Statement on Auditing Standards – SA 720

SA 720 – Statement on Auditing Standards

Scope and objectives

The responsibilities of auditors regarding “other information” that is included in an entity’s annual report, which refers to any financial or non-financial information (excluding financial statements and the auditor’s report) presented in a single document or a combination of documents that serve the same purpose.

The objectives of the auditor in relation to other information are to consider whether there is a material inconsistency between the other information and the financial statements, and whether there is a material inconsistency between the other information and the auditor’s knowledge obtained in the audit. The auditor must respond appropriately when material inconsistencies appear to exist, or when the auditor becomes aware that other information appears to be materially misstated. The auditor must also report in accordance with the SA 720.

The SA 720 applies to audits of financial statements for periods beginning on or after April 1, 2018, and the auditor’s responsibilities apply regardless of whether the other information is obtained by the auditor prior to, or after, the date of the auditor’s report.

The SA 720 does not apply to preliminary announcements of financial information or securities offering documents, including prospectuses. The auditor’s responsibilities under this SA 720 do not constitute an assurance engagement on other information or impose an obligation on the auditor to obtain assurance about the other information.

The SA 720 also provides definitions of terms used, such as “annual report,” which is a document or combination of documents prepared typically on an annual basis by management or those charged with governance in accordance with law, regulation, or custom. It contains or accompanies the financial statements and the auditor’s report thereon and usually includes information about the entity’s developments, future outlook and risks, a statement by the entity’s governing body, and reports covering governance matters. The content and name of an annual report may vary from one law or regulation to another.

Obtaining the Other Information

“Other information” refers to any information other than the financial statements that is included in an entity’s annual report, such as a management discussion and analysis, sustainability report, or press release.

That auditor should take into account when determining which documents constitute the annual report. This may be straightforward in some cases, but in others, it may require an understanding of the intended audience and purpose of the documents. The auditor should communicate with management or those charged with governance to ensure that they obtain the final version of the annual report in a timely manner, and to discuss the possible implications if other information is obtained after the date of the auditor’s report.

SA 720 also notes that the auditor is not responsible for searching for other information that is only available on an entity’s website, nor is the auditor required to update their procedures if other information is obtained after the date of the auditor’s report. However, the auditor may request written representations from management to support their ability to complete the procedures required by this standard. Additionally, the audit engagement letter may include an agreement with management to make the other information available in a timely manner.

Overall, the requirements set out in this SA 720 are intended to ensure that auditors are able to obtain and evaluate other information in a timely and effective manner, and to communicate with management and those charged with governance to ensure that all necessary information is obtained.

Reading and Considering the Other Information

SA 720 includes being sceptical about the information presented by management, recognizing potential inconsistencies with the financial statements or the auditor’s knowledge obtained during the audit.

The auditor must take responsibility for the direction, supervision, and performance of the audit engagement and determine the appropriate engagement team members to address the objectives. Factors such as team members’ relative experience, knowledge, and judgment are taken into account.

The auditor is required to consider whether there is a material inconsistency between the other information and the financial statements, and they are expected to compare selected amounts or other items in the other information with corresponding amounts or items in the financial statements.

Examples of other information include tables, charts, graphs, and disclosures providing greater detail about accounts or balances shown in the financial statements. The auditor’s judgment is required in determining the nature and extent of procedures to address the objectives, including comparing information, obtaining reconciliations, and checking for accuracy.

The auditor’s knowledge obtained during the audit includes understanding the entity and its environment, including its internal controls, industry, regulatory, and external factors, and assessing risks of material misstatement. The auditor is also expected to consider the nature of the other information and the manner of its presentation when evaluating its consistency with the financial statements or the auditor’s knowledge obtained in the audit.

Responding When a Material Inconsistency Appears to Exist or Other Information Appears to Be Materially Misstated

If the auditor identifies a material inconsistency or becomes aware that other information is materially misstated, they must discuss the matter with management and perform additional procedures to determine whether the inconsistency or misstatement is indeed material.

During the discussion with management, the auditor may request that management provide support for the basis of their statements in the other information. Management’s explanations may indicate reasonable and sufficient grounds for valid differences of judgment, or may support the auditor’s conclusion that a material misstatement of the other information exists.

The auditor must exercise professional judgment in determining the nature and extent of other procedures that need to be performed to conclude whether a material misstatement of the other information exists. In some cases, the auditor may need to consult with a qualified third party, such as management’s expert or legal counsel.

If the auditor is unable to conclude that a material inconsistency no longer exists or that the other information is no longer materially misstated, it may indicate that a material misstatement of the other information or the financial statements exists, or that the auditor’s understanding of the entity and its environment needs to be updated.

Responding When the Auditor Concludes That a Material Misstatement of the Other Information Exists

The auditors should take if they conclude that there is a material misstatement in the “other information” included in an entity’s annual report or other financial statements. “Other information” refers to any information outside the financial statements that is included in the entity’s annual report or other documents. If the auditor finds a material misstatement in the other information, they are required to request management to correct it. If management agrees to make the correction, the auditor must verify that the correction has been made. If management refuses to make the correction, the auditor must communicate the matter with those charged with governance (e.g., the board of directors) and request that the correction be made.

If the auditor concludes that a material misstatement exists in other information obtained prior to the date of the auditor’s report, and the other information is not corrected after communicating with those charged with governance, the auditor must take appropriate action, which is a matter of the auditor’s professional judgment. The auditor may consider whether the rationale given by management and those charged with governance for not making the correction raises doubt about their integrity or honesty, and may seek legal advice. In rare circumstances, a disclaimer of opinion on the financial statements may be appropriate if the refusal to correct the material misstatement of the other information casts doubt on the integrity of management and those charged with governance.

If the auditor concludes that a material misstatement exists in other information obtained after the date of the auditor’s report, the auditor must either verify that the correction has been made, or take appropriate action if the other information is not corrected after communicating with those charged with governance. The actions the auditor can take include issuing a new or amended auditor’s report, bringing the material misstatement to the attention of the appointing authority, communicating with the regulator, or considering the implications for engagement continuance. The auditor must exercise professional judgment in determining which action to take.

The Auditor Understands of the Entity and Its Environment Needs to Be Updated

The actions an auditor should take if, while performing an audit, they discover either a material misstatement in the financial statements or a need to update their understanding of the entity and its environment. In either case, the auditor is required to respond appropriately in accordance with other relevant standards.

In addition, while reading other information (outside of the financial statements) during the audit, the auditor may come across new information that could impact their understanding of the entity and its environment. This could require the auditor to revise their risk assessment accordingly. The auditor is also responsible for evaluating the effect of identified misstatements on the audit and of any uncorrected misstatements on the financial statements. Finally, the auditor must also be aware of their responsibilities relating to subsequent events.

Reporting

The SA 720 is required when the auditor has obtained or expects to obtain other information that is subject to the auditor’s responsibilities under the applicable standards.

The “Other Information” section should include a statement that management is responsible for the other information, an identification of any other information obtained by the auditor prior to the date of the report, and an identification of any other information expected to be obtained after the date of the report. The section should also include a statement that the auditor’s opinion does not cover the other information and that the auditor does not express or will not express an audit opinion or any form of assurance conclusion on the other information.

In addition, the section should describe the auditor’s responsibilities relating to reading, considering, and reporting on other information as required by the applicable standards. If the auditor has obtained other information prior to the date of the report, the section should include either a statement that the auditor has nothing to report or, if the auditor has identified an uncorrected material misstatement of the other information, a statement describing the misstatement.

SA 720 also provides guidance on how auditors should approach the “Other Information” section in specific situations, such as when they have expressed a qualified or adverse opinion on the financial statements, when there is a limitation of scope with respect to a material item in the financial statements, or when they have disclaimed an opinion on the financial statements.

Reporting Prescribed by Law or Regulation

The Auditing standards establish a standard format and wording for auditor’s reports, but in some cases, legal or regulatory requirements may mandate a different layout or wording. In such cases, auditors must still include certain elements in their reports to comply with the SA 720, such as identifying the other information obtained by the auditor, describing the auditor’s responsibilities with respect to that information, and explicitly stating the outcome of the auditor’s work for that purpose. If these elements are included, auditors may still refer to the Standards on Auditing even if the layout and wording of the report is specified by legal or regulatory reporting requirements. This promotes consistency and credibility in the global marketplace by making it easier to identify audits that have been conducted in accordance with recognized standards.

Documentation

The auditing standard documentation is requirements issued by the International Auditing and Assurance Standards Board (IAASB). The standard sets out the requirements for auditors to document the work they have performed and the conclusions they have reached during the course of the audit.

The auditor must include two specific types of documentation in their audit documentation for this particular audit engagement:

(a) Documentation of the procedures performed under this SA – This means that the auditor must maintain records of the procedures they carried out in order to comply with SA 2304 in the context of this particular audit engagement. This documentation should demonstrate that the auditor has followed the standard’s requirements with regards to audit documentation.

(b) The final version of the other information on which the auditor has performed the work required under this SA 720 – This means that the auditor should maintain the final version of any other information (documents, records, etc.) on which they have performed work required under this SA. This documentation should demonstrate the auditor’s compliance with the standard’s requirements with regards to the use of other information in the audit process.

 It provided specifies the documentation requirements that the auditor must follow for this specific audit engagement in order to comply with SA 2304. The auditor must maintain records of the procedures performed under the standard and the final version of any other information used in the audit.

The Auditor’s Responsibilities Relating to Other Information

The reporting requirements depend on whether the auditor has obtained some or all of the other information by the date of the auditor’s report. In India, where there are many unlisted entities, auditors may face practical difficulties in obtaining other information for non-corporate entities, as these entities may not be required to issue annual reports containing such information under applicable laws or regulations.

To address this issue, SA 720 (Revised) has been modified to require reporting on other information only for unlisted corporate entities. This means that auditors will not be required to report on other information for unlisted non-corporate entities. However, all other requirements in SA 720 (Revised) will still apply to audits of all unlisted entities.

Overall, the importance of auditors reporting is on other information in annual reports to provide assurance to stakeholders and to maintain the integrity and transparency of financial reporting. The modifications to SA 720 (Revised) in India aim to balance this objective with the practical difficulties faced by auditors in obtaining other information for certain types of unlisted entities.

Examples of Amounts or Other Items that May Be Included in the Other Information

The examples of the types of amounts and other items that may be included in “other information” provided by entities in addition to their financial statements. The list of amounts includes net income, earnings per share, sales and other operating revenues, liquidity and capital resource information, capital expenditures, amounts involved in off-balance sheet arrangements, and financial measures or ratios. The list of other items includes explanations of critical accounting estimates and related assumptions, identification of related parties and descriptions of transactions with them, descriptions of the nature of off-balance sheet arrangements, descriptions of changes in legal or regulatory requirements, management’s qualitative assessments of the impacts of new financial reporting standards, and general descriptions of the business environment and outlook. These examples are not exhaustive, meaning that other types of amounts and other items may also be included in other information.

Quiz: The Auditor’s Responsibilities Relating to Other Information

1. Which of the following is NOT considered “other information” in an entity’s annual report?

a) Financial statements

b) Management discussion and analysis

c) Press release

d) Auditor’s report

Answer: d)

2. True or False: The auditor’s responsibilities regarding other information only apply to financial statements of listed entities.

Answer: False

3. When considering other information, the auditor should:

a) Be sceptical and recognize potential inconsistencies

b) Ignore any inconsistencies and focus only on the financial statements

c) Rely solely on management’s explanations

d) Disregard the nature of the other information

Answer: a)

4. If the auditor identifies a material inconsistency in the other information, they should:

a) Discuss the matter with management and perform additional procedures

b) Ignore the inconsistency as it is not within their responsibility

c) Report the inconsistency directly to regulatory authorities

d) Request management to correct the financial statements

Answer: a)

5. The auditor’s documentation for the audit engagement should include:

a) Only the final version of the other information used in the audit

b) Documentation of the procedures performed under SA 720

c) Management’s representations about the other information

d) Only the financial statements and the auditor’s report

Answer: b)

6. The responsibilities of auditors regarding “other information” in an entity’s annual report exclude which of the following?

a) Financial statements

b) Auditor’s report

c) Management discussion and analysis

d) Regulatory filings

Answer: b)

7. True or False: The auditor’s responsibilities regarding other information apply only to financial statements for periods beginning on or after April 1, 2018.

Answer: True

8. What is the main objective of the auditor in relation to other information?

a) Ensure all information is accurate

b) Verify the reliability of financial statements

c) Evaluate material inconsistencies with financial statements

d) Assess the competence of management

Answer: c)

9. Other information includes which of the following?

a) Preliminary announcements of financial information

b) Auditor’s working papers

c) Prospectuses for securities offerings

d) Minutes of board meetings

Answer: a)

10. The auditor’s knowledge obtained during the audit includes understanding the entity and its environment, which may include:

a) Industry and regulatory factors

b) Political affiliations of management

c) Personal opinions of shareholders

d) Historical stock prices

Answer: a)

Additional question:

11. If a material inconsistency is identified between the other information and the financial statements, the auditor should:

a) Adjust the financial statements to match the other information

b) Disregard the inconsistency and focus on the auditor’s report

c) Discuss the matter with management and perform additional procedures

d) Ignore the inconsistency as it is management’s responsibility

Answer: c)

12. True or False: The auditor is responsible for searching for other information that is only available on an entity’s website.

Answer: False

13. If the auditor concludes that a material misstatement exists in the other information obtained after the date of the auditor’s report, the auditor should:

a) Amend the financial statements accordingly

b) Request management to correct the misstatement

c) Seek legal advice and initiate legal proceedings against management

d) Modify the auditor’s report or take appropriate action

Answer: d)

14. Which of the following is NOT a requirement for the “Other Information” section in the auditor’s report?

a) Identifying any other information obtained by the auditor

b) Describing the auditor’s responsibilities with respect to other information

c) Expressing an opinion on the other information

d) Describing any identified misstatement in the other information

Answer: c)

15. The auditor’s responsibilities regarding other information apply to audits of which entities?

a) Only listed entities

b) Only unlisted entities

c) Both listed and unlisted entities

d) Only government entities

Answer: c)

16. If the auditor discovers a need to update their understanding of the entity and its environment, they should respond appropriately in accordance with:

a) SA 720

b) International Financial Reporting Standards (IFRS)

c) Local tax regulations

d) Industry-specific guidelines

Answer: a)

17. The auditor’s documentation for the audit engagement must include records of:

a) Procedures performed under SA 720

b) Management’s representations about the other information

c) Management’s explanations for any inconsistencies

d) Audit planning meeting minutes

Answer: a)

18. True or False: Auditors are required to report on other information for all types of unlisted entities, regardless of their legal structure or form.

Answer: False

19. If management refuses to correct a material misstatement in the other information, the auditor should:

a) Ignore the misstatement and issue an unqualified opinion

b) Discuss the matter with the external auditors of the entity

c) Communicate the matter with those charged with governance

d) File a complaint with the regulatory authorities

Answer: c)

20. The reporting requirements for other information depend on:

a) The auditor’s personal preference

b) The size of the entity being audited

c) Whether the auditor is a member of a professional body

d) Whether the auditor has obtained or expects to obtain the other information

Answer: d)

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