AU 550: Other Information in Documents Containing Audited Financial Statements

AU-C 720: Other Information in Documents Containing Audited Financial Statements

AU EFFECTIVE DATE AND APPLICABILITY

Original Pronouncement Statement on Auditing Standards (SAS) 118.
Effective Date This statement currently is effective.
Applicability Annual reports or similar documents that are issued to owners or similar stakeholders, and annual reports of governments and organizations for charitable or philanthropic purposes that are available to the public that contain audited financial statements and the auditor’s related report.

AU-C EFFECTIVE DATE AND SUMMARY OF CHANGES

To address practice issues, SAS No. 118, Other Information in Documents Containing Audited Financial Statements, 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. 118 was codified in AU 550 when issued, but was moved to AU-C 720 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

Inconsistency. Information that conflicts with the information contained within the audited financial statements. Such an inconsistency may raise doubts about audit conclusions based on audit evidence that was previously obtained, and possibly about the basis for the auditor’s opinion on the financial statements.

Other information. Both financial and nonfinancial information (not including the financial statements and related auditor’s report) that is included in a document that contains audited financial statements and the auditor’s related report. It does not include required supplementary information. Examples of other information are financial summaries, employment data, planned capital expenditures, financial ratios, the names of officers and directors, and selected quarterly data.

Misstatement of fact. Other information unrelated to matters appearing in the audited financial statements that is incorrectly stated or presented. If this misstatement is material, it can undermine the credibility of a document that also contains audited financial statements.

AU-C DEFINITIONS OF TERMS

Source: AU-C 720.05

Inconsistency. Other information that conflicts with information contained in the audited financial statements. A material inconsistency may raise doubt about the audit conclusions drawn from audit evidence previously obtained and, possibly, about the basis for the auditor’s opinion on the financial statements.

Misstatement of fact. Other information that is unrelated to matters appearing in the audited financial statements that is incorrectly stated or presented. A material misstatement of fact may undermine the credibility of the document containing audited financial statements.

Other information. Financial and nonfinancial information (other than the financial statements and the auditor’s report thereon) that is included in a document containing audited financial statements and the auditor’s report thereon, excluding required supplementary information.

OBJECTIVES OF AU SECTION 550

A document containing audited financial statements and the associated auditor’s report may include other information that could undermine the credibility of the financial statement and auditor’s report. This section describes the steps that an auditor should follow to ascertain the presence of material inconsistencies or material misstatements of facts in this other information, and subsequent steps, required if such issues do exist.

OBJECTIVE OF AU-C SECTION 720

AU-C Section 720.04 states that:

. . . the objective of the auditor is to respond appropriately when the auditor becomes aware that documents containing audited financial statements and the auditor’s report thereon include other information that could undermine the credibility of those financial statements and the auditor’s report.

FUNDAMENTAL REQUIREMENTS

The auditor should take the following steps:

1. Read other information. Read the other information in the document, looking for any inconsistencies with the audited financial statements. The auditor should obtain this information from management or those charged with governance prior to the report release date; if the information is not available prior to the report release date, then read the information as soon as practicable thereafter.
NOTE: The auditor may delay the release of the auditor’s report until management provides the other information to the auditor.
2. Procedures. Inform those charged with governance of the auditor’s responsibility regarding the other information, as well as any procedures performed on it and the results.
3. Treatment of material inconsistencies. If there is a material inconsistency in the other information, determine whether the audited financial statements or the other information should be revised. Use the following table to select the correct treatment, which assume that the report has not yet been released:
Situation Auditor Action
There is a material inconsistency that requires revision of the financial statements, and management refuses to make the revision. Modify the auditor’s opinion in accordance with Section 508, Reports on Audited Financial Statements.
There is a material inconsistency that requires revision of the other information and management refuses to make the revision. Communicate the issue to those charged with governance. Also, either include in the auditor’s report an explanation of the material inconsistency, or withhold the auditor’s report, or withdraw from the engagement.
If the report has already been released, then instead use the following table to select the correct treatment:
Situation Auditor Action
There is a material inconsistency that requires revision of the financial statements Apply Section 561, Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report
There is a material inconsistency that requires revision of the other information and management agrees to make the revision. Complete those procedures necessary under the circumstances.
There is a material inconsistency that requires revision of the other information management refuses to make the revision. Notify those charged with governance, and take further actions as appropriate.
NOTE: When management agrees to make a revision to a document that has already been issued, the auditor may review the steps taken by management to ensure that those in receipt of the previous document version are informed of the need for a revised document.
4. Treatment of material misstatements. If there is a material misstatement of fact, discuss the situation with management. Then, if there is still an apparent material misstatement of fact, ask management to consult with a qualified third party; the auditor should consider any advice received from this third party. If there is still a material misstatement of fact and management refuses to correct it, then notify those charged with governance of the situation, and take further actions as appropriate.
NOTE: Following discussion of an apparent material misstatement of fact with management, the auditor may conclude that there are valid differences of judgment or opinion.

INTERPRETATIONS

There are no interpretations for this section.

ILLUSTRATION

It is not necessary to reference the other information in the auditor’s report on the financial statements. However, if the auditor believes that he or she could be associated with the information, this may imply a level of assurance that the auditor did not intend. Accordingly, consider using the disclaimer in Illustration 1 to disclaim an opinion on the other information.

Illustration 1. Explanatory Paragraph to Disclaim an Opinion on Other Information (From AU 550.A13 AND AU-C 720.A13).
Our audit was conducted for the purpose of forming an opinion on the basic financial statements as a whole. The [identify the other information] is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on it.
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