A retailer issues a 96-page annual report. Pages 4-22 are the chairman's letter, MD&A, and a five-year selected financial data table. The audited statements start on page 38. The MD&A says operating cash flow grew $48 million; the audited statement of cash flows shows growth of $36 million. The exam question is not whether you audited the MD&A (you did not). It is whether you read it, caught the inconsistency, and did the right thing about it.
HIGH-FREQUENCY: AU-C 720 applies when audited financial statements are issued in a document (typically an annual report) that also contains other information prepared by management or those charged with governance. The auditor does not audit the other information and expresses no opinion or assurance on it. The auditor does have an active responsibility to read the other information and consider whether it is consistent with the audited statements and free of material misstatements of fact.
Items that qualify as other information include MD&A, the chairman's or CEO's letter, five- or ten-year selected financial data, operating and statistical highlights (units sold, store count, headcount), employment data...
Common mistakes
- Treating the auditor's role as an audit of the other information. AU-C 720 requires reading and considering, not auditing, not procedures, not assurance. Any answer that says the auditor "tests," "examines," or "performs procedures on" the MD&A under AU-C 720 is wrong.
- Confusing material inconsistency with material misstatement of fact. Inconsistency means the other information conflicts with the audited statements; misstatement of fact means the other information is wrong on its own. The exam describes one and offers the other as a distractor.
- Applying AU-C 720 outside the annual report. A standalone press release issued before the annual report is not "other information" under AU-C 720. The standard's scope is the annual report or equivalent document containing the audited statements.
Bottom line
- AU-C 720 governs "other information" in documents containing audited financial statements, typically the annual report.
- Other information includes MD&A, chairman's letter, selected financial data, and employment data packaged with the audited statements, not the audited FS or the auditor's report.
- The auditor must read and consider whether the other information is materially inconsistent with the audited FS or contains a material misstatement of fact, giving no opinion and no assurance.
- Material inconsistency is a conflict with the audited FS; material misstatement of fact is wrong on its own terms, unrelated to the FS.
Exam shortcut
When a question asks about the auditor's responsibility for MD&A, the chairman's letter, or selected financial data in an annual report, the answer is AU-C 720: read and consider, no opinion, no assurance. Eliminate any choice that includes "audit," "test," or "express assurance on" the other information.
The full lesson (about 2,119 words, 14 min read) adds 1 worked example, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- IV.E2
Browse all free CPA AUD lessons or jump into free CPA AUD practice questions.