AT 701: Management’s Discussion and Analysis (MD&A)—A Summary1,2

EFFECTIVE DATE AND APPLICABILITY

Original Pronouncement Statements on Standards for Attestation Engagements (SSAE) 10, Attestation Standards: Revision and Recodification.
Effective Date This statement currently is effective.
Applicability When a practitioner is engaged by a public entity that prepares Management’s Discussion and Analysis (MD&A) in accordance with the rules and regulations adopted by the Securities and Exchange Commission (SEC) (or a nonpublic entity following the same requirements) to either perform an examination or review of MD&A. A practitioner engaged to perform agreed-upon procedures on MD&A should follow the guidance in Section 201.

DEFINITION OF TERM

MD&A. Management’s Discussion and Analysis of Financial Condition and Results of Operations adopted by the SEC and found in Item 303 of Regulation S-K, as interpreted by Financial Reporting Release (FRR) 36.

OBJECTIVES OF AT SECTION 701

The SEC adopted requirements for MD&A in 1974 to have management provide a narrative explanation of the financial statements. The idea was to allow the user to see the company’s financial position and operating results through management’s eyes.

Two levels of service are possible—an examination or a review. A review report is restricted as to use and is not intended to be filed with the SEC. An examination report is intended for general use, but at this stage, whether there will be a significant demand for this service is unknown. The SEC does not require a practitioner’s report on MD&A—the narrative presentation is management’s responsibility and not a part of the audited financial statements.

According to AT 701.05, the practitioner’s objective in an examination of MD&A is to express an opinion on the presentation taken as a whole by reporting whether:

1. The presentation includes, in all material respects, the required elements of the rules and regulations adopted by the SEC.
2. The historical financial amounts included in the presentation have been accurately derived, in all material respects, from the entity’s financial statements.
3. The underlying information, determinations, estimates and assumptions of the entity provide a reasonable basis for the disclosures contained in the presentation.

The objective of a review of MD&A is to provide negative assurance on these three items.

NOTE: “Negative assurance” indicates that no information came to the accountant’s attention that would cause him or her not to believe the three statements.

An examination of MD&A would generally be expected to relate to the MD&A for annual periods, but a review might relate to the MD&A for annual or interim periods or some combination.

In an examination, the practitioner seeks to obtain reasonable assurance by accumulating sufficient evidence to support the disclosures and assumptions, thus limiting attestation risk to an appropriately low level. A review consists principally of applying analytical procedures and making inquiries and does not provide assurance that a practitioner would become aware of all significant matters that would be disclosed in an examination.

In 2001 the Auditing Standards Board issued SSAE 10, Attestation Standards: Revision and Recodification. SSAE 10 superseded SSAEs 1 through 9 and renumbered the AT sections in the American Institute of Certified Public Accountants’ (AICPA’s) Codification. SSAE 10 made only minor changes to this section, including modifying the reports in this section to conform to changes made by Statement on Auditing Standards (SAS) 93, Omnibus Statement on Auditing Standards—2000.

FUNDAMENTAL REQUIREMENTS: EXAMINATION

Acceptance

To accept an engagement to examine MD&A, the practitioner should audit the financial statements for at least the latest period to which the MD&A presentation relates and the financial statements for the other periods covered by the MD&A presentation should have been audited by the practitioner or a predecessor auditor.

Performance

According to AT 701.41, the practitioner should do the following:

1. Obtain an understanding of the rules and regulations adopted by the SEC for MD&A and management’s method of preparing MD&A.
2. Plan the engagement by developing an overall strategy considering factors such as matters affecting the entity’s industry and similar knowledge obtained during the audit of financial statements.
3. Consider relevant portions of internal control applicable to the preparation of MD&A.
4. Obtain sufficient evidence, including testing completeness, by comparing the content of the MD&A to the information obtained in the audit of financial statements and considering whether the explanations in the MD&A are consistent with this information.
5. Consider the effect of events subsequent to the balance sheet date by extending subsequent events review procedures in the audit to the MD&A information.
6. Obtain written representations from management concerning its responsibility for MD&A, completeness of minutes, events subsequent to the balance sheet date, and other matters the practitioner considers relevant to the MD&A presentation.
7. Form an opinion about whether the MD&A presentation meets the objectives for an opinion on such a presentation.

Reporting

The financial statements for the periods covered by the MD&A presentation and the related auditors’ report should accompany the presentation or be incorporated by reference to information filed with a regulatory agency.

The report should include the elements as found in the example in Illustration 1.

FUNDAMENTAL REQUIREMENTS: REVIEW

Acceptance

A practitioner may accept an engagement to review an MD&A presentation for an annual period under the same circumstances as an examination.

To accept an engagement to review the MD&A presentation for an interim period, both of the following points should occur:

1. The practitioner should either:
a. Review and report on the historical financial statements for the related comparative interim periods or
b. Audit the interim financial statements
2. The practitioner or a predecessor auditor either has already or will examine the MD&A presentation for the most recent fiscal year.

Performance

According to AT 701.76, the practitioner should do the following:

1. Obtain an understanding of the rules and regulations adopted by the SEC for MD&A and management’s method of preparing MD&A.
2. Plan the engagement, considering factors such as matters affecting the industry, the types of information management reports to external analysts, and matters identified during the audit or review of historical financial statements.
3. Consider relevant portions of the entity’s internal control applicable to the MD&A.
4. Apply analytical procedures and make inquiries of management and others.
5. Consider the effects of events subsequent to the balance sheet date.
6. Obtain written representations from management.
7. Form a conclusion as to whether any information came to the practitioner’s attention that would cause him or her to believe the objectives related to the MD&A presentation were not achieved.

Reporting

The financial statements for the periods covered by the MD&A presentation and the related auditors’ or accountants’ reports should accompany the presentation or be incorporated by reference to information filed with a regulatory agency.

The report should include the elements as found in the examples in Illustrations 2 and 3.

INTERPRETATIONS

There are no interpretations for this section.

ILLUSTRATIONS

The following reports are adapted from SSAE 10:3

1. An illustration of the wording of a standard examination report
2. A standard review report on an annual MD&A presentation
3. A standard review report on an MD&A presentation for an interim period
Illustration 1. Standard Examination Report
Report of Independent Registered Public Accounting Firm
To the Audit Committee, Board of Directors, and Shareholders
Widget Company
Main City, USA
We have examined Widget Company’s Management’s Discussion and Analysis taken as a whole, included [incorporated by reference] in the Company’s [insert description of registration statement or document]. Management is responsible for the preparation of the Company’s Management’s Discussion and Analysis pursuant to the rules and regulations adopted by the Securities and Exchange Commission. Our responsibility is to express an opinion on the presentation based on our examination. We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the financial statements of Widget Company as of December 31, 20X2 and 20X1, and for each of the years in the three-year period ended December 31, 20X2; in our report dated February 15, 20X3, we expressed an unqualified opinion on those financial statements.4
Our examination of Management’s Discussion and Analysis was conducted in accordance with attestation standards established by the Public Company Accounting Oversight Board and, accordingly, included examining, on a test basis, evidence supporting the historical amounts and disclosures in the presentation. An examination also includes assessing the significant determinations made by management as to the relevancy of information to be included and the estimates and assumptions that affect reported information. We believe that our examination provides a reasonable basis for our opinion.
The preparation of Management’s Discussion and Analysis requires management to interpret the criteria, make determinations as to the relevancy of information to be included, and make estimates and assumptions that affect reported information. Management’s Discussion and Analysis includes information regarding the estimated future impact of transactions and events that have occurred or are expected to occur, expected sources of liquidity and capital resources, operating trends, commitments, and uncertainties. Actual results in the future may differ materially from management’s present assessment of this information because events and circumstances frequently do not occur as expected.5
In our opinion, the Company’s presentation of Management’s Discussion and Analysis includes, in all material respects, the required elements of the rules and regulations adopted by the Securities and Exchange Commission; the historical financial amounts included therein have been accurately derived, in all material respects, from the Company’s financial statements; and the underlying information, determinations, estimates, and assumptions of the Company provide a reasonable basis for the disclosures contained therein.
Smith and Jones
Honolulu, Hawaii
March 1, 20X3
Illustration 2. Standard Review Report on an Annual MD&A Presentation
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Widget Company
Main City, USA
We have reviewed Widget Company’s Management’s Discussion and Analysis taken as a whole, included [incorporated by reference] in the Company’s [insert description of registration statement or document]. Management is responsible for the preparation of the Company’s Management’s Discussion and Analysis pursuant to the rules and regulations adopted by the Securities and Exchange Commission. We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the financial statements of Widget Company as of December 31, 20X2 and 20X1, and for each of the years in the three-year period ended December 31, 20X2, and in our report dated February 15, 20X3, we expressed an unqualified opinion on those financial statements.
We conducted our review of Management’s Discussion and Analysis in accordance with attestation standards established by the Public Company Accounting Oversight Board. A review of Management’s Discussion and Analysis consists principally of applying analytical procedures and making inquiries of persons responsible for financial, accounting, and operational matters. It is substantially less in scope than an examination, the objective of which is the expression of an opinion on the presentation. Accordingly, we do not express such an opinion.
The preparation of Management’s Discussion and Analysis requires management to interpret the criteria, make determinations as to the relevancy of information to be included, and make estimates and assumptions that affect reported information. Management’s Discussion and Analysis includes information regarding the estimated future impact of transactions and events that have occurred or are expected to occur, expected sources of liquidity and capital resources, operating trends, commitments, and uncertainties. Actual results in the future may differ materially from management’s present assessment of this information because events and circumstances frequently do not occur as expected.6
Based on our review, nothing came to our attention that caused us to believe that the Company’s presentation of Management’s Discussion and Analysis does not include, in all material respects, the required elements of the rules and regulations adopted by the Securities and Exchange Commission; that the historical financial amounts included therein have not been accurately derived, in all material respects, from the Company’s financial statements; or that the underlying information, determinations, estimates, and assumptions of the Company do not provide a reasonable basis for the disclosures contained therein.
This report is intended solely for the information and use of [list or refer to the specified parties] and is not intended to be, and should not be, used by anyone other than the specified parties.
Smith and Jones
March 1, 20X3
Illustration 3. Standard Review Report on an Interim MD&A Presentation
Report of Independent Registered Public Accounting Firm
To the Audit Committee, Board of Directors, and Shareholders
Widget Company
Main City, USA
We have reviewed Widget Company’s Management’s Discussion and Analysis taken as a whole, included in the Company’s [insert description of registration statement or document]. Management is responsible for the preparation of the Company’s Management’s Discussion and Analysis pursuant to the rules and regulations adopted by the Securities and Exchange Commission. We have reviewed, in accordance with the standards of the Public Company Accounting Oversight Board, the interim financial information of Widget Company as of June 30, 20X3 and 20X2, and for the three-month and six-month periods then ended and have issued our report thereon dated July 15, 20X3.
We conducted our review of Management’s Discussion and Analysis in accordance with attestation standards established by the Public Company Accounting Oversight Board. A review of Management’s Discussion and Analysis consists principally of applying analytical procedures and making inquiries of persons responsible for financial, accounting, and operational matters. It is substantially less in scope than an examination, the objective of which is the expression of an opinion on the presentation. Accordingly, we do not express such an opinion.
The preparation of Management’s Discussion and Analysis requires management to interpret the criteria, make determinations as to the relevancy of information to be included, and make estimates and assumptions that affect reported information. Management’s Discussion and Analysis includes information regarding the estimated future impact of transactions and events that have occurred or are expected to occur, expected sources of liquidity and capital resources, operating trends, commitments, and uncertainties. Actual results in the future may differ materially from management’s present assessment of this information because events and circumstances frequently do not occur as expected.7
Based on our review, nothing came to our attention that caused us to believe that the Company’s presentation of Management’s Discussion and Analysis does not include, in all material respects, the required elements of the rules and regulations adopted by the Securities and Exchange Commission; that the historical financial amounts included therein have not been accurately derived, in all material respects, from the Company’s financial statements; or that the underlying information, determinations, estimates, and assumptions of the Company do not provide a reasonable basis for the disclosures contained therein.
This report is intended solely for the information and use of [list or refer to the specified parties] and is not intended to be, and should not be, used by anyone other than the specified parties.
Smith and Jones
March 1, 20X3

1 The SSAE on examination or review of MD&A is essentially a detailed manual on how to perform examinations and reviews, and only the highlights are summarized here. A practitioner seeking to provide these services should refer to SSAE 10 and the SEC’s rules and regulations on MD&A. Only the considerations for a public entity are covered here. The considerations for a nonpublic entity are very similar because only the SEC has, at this point, issued rules and regulations that provide guidance on the presentation of MD&A.

2 Practitioners should be aware that, on April 15, 2002, the SEC issued “Commission Statement about Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The release sets forth certain views of the SEC regarding disclosures that should be considered by registrants. Disclosure matters covered in the release are liquidity and capital resources, including off-balance-sheet arrangements; certain trading activities that include nonexchange traded contracts accounted for at fair value; and the effects of transactions with related and certain other parties. The release can be found on the SEC’s website at www.sec.gov.

3 If the entity is a nonissuer and complies with GAAS rather than the standards of the PCAOB, the references in the report to the PCAOB’s standards should be changed to refer to “auditing standards generally accepted in the United States of America” and “attestation standards established by the American Institute of Certified Public Accountants.”

4 If prior financial statements were audited by other auditors, this sentence would be replaced by the following:

We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the financial statements of Widget Company as of and for the year ended December 31, 20X2, and in our report dated Month XX, 20X3, we expressed an unqualified opinion on those financial statements. The financial statements of Widget Company as of December 31, 20X1, and for each of the years in the two-year period then ended were audited by other auditors, whose report dated Month XX, 20X2, expressed an unqualified opinion on those financial statements.

If the practitioner’s opinion on the financial statements is based on the report of other auditors, this sentence would be replaced by the following:

We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the financial statements of Widget Company as of December 31, 20X2 and 20X1, and for each of the years in the three-year period ended December 31, 20X2, and in our report dated Month XX, 20X3, we expressed an unqualified opinion on those financial statements based on our audits and the report of other auditors.

5 The following sentence should be added to the beginning of the explanatory paragraph if the entity is a nonpublic entity:

Although Widget Company is not subject to the rules and regulations of the Securities and Exchange Commission, the accompanying Management’s Discussion and Analysis is intended to be a presentation in accordance with the rules and regulations adopted by the Securities and Exchange Commission.

6 The following sentence should be added to the beginning of the explanatory paragraph if the entity is a nonpublic entity:

Although Widget Company is not subject to the rules and regulations of the Securities and Exchange Commission, the accompanying Management’s Discussion and Analysis is intended to be a presentation in accordance with the rules and regulations adopted by the Securities and Exchange Commission.

7 The following sentence should be added to the beginning of the explanatory paragraph if the entity is a nonpublic entity:

Although Widget Company is not subject to the rules and regulations of the Securities and Exchange Commission, the accompanying Management’s Discussion and Analysis is intended to be a presentation in accordance with the rules and regulations adopted by the Securities and Exchange Commission.

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