procedures have raised doubts about whether material modifications should be made to the required supplementary information for it to be presented in accordance with the guidelines established the designated accounting standard setter.
NOTE: Required supplementary information is not part of the basic financial statements, so the auditor’s opinion on the fairness of presentation of financial statements is not affected by the presentation of the supplementary information or the failure to present some or all of it.
Examples of the above variations on the auditor’s report regarding required supplementary information are noted below under “Illustrations.”
INTERPRETATIONS
Supplementary Oil and Gas Information (February 1989; Revised June 2009)
FASB ASC 932-235, Extractive Activities—Oil and Gas Notes to Financial Statements, requires that publicly traded entities with significant oil- and gas-producing activities include, with complete sets of annual financial statements, disclosures of proved oil and gas reserve quantities, changes in reserve quantities, a standardized measure of discounted future net cash flows relating to reserve quantities, and changes in the standardized measure. The SEC requires that the disclosures related to annual periods be presented for each annual period for which an income statement is required and the disclosures as of the end of an annual period be presented as of the date of each audited balance sheet required. These disclosures are supplementary information and may be presented outside the basic financial statements. In these circumstances, the auditor should consider the provisions of this section.
When making the inquiries in this section, the auditor’s inquiries should be directed to management’s understanding of the specific requirements for disclosure of supplementary oil and gas reserve information, including the following from AU 9558.04–.05:
1. The factors considered in determining the reported reserve quantity information, such as including in the information the following:
a. Quantities of all domestic and foreign proved oil and gas reserves owned by the entity net of interests of others.
b. Reserves attributable to consolidated subsidiaries.
c. A proportionate share of reserves of investees that are proportionately consolidated.
d. Reserves relating to royalty interests owned.
2. The separate disclosure of items such as the following:
a. The entity’s share of oil and gas produced from royalty interests for which reserve quantity information is unavailable.
b. Reserves subject to long-term agreements with governments or authorities in which the entity participates in the operation or otherwise serves as producer.
c. The entity’s proportional interest in reserves of investees accounted for by the equity method.
d. Subsequent events, important economic factors, or significant uncertainties affecting particular components of the reserve quantity information.
e. Whether the entity’s reserves are located entirely within its home country.
f. Whether certain named governments restrict the disclosure of reserves or require that the reserve estimates include reserves other than proved.
3. The factors considered in determining the standardized measure of discounted future net cash flows to be reported.
The auditor should also do the following:
1. Inquire about whether the person who estimated the entity’s reserve quantity information has appropriate qualifications (see Section 336, Using the Work of a Specialist).
2. Compare the entity’s recent production with its reserve estimates for properties that have significant production or significant reserve quantities and inquire about disproportionate ratios.
3. Compare the entity’s reserve quantity information with the corresponding information used for depletion and amortization, and make inquiries when differences exist.
4. Inquire about the calculation of the standardized measure of discounted future net cash flows. These inquiries might include matters such as the following:
a. The prices used to develop future cash inflows from estimated production of the proved reserves are based on prices received at the end of the entity’s fiscal year and whether the calculation of future cash inflows appropriately reflects the terms of sales contracts and applicable governmental laws and regulations.
b. The entity’s estimate of the nature and timing of future development of the proved reserves and the future rates of production are consistent with available development plans.
c. The entity’s estimates of future development and production costs are based on year-end costs and assumed continuation of existing economic conditions.
d. Future income tax expenses have been computed using the appropriate year-end statutory tax rates, with consideration of future tax rates already legislated, after giving effect to the tax basis of the properties involved, permanent differences, and tax credits and allowances.
e. The future net cash flows have been appropriately discounted.
f. With respect to full cost companies, the estimated future development costs are consistent with the corresponding amounts used for depletion and amortization purposes.
g. With respect to the disclosure of changes in the standardized measure of discounted future net cash flows, the entity has computed and presented the sources of the changes in conformity with the requirements of FASB Accounting Standards Codification (ASC) 932-235.
5. Inquire about whether the methods and bases for estimating the entity’s reserve information are documented and whether the information is current.
If the auditor believes that the information may not be presented within applicable guidelines, he or she should ordinarily make additional inquiries. However, the auditor may not be able to evaluate responses to the additional inquiries. In these circumstances, the auditor should report as follows from AU 9558.06:
TECHNIQUES FOR APPLICATION
Coordination with Other Audit Areas
The auditor should coordinate the application of procedures to supplementary information with procedures applied in other areas. For example, for an entity engaged in oil- and gas-producing activities, the entity might be required to pay state or federal taxes on oil and gas produced in particular geographical areas. In this circumstance, the auditor would want to coordinate work on tax expense and payables and segment disclosures with work on the required supplementary oil and gas information.
AU ILLUSTRATIONS
The following examples from AU 558 illustrate the separate explanatory paragraphs that might be added to the standard report in the indicated circumstances.
Illustration 1. Supplementary Information is Included and Procedures Were Performed
[Identify the applicable financial reporting framework] require that the [identify the required supplementary information] on page XX be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by [identify the designated accounting standard setter] who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.
Illustration 2. All Required Supplementary Information Omitted
Management has omitted [describe the missing required supplementary information] that [identify the applicable financial reporting framework] require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by [identify designated accounting standard setter] who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.
Illustration 3. Some Required Supplementary Information is Omitted and Some is Presented in Accordance with the Prescribed Guidelines
[Identify the applicable financial reporting framework] require that [identify the included supplementary information] be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by [identify designated accounting standard setter], who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with evidence sufficient to express an opinion or provide any assurance.
Management has omitted [describe the missing required supplementary information] that [identify the applicable financial reporting framework] require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by [identify designated accounting standard setter] who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operation, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.
Illustration 4. Material Departures from Prescribed Guidelines Identified
[Identify the applicable financial reporting framework] require that [identify the supplementary information] on page XX be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by [identify designated accounting standard setter] who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. Although our opinion on the basic financial statements is not affected, the following material departures from the prescribed guidelines exist [identify the required supplementary information and describe the material departures from the prescribed guidelines]. We do not express an opinion or provide any assurance on the information.
Illustration 5. Specified Procedures Not Completed
[Identify the applicable financial reporting framework] require that the [identify the supplementary information] on page XX be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by [identify designated accounting standard setter], who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We were unable to apply certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America because [state the reasons]. We do not express an opinion or provide any assurance on the information.
Illustration 6. Unresolved Doubts about Whether the Required Supplementary Information Is in Accordance with Prescribed Guidelines
[Identify the applicable financial reporting framework] require that the [identify the supplementary information] on page XX be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by [identify designated accounting standard setter] who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Although our opinion on the basic financial statements is not affected, the results of the limited procedures have raised doubts about whether material modifications should be made to the required supplementary information for it to be presented in accordance with guidelines established by [identify designated accounting standard setter].
AU-C 730 ILLUSTRATIONS
The following examples from AU-C 730 illustrate the separate explanatory paragraphs that might be added to the standard report in the indicated circumstances.
Illustration 1. The Required Supplementary Information is Included, the Auditor Has Applied the Specified Procedures, and No Material Departures from Prescribed Guidelines Have Been Identified
[Identify the applicable financial reporting framework (for example, accounting principles generally accepted in the United States of America)] require that the [identify the required supplementary information] on page XX be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by [identify designated accounting standards setter], who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.
Illustration 2. All Required Supplementary Information Omitted
Management has omitted [describe the missing required supplementary information] that [identify the applicable financial reporting framework (for example, accounting principles generally accepted in the United States of America)] require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by [identify designated accounting standards setter] who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.
Illustration 3. Some Required Supplementary Information is Omitted and Some Is Presented in Accordance with the Prescribed Guidelines
[Identify the applicable financial reporting framework (for example, accounting principles generally accepted in the United States of America)] require that [identify the included supplementary information] be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by [identify designated accounting standards setter] who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with evidence sufficient to express an opinion or provide any assurance.
Management has omitted [describe the missing required supplementary information] that [identify the applicable financial reporting framework] require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by [identify designated accounting standards setter] who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.
Illustration 4. Material Departures from Prescribed Guidelines Identified
[Identify the applicable financial reporting framework (for example, accounting principles generally accepted in the United States of America)] require that the [identify the supplementary information] on page XX be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by [identify designated accounting standards setter], who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements.
Although our opinion on the basic financial statements is not affected, the following material departures from the prescribed guidelines exist [identify the required supplementary information and describe the material departures from the prescribed guidelines]. We do not express an opinion or provide any assurance on the information.
Illustration 5. Specified Procedures Not Completed
[Identify the applicable financial reporting framework (for example, accounting principles generally accepted in the United States of America)] require that the [identify the supplementary information] on page XX be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by [identify designated accounting standards setter] who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We were unable to apply certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America because [state the reasons]. We do not express an opinion or provide any assurance on the information.
Illustration 6. Unresolved Doubts About Whether the Required Supplementary Information Is In Accordance with Prescribed Guidelines
[Identify the applicable financial reporting framework (for example, accounting principles generally accepted in the United States of America)] require that the [identify the supplementary information] on page XX be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by [identify designated accounting standards setter] who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Although our opinion on the basic financial statements is not affected, the results of the limited procedures have raised doubts about whether material modifications should be made to the required supplementary information for it to be presented in accordance with guidelines established by [identify designated accounting standards setter]. [The auditor may consider including in the report the reason(s) he or she was unable to resolve his or her doubts.]
