By Troy Y. Manning, CPA In February 2010, the Auditing Standards Board issued Statements on Auditing Standards (SAS) No. 118, 119 and 120. These standards establish presumptively mandatory requirements that define the auditor’s responsibilities related to other information in documents containing audited financial statements; reporting on supplementary information in relation to the financial statement as a whole; and required supplementary information. The effective date of these standards is for audits of financial statements for periods beginning on or after Dec. 15, 2010. This standard defines the auditor’s responsibilities when he or she becomes aware that documents containing audited financial statements and the auditor’s report thereon also include other information that could undermine the credibility of the financial statements and the auditor’s report. When other information is inconsistent with information contained in the audited financial statements, it may raise doubts about the audit conclusions drawn and the basis for the auditor’s opinion on the financial statements. An example of other information in documents containing audited financial statements and the auditor’s report is the annual report. Other information may consist of financial and nonfinancial information, such as a report by management or those charged with governance on operations; financial summaries or highlights; financial ratios; and selected quarterly data. Other information does not include the information contained on the entity’s website, or a press release or similar memorandum that accompanies the document containing audited financial statements and the auditor’s report thereon. The auditor should read the other information to identify material inconsistencies with the audited financial statements. The auditor should make the appropriate arrangements with management, or those charged with governance, to obtain the other information before the report release date. By obtaining the other information before the report release date, the auditor can promptly resolve with management possible material inconsistencies and apparent material misstatements of fact. Upon reading the other information, the standard defines other requirements if the auditor identifies a material inconsistency between the other information and the information contained in the audited financial statement. The auditor’s responsibilities will depend on a.) if the material inconsistencies were identified prior or subsequent to the report release date; b.) if the identified material inconsistency requires revision to the audited financial statements or to the other information; or c.) if management refuses to make the revisions.
Here is a summary of auditors’ responsibilities as defined in these standards.
Other Information in Documents Containing Audited Financial Statements
The auditor may either not include a reference to the other information in the auditor’s report (be silent) or include an explanatory paragraph that disclaims an opinion on the other information. The standard provides an example of an explanatory paragraph to disclaim an opinion on other information.
SAS No. 119
Supplementary Information in Relation to the Financial Statements as a Whole
This standard defines the auditor’s responsibility when engaged to report on whether supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole. Supplementary information is defined as information presented outside the basic financial statement and excludes required supplementary information (see SAS No. 120) that is not considered necessary for the financial statement to be fairly presented in accordance with the applicable financial reporting framework. Examples of supplementary information include:
- Additional details or explanations of items in or related to the basic financial statements
- Consolidating information
- Historical summaries of items extracted from the basic financial statements
- Statistical data
- Other material from sources outside the accounting system or outside the entity
To opine on the supplementary information in relation to the financial statements as a whole, the auditor should determine that certain conditions are met. One of these conditions is determining that the supplementary information was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. Another is determining that the information relates to the same period as the financial statements.
The auditor also should obtain management’s agreement that they acknowledge and understand their responsibilities for preparing the supplementary information. The standard defines the procedures the auditor should perform to opine on the supplementary information that includes, among other things: Perform certain inquiries of management about the purpose of the supplementary information; the criteria used; and the significant assumptions or interpretations that underlie the information’s measurement or presentation. Determine whether the form and content comply with the applicable criteria. Understand the methods used in preparing the information and determine whether they have changed from the prior period and the reasons for such changes, if any. Compare and reconcile the information to the underlying accounting and other records. Evaluate the appropriateness and completeness of the information
Obtain written representations from management.
The auditor’s consideration of materiality as it relates to applying the requirements of SAS No. 119 to supplementary information is in relation to the financial statement as a whole. Therefore, when the auditor reports on financial statements that include multiple opinions (i.e., state and local governments), materiality is considered at a level that represents the entire governmental entity.
When the supplementary information is presented with the financial statements, the auditor should report on the supplementary information either in an explanatory paragraph that follows the opinion paragraph or in a separate report on the supplementary information. The standard defines the elements that the explanatory paragraph should include and provides illustrative reporting examples.
SAS No. 120Required Supplementary Information
This standard defines the auditor’s responsibilities with respect to information that a designated accounting-standard setter requires to accompany an entity’s basic financial statements (required supplementary information). Required supplementary information is not part of the basic financial statement. However, the designated accounting-standard setter considers the information to be an essential part of the financial reporting for placing the basic financial statements in an appropriate operational, economic or historical context.
A designated accounting-standard setter is a body designated by the AICPA council to establish generally accepted auditing standards pursuant to Rule 202 and 203. This includes the Financial Accounting Standards Board; the Governmental Accounting Standards Board (GASB); the Federal Accounting Standards Advisory Board; and the International Accounting Standards Board. An example of required supplementary information is GASB’s requirement for state and local governments to present, among other things, a management’s discussion and analysis that introduces the basic financial statements and includes information useful to assess the government’s financial position.
It’s important to note is that SAS No. 119 may be applied when the auditor is engaged to report on whether the required supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole. In this circumstance, the report wording will need to be adapted as necessary.
The auditor’s responsibilitiesThe standard defines the procedures the auditor should perform with respect to information that a designated accounting-standard setter requires to accompany an entity’s basic financial statements. The procedures can be summarized as follows:
Perform certain inquires of management about the methods of preparing the information Compare the information for consistency with management’s responses to inquiries; the basic financial statements; and other knowledge obtained during the audit of the basic financial statements Obtain written representations from management The auditor should inform those charged with governance if he or she is unable to complete the required procedures because of significant difficulties encountered in dealing with management. The auditor should include an explanatory paragraph in the auditor’s report on the financial statements to refer to the required supplementary information. The standard defines the elements the explanatory paragraph should include in several different circumstances, such as if information was omitted or if the auditor identified material departures from prescribed guidelines. The standard also includes examples of explanatory paragraphs based on the circumstances.
The effective date for implementing these standards is quickly approaching, so auditors need to have a clear understanding of the standard that will apply based on the circumstances. Auditors also should consider discussing the requirements of these standards with auditees early in the audit process. This discussion will help auditees understand auditors’ responsibilities relating to these new standards and the reason for additional inquiries, requests for information, or written representations from management.
Troy Y. Manning, CPA, specializes in local governments and not-for-profits as a practitioner, consultant, instructor, speaker and author. Manning is a member of the FICPA Editorial Committee and an instructor for Thomson Reuters.
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