AUD CPA Exam: Understanding the Auditor’s Responsibilities Related to Other Information Included in Documents with Audited Financial Statements

Introduction

Overview of Auditor’s Responsibilities

In this article, we’ll cover understanding the auditor’s responsibilities related to other information included in documents with audited financial statements. When an auditor performs an audit of financial statements, their primary responsibility is to express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. However, financial statements are often accompanied by other information in documents such as annual reports, management discussion and analysis (MD&A), or press releases. This “other information” is not audited, but it is still of significant interest to the auditor due to its potential to influence the users of the financial statements.

What is “Other Information”?

“Other information” refers to any content that accompanies the audited financial statements but is not part of the financial statements themselves. This can include sections like the MD&A, chairman’s letter, or any narrative, graphical, or supplementary information included in an annual report or similar document. It is important to note that while auditors do not audit this information, they are required to read and consider it in the context of the audited financial statements.

Importance of the Auditor’s Role

The auditor’s role in relation to other information is crucial because inconsistencies or misstatements in this information can mislead stakeholders, even if the financial statements themselves are accurate. If the other information contains errors or discrepancies that are materially inconsistent with the audited financial statements, it can undermine the credibility of the financial reporting process. Therefore, auditors have a responsibility to ensure that the other information does not contradict or misrepresent the audited financial statements.

Purpose of the Article

This article aims to provide CPA exam candidates with a thorough understanding of the auditor’s responsibilities related to other information included in documents containing audited financial statements. By exploring the scope of these responsibilities and the limitations inherent in them, the article seeks to clarify how auditors should approach their work in this context.

Helping CPA Exam Candidates

For CPA exam candidates, particularly those preparing for the AUD section, understanding the auditor’s responsibilities related to other information is essential. This topic is not only relevant to real-world auditing practices but also a significant area of focus in the exam. This article will help candidates grasp the nuances of these responsibilities, including the procedures auditors should perform and the potential implications of their findings. By mastering this content, candidates will be better prepared to address related questions on the CPA exam and to apply this knowledge in their professional careers.

Definition of “Other Information”

What Constitutes “Other Information”

Definition According to Relevant Auditing Standards

“Other information” is defined in auditing standards, particularly in AU-C Section 720, as any information, other than the financial statements and the auditor’s report thereon, that is included in an entity’s annual report or equivalent document that contains the audited financial statements. The standards require auditors to consider whether this other information is consistent with the audited financial statements and whether it contains any material misstatements of fact.

AU-C Section 720 emphasizes that the auditor’s responsibility is not to audit this information but to read it and consider its consistency with the financial statements. The purpose is to ensure that the other information does not undermine the credibility of the financial statements by presenting misleading or inaccurate information.

Examples of Other Information

Other information typically includes a variety of documents and sections within reports that accompany the audited financial statements. Some common examples include:

• Annual Reports: Comprehensive reports that provide an overview of a company’s business and financial performance for the year, often including narrative descriptions, graphical presentations, and other supplementary information.
• Management Discussion and Analysis (MD&A): A section of the annual report where management discusses the company’s financial condition, results of operations, and future prospects. The MD&A is intended to provide context to the financial statements but is not part of the audited statements themselves.
• Press Releases: Public announcements made by the company that may include financial information, performance highlights, and forward-looking statements.
• Chairman’s Letter: A letter from the chairman of the board or CEO that often includes commentary on the company’s performance and strategic direction.
• Corporate Governance Reports: Sections detailing the company’s governance practices, board structure, and compliance with governance codes.

These elements are intended to provide stakeholders with additional insight into the company’s performance and future outlook, but they do not fall under the scope of the audit.

Distinction Between Audited Financial Statements and Other Information

Clarification on the Difference in Scope and Assurance

The key distinction between audited financial statements and other information lies in the scope of the audit and the level of assurance provided. Audited financial statements are subject to a thorough examination by the auditor, who applies auditing standards to gather sufficient and appropriate evidence to express an opinion on whether the financial statements are free from material misstatement. This opinion provides a high level of assurance to users of the financial statements.

In contrast, other information is not subject to the same level of scrutiny. The auditor does not audit this information and, therefore, does not provide an opinion on its accuracy or completeness. The auditor’s responsibility is limited to reading the other information and considering whether it is materially inconsistent with the audited financial statements or contains any material misstatements of fact. If such inconsistencies or misstatements are identified, the auditor may need to take further action, but the level of assurance provided in relation to other information is significantly lower than that provided for the audited financial statements.

This distinction is crucial for understanding the auditor’s role and the expectations of stakeholders. While audited financial statements are the primary focus, other information also plays a role in shaping the overall perception of the company’s financial health and operations. Therefore, ensuring that this information is not misleading is an important, albeit more limited, aspect of the auditor’s responsibilities.

Auditor’s Responsibilities Regarding Other Information

Overview of Responsibilities

The auditor’s primary responsibility concerning other information included in documents with audited financial statements is to read and consider it in the context of the knowledge obtained during the audit. This responsibility is clearly outlined in auditing standards, such as AU-C Section 720, which mandates that auditors review the other information to identify any material inconsistencies or potential material misstatements.

The Auditor’s Duty to Read and Consider Other Information

While the auditor is not required to audit or express an opinion on other information, they must carefully review it to ensure it aligns with the audited financial statements. This involves reading the entire document that includes the audited financial statements to identify any statements, figures, or representations that may contradict or mislead users about the financial position or performance of the entity.

By considering this other information, the auditor helps to safeguard the integrity of the financial reporting process. If the auditor identifies a discrepancy or a misleading statement, they are required to discuss the matter with management and determine if corrective action is necessary. This responsibility underscores the auditor’s role in maintaining the reliability of financial communication to stakeholders.

Objective of the Auditor

The overarching objective of the auditor in relation to other information is to ensure that it does not undermine the credibility of the audited financial statements. Specifically, the auditor aims to ensure that other information:

1. Is Not Materially Inconsistent with the Audited Financial Statements:
   • The auditor’s first objective is to identify any material inconsistencies between the audited financial statements and the other information. A material inconsistency occurs when the other information contradicts the audited financial statements in a way that could confuse or mislead users. For example, if the MD&A section presents revenue figures that differ from those in the audited financial statements, this would be a material inconsistency that requires further investigation.
2. Does Not Contain Any Material Misstatements of Fact:
   • Beyond checking for inconsistencies, the auditor is also responsible for identifying any material misstatements of fact within the other information. A material misstatement of fact occurs when the other information includes false or misleading statements that could influence users’ understanding of the financial statements. For instance, if a company’s annual report claims a market share that is significantly overstated, the auditor has a duty to address this with management.

If the auditor identifies either of these issues—material inconsistencies or material misstatements of fact—they must take appropriate actions. This may involve discussing the matter with management, requesting revisions to the other information, or, in some cases, modifying the auditor’s report to reflect the identified issues. The ultimate goal is to ensure that stakeholders receive a clear, accurate, and consistent portrayal of the company’s financial health and operations.

Procedures Performed by the Auditor

When dealing with other information included in documents that accompany audited financial statements, the auditor must follow a systematic approach to fulfill their responsibilities. These procedures ensure that the other information does not contradict or mislead in relation to the audited financial statements.

Steps Involved in Reading and Considering Other Information

The first step in the auditor’s process is to thoroughly read and consider the other information. This involves the following actions:

1. Comprehensive Review of the Entire Document:
   • The auditor reads the entire document that contains the audited financial statements, paying particular attention to sections like the management discussion and analysis (MD&A), chairman’s letter, and other narrative sections that provide context to the financial data.
2. Cross-Referencing with Audited Financial Statements:
   • As the auditor reads the other information, they continuously cross-reference it with the audited financial statements. This helps to identify any figures, statements, or data that could potentially conflict with the financial statements.
3. Assessment of the Overall Consistency:
   • Beyond just numerical comparisons, the auditor also assesses the overall tone and narrative of the other information. They consider whether the general message conveyed by the other information is consistent with the audited financial statements.

Identification of Potential Material Inconsistencies or Material Misstatements

Once the other information has been reviewed, the auditor then focuses on identifying any potential material inconsistencies or material misstatements. This involves:

1. Spotting Material Inconsistencies:
   • A material inconsistency occurs when there is a significant difference between the audited financial statements and the other information that could mislead users. For example, if the MD&A describes a strong financial performance while the audited financial statements show a decline, this would be a material inconsistency.
2. Detecting Material Misstatements of Fact:
   • A material misstatement of fact involves incorrect or misleading information within the other information that could affect users’ understanding of the financial statements. This could include inaccurate statistics, overstated achievements, or incorrect assertions about the company’s market position.

Actions Taken if Inconsistencies or Misstatements Are Identified

If the auditor identifies any material inconsistencies or material misstatements of fact, specific actions must be taken to address these issues:

1. Discussion with Management:
   • The auditor’s first course of action is to bring the inconsistency or misstatement to the attention of management. The auditor discusses the issue and seeks clarification or correction. Management may agree to revise the other information to resolve the inconsistency or misstatement.
2. Request for Revision of Other Information:
   • If the inconsistency or misstatement is material and management agrees, the auditor requests that the other information be revised. This ensures that the final document presented to stakeholders is accurate and consistent with the audited financial statements.
3. Consideration of the Impact on the Auditor’s Report:
   • If management refuses to revise the other information, or if the issue remains unresolved, the auditor must consider the implications for the auditor’s report. The auditor may choose to include an additional paragraph in the report to highlight the issue, or in more severe cases, modify the audit opinion to reflect the inconsistency.
4. Documentation of the Issue and Resolution:
   • Regardless of the outcome, the auditor must document the identified issue, the discussions with management, and the final resolution. This documentation is crucial for supporting the auditor’s decisions and for any subsequent reviews of the audit.

By following these procedures, auditors help ensure that the other information does not undermine the credibility of the audited financial statements, thereby upholding the integrity of the financial reporting process.

Reporting on Other Information

Auditor’s Communication in the Auditor’s Report

When an auditor completes the audit of financial statements, the communication regarding other information included in the same document is an essential component of the auditor’s report. The auditor must clearly address their responsibilities and findings related to other information to ensure that users of the financial statements understand the extent of the auditor’s work in this area.

How the Auditor References Other Information in the Audit Report

According to auditing standards, the auditor’s report should include a section that discusses other information. This section typically outlines:

1. The Auditor’s Responsibilities Regarding Other Information:
   • The auditor explains that their responsibility is limited to reading the other information and considering whether it is materially inconsistent with the audited financial statements or contains any material misstatements of fact. The report clarifies that the auditor does not audit the other information and does not express an opinion on it.
2. Statement of Whether Material Inconsistencies or Misstatements Were Identified:
   • The auditor states whether, based on their reading, they identified any material inconsistencies or material misstatements of fact. If no such issues were found, this is typically noted in the auditor’s report.
3. Reference to the Section of the Report Addressing Other Information:
   • The report may include a reference to a specific section or paragraph where the auditor discusses other information. This helps users easily locate the relevant information within the report.

Situations Where the Auditor May Need to Modify the Audit Opinion or Include an Additional Paragraph

In some cases, the auditor may need to take further steps if they encounter significant issues with the other information. These actions can include modifying the audit opinion or adding an explanatory paragraph:

1. Including an Emphasis of Matter or Other Matter Paragraph:
   • If the other information contains a material inconsistency or a material misstatement that management refuses to correct, the auditor may include an emphasis of matter or other matter paragraph in the audit report. This paragraph draws attention to the issue without modifying the audit opinion. For example, the auditor might state that certain information in the MD&A is inconsistent with the audited financial statements.
2. Modifying the Audit Opinion:
   • In more severe cases, where the other information is so misleading that it affects the reliability of the audited financial statements, the auditor may decide to modify the audit opinion. This could involve issuing a qualified opinion, an adverse opinion, or even disclaiming an opinion on the financial statements, depending on the severity of the issue.
3. Including a Disclaimer Regarding Other Information:
   • The auditor may also include a disclaimer in the report stating that they do not express an opinion on the other information and that their responsibility is limited to reading and considering it for consistency with the audited financial statements.

Examples of Reporting Scenarios

Understanding how an auditor might report on other information in various situations can help illustrate the practical application of these responsibilities. Below are different examples of how an auditor might address other information in the audit report:

1. Scenario 1: No Material Inconsistencies or Misstatements Identified
   • In this scenario, the auditor reads the other information and finds it to be consistent with the audited financial statements. The auditor’s report would include a standard paragraph indicating that no material inconsistencies or misstatements were identified.
     Example Reporting Language:
     • “We have read the other information included in the [Annual Report] and, based on our reading, we did not identify any material inconsistencies with the audited financial statements or material misstatements of fact.”
2. Scenario 2: Material Inconsistency Identified, Management Agrees to Revise
   • Here, the auditor identifies a material inconsistency in the MD&A. After discussing the issue with management, they agree to revise the MD&A to correct the inconsistency. The auditor’s report may include a note that the inconsistency was resolved, with no need for further action.
     Example Reporting Language:
     • “We identified a material inconsistency in the MD&A regarding revenue figures, which was subsequently corrected by management. As a result, no material inconsistencies exist between the other information and the audited financial statements.”
3. Scenario 3: Material Misstatement of Fact, Management Refuses to Correct
   • In this more complex scenario, the auditor identifies a material misstatement of fact in the other information, such as an overstated market share. Management refuses to correct the information. The auditor includes an emphasis of matter paragraph in the report to highlight the issue.
     Example Reporting Language:
     • “The other information included in the [Annual Report] contains a statement regarding the company’s market share that is materially inconsistent with our audit findings. Management has not agreed to correct this misstatement. Our opinion on the financial statements is not modified in respect of this matter.”
4. Scenario 4: Severe Inconsistency Leading to a Modified Opinion
   • In a severe case where the other information significantly contradicts the financial statements, and management refuses to make corrections, the auditor may issue a qualified or adverse opinion.
     Example Reporting Language:
     • “Due to the material inconsistency between the financial statements and the other information, and the refusal of management to address this issue, we have issued a qualified opinion on the financial statements.”

These examples demonstrate the different ways an auditor might address issues with other information in their report, depending on the nature and severity of the inconsistencies or misstatements encountered.

Impact of Other Information on the Audit Opinion

When Other Information Leads to a Modified Opinion

While the auditor’s primary responsibility is to express an opinion on the financial statements, there are circumstances where the other information included in documents with audited financial statements can impact the auditor’s opinion. When discrepancies or material misstatements in other information are significant enough to affect users’ understanding of the financial statements, the auditor may need to modify their audit opinion.

Scenarios Where Discrepancies or Misstatements in Other Information Could Affect the Audit Opinion

1. Material Inconsistencies with Financial Statements:
   • If other information is materially inconsistent with the audited financial statements, and the inconsistency is so significant that it undermines the credibility of the financial statements, the auditor might issue a modified opinion. For example, if the MD&A section of the annual report presents revenue figures that are significantly higher than those in the audited financial statements, and management refuses to correct this discrepancy, the auditor may need to issue a qualified or adverse opinion.
2. Material Misstatements of Fact:
   • Material misstatements of fact in the other information can also lead to a modified audit opinion if they are severe enough to mislead the users of the financial statements. For instance, if the other information claims that the company has a dominant market share that is not supported by the audited financial data, and this claim is central to the understanding of the company’s financial position, the auditor may decide that this misstatement necessitates a modified opinion.
3. Unresolved Discrepancies After Discussion with Management:
   • When the auditor identifies a material inconsistency or misstatement and brings it to management’s attention, the expectation is that management will correct the issue. However, if management refuses to make the necessary corrections and the issue is material, the auditor might have no choice but to modify the audit opinion to reflect the unresolved issue. This could involve issuing a qualified opinion, where the auditor highlights the specific issue, or an adverse opinion, where the auditor expresses that the financial statements do not present a true and fair view.

Case Studies

Understanding how material inconsistencies or misstatements in other information can impact the audit opinion is best illustrated through real-world examples. The following case studies demonstrate different scenarios where other information led to a modified audit opinion.

Case Study 1: Misleading Revenue Projections in the MD&A

In this case, a company’s MD&A section presented revenue projections for the upcoming year that were significantly higher than what was reflected in the audited financial statements. The audited financial statements showed a decline in revenue due to a downturn in the market, but the MD&A painted a very optimistic picture, suggesting a major recovery that was not supported by any evidence.

The auditor identified this as a material inconsistency and discussed it with management, suggesting that the MD&A should be revised to align more closely with the financial statements. However, management refused to make any changes, arguing that the projections were based on confidential plans that could not be disclosed.

Given the material nature of the inconsistency and its potential to mislead stakeholders, the auditor issued a qualified opinion. The audit report included an emphasis of matter paragraph, highlighting the inconsistency between the MD&A and the financial statements.

Case Study 2: Overstated Market Share in an Annual Report

In another example, a company included a statement in its annual report claiming that it held a 50% market share in its industry. However, the audited financial statements did not support this claim, and the auditor found that the actual market share was closer to 30%. This discrepancy was considered a material misstatement of fact because it significantly overstated the company’s market position, which could mislead investors and other stakeholders.

The auditor discussed the issue with management, who acknowledged the mistake but refused to correct it, citing concerns about the impact on the company’s stock price. As a result, the auditor issued an adverse opinion, stating that the financial statements, taken as a whole, did not present a true and fair view due to the material misstatement of fact in the other information.

Case Study 3: Significant Discrepancies in Sustainability Reporting

A company’s annual report included a section on sustainability, highlighting its environmental achievements and commitments. However, the auditor found that many of the claims made in this section were not supported by the evidence obtained during the audit. For example, the report claimed a 40% reduction in carbon emissions, but the auditor’s review of the underlying data showed only a 15% reduction.

The auditor considered this a material inconsistency, as the sustainability reporting was an integral part of the company’s public image and could significantly influence stakeholder perceptions. When management refused to revise the sustainability section, the auditor decided to issue a qualified opinion, noting the discrepancy in an emphasis of matter paragraph.

These case studies highlight how material inconsistencies or misstatements in other information can lead to modified audit opinions. Auditors must exercise professional judgment in determining when such modifications are necessary to ensure that the financial statements, along with the other information, present a clear and accurate picture of the company’s financial position.

Challenges and Considerations for Auditors

Practical Challenges

When auditors deal with other information included in documents that accompany audited financial statements, they encounter several practical challenges. These challenges can complicate the process of ensuring that the other information is consistent with the audited financial statements and free from material misstatements.

Common Issues Auditors Face When Dealing with Other Information

1. Limited Access to Supporting Evidence:
   • Unlike financial statements, which are thoroughly audited with access to underlying documentation and evidence, other information is not subject to the same level of scrutiny. Auditors often have limited access to the data or assumptions that management used to prepare sections like the MD&A or sustainability reports, making it difficult to verify the accuracy of this information.
2. Ambiguity in Defining Material Inconsistencies or Misstatements:
   • Determining what constitutes a material inconsistency or misstatement in other information can be subjective. Auditors must consider whether the discrepancies are significant enough to potentially mislead users, which can be challenging, especially when dealing with qualitative statements or projections.
3. Resistance from Management:
   • When auditors identify issues in other information, they may face resistance from management, particularly if the corrections could negatively impact the company’s public image or stock price. Convincing management to make necessary revisions can be difficult, especially when the discrepancies involve optimistic forecasts or strategic messaging.
4. Time Constraints:
   • Auditors often work under tight deadlines, and the review of other information typically occurs toward the end of the audit process. This timing can put pressure on auditors to quickly assess the other information, leaving less time to thoroughly investigate potential inconsistencies or misstatements.

Professional Judgment

Professional judgment plays a crucial role in the auditor’s evaluation of other information. Given the subjective nature of assessing material inconsistencies or misstatements, auditors must rely on their experience, knowledge, and understanding of the entity and its environment to make informed decisions.

The Role of Professional Judgment in Evaluating Other Information

1. Determining Materiality:
   • Auditors must use professional judgment to assess the materiality of any inconsistencies or misstatements they identify. This involves considering the potential impact on the users of the financial statements and whether the issue could influence their economic decisions.
2. Balancing Objectivity with Practical Realities:
   • Auditors must remain objective when evaluating other information, even when faced with pressures from management or time constraints. Professional judgment helps auditors balance the need for thoroughness with the practical realities of the audit process.
3. Assessing the Implications for the Audit Report:
   • When inconsistencies or misstatements are identified, auditors must use their judgment to decide how these issues should be addressed in the audit report. This includes determining whether to include an emphasis of matter paragraph, modify the audit opinion, or take other actions to ensure that users are adequately informed.

Ethical Considerations

Auditors are bound by strict ethical standards that require them to maintain integrity, objectivity, and professional skepticism throughout the audit process. These ethical considerations are particularly important when dealing with other information, as the potential for bias or influence can be significant.

Ethical Implications and the Auditor’s Responsibility to Maintain Integrity and Objectivity

1. Independence and Objectivity:
   • Auditors must ensure that their assessment of other information is free from bias. This includes resisting any pressure from management to overlook or downplay inconsistencies or misstatements. Maintaining independence is essential to preserving the credibility of the audit process.
2. Professional Skepticism:
   • Auditors should approach other information with professional skepticism, recognizing the possibility that it may contain misleading or biased information. This mindset helps auditors remain vigilant and thorough in their review, even when management presents the information in a positive light.
3. Integrity in Reporting:
   • When auditors identify material inconsistencies or misstatements in other information, they have an ethical obligation to report these findings accurately in the audit report. This may require difficult conversations with management and could potentially lead to a modified audit opinion, but it is essential for maintaining the integrity of the financial reporting process.
4. Confidentiality and Transparency:
   • Auditors must balance their duty to maintain confidentiality with the need for transparency in reporting issues with other information. They must carefully navigate these ethical considerations to ensure that stakeholders receive accurate and complete information without compromising the confidentiality of sensitive company data.

By understanding and addressing these challenges and considerations, auditors can more effectively manage their responsibilities related to other information and uphold the standards of the auditing profession.

Relevant Standards and Guidance

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

Summary of the Key Points from This Standard

AU-C Section 720, titled “Other Information in Documents Containing Audited Financial Statements,” provides the framework for auditors’ responsibilities regarding other information included in documents alongside audited financial statements. This standard is part of the Generally Accepted Auditing Standards (GAAS) in the United States and outlines the following key points:

1. Scope of the Auditor’s Responsibility:
   • The auditor’s responsibility is to read and consider other information to identify any material inconsistencies with the audited financial statements or material misstatements of fact. The standard emphasizes that the auditor is not responsible for auditing the other information, nor for expressing an opinion on it.
2. Definition of Other Information:
   • AU-C Section 720 defines other information as any information, other than the financial statements and the auditor’s report, that is included in a document containing the audited financial statements. This can include sections like the management discussion and analysis (MD&A), chairman’s letter, and sustainability reports.
3. Identification of Material Inconsistencies and Misstatements:
   • The auditor must determine whether there are any material inconsistencies between the audited financial statements and the other information or material misstatements of fact. If such issues are identified, the auditor must discuss them with management and seek corrections.
4. Reporting Requirements:
   • If the auditor identifies material inconsistencies or misstatements that management refuses to correct, the auditor may need to modify the audit report. This could involve adding an emphasis of matter paragraph or, in more severe cases, issuing a qualified or adverse opinion.
5. Documentation:
   • The auditor is required to document the procedures performed, the issues identified, the discussions with management, and the final resolution of any material inconsistencies or misstatements.

International Standards on Auditing (ISA) 720

Comparison with the International Approach

ISA 720, titled “The Auditor’s Responsibilities Relating to Other Information,” provides a similar framework to AU-C Section 720 but with some differences in emphasis and application. Key points of comparison include:

1. Scope of Responsibility:
   • Like AU-C Section 720, ISA 720 requires auditors to read and consider other information to identify material inconsistencies and misstatements. However, ISA 720 places greater emphasis on the auditor’s responsibility to actively engage with the other information, ensuring it does not undermine the credibility of the audited financial statements.
2. Clarification on Other Information:
   • ISA 720 provides a more detailed discussion of what constitutes other information, offering guidance on how to handle different types of documents that may accompany the audited financial statements. This standard also emphasizes the need to consider whether the other information is consistent with both the audited financial statements and the auditor’s knowledge obtained during the audit.
3. Communication in the Auditor’s Report:
   • ISA 720 requires that the auditor’s report include a specific section on other information, detailing the auditor’s responsibilities and the outcome of their review. This communication must clearly state whether the auditor identified any material inconsistencies or misstatements and how these were addressed.
4. Greater Focus on the Auditor’s Judgment:
   • ISA 720 highlights the importance of professional judgment in determining the impact of other information on the audit. The standard encourages auditors to consider the broader context of the financial statements and the potential for other information to mislead users.

PCAOB Standards

Any Additional or Different Requirements Under PCAOB Standards

The Public Company Accounting Oversight Board (PCAOB) standards also address the auditor’s responsibilities related to other information, particularly in the context of audits of public companies. The PCAOB’s approach includes some additional requirements compared to AU-C Section 720:

1. Emphasis on Public Company Disclosures:
   • PCAOB standards place a stronger emphasis on the auditor’s responsibility to consider other information in documents such as annual reports (Form 10-K) and quarterly reports (Form 10-Q) for public companies. The PCAOB requires auditors to assess whether other information is materially inconsistent with the financial statements or contains material misstatements, particularly in the context of regulatory filings.
2. Explicit Requirement for Auditor’s Report:
   • The PCAOB requires that the auditor’s report explicitly address the auditor’s responsibilities concerning other information. This includes a statement indicating that the auditor’s responsibility is to read the other information and consider whether it is materially inconsistent with the financial statements.
3. Focus on Management’s Assertions:
   • PCAOB standards emphasize the need to scrutinize management’s assertions in other information, especially forward-looking statements and performance metrics. The auditor is required to be vigilant in assessing whether these assertions are supported by the evidence obtained during the audit.
4. Potential for Expanded Disclosure:
   • In cases where the auditor identifies significant issues with other information, PCAOB standards allow for the possibility of expanded disclosure in the auditor’s report, including detailed explanations of the inconsistencies or misstatements and their potential impact on the financial statements.

While AU-C Section 720, ISA 720, and PCAOB standards all address the auditor’s responsibilities regarding other information, each provides a slightly different perspective and set of requirements. Auditors must be familiar with the relevant standards applicable to their audit engagements and apply them appropriately to ensure that other information does not undermine the credibility of the audited financial statements.

Conclusion

Recap of Key Points

Understanding the auditor’s responsibilities related to other information included in documents containing audited financial statements is essential for ensuring the credibility and integrity of financial reporting. Key points to remember include:

• Definition of Other Information: This refers to any content included alongside audited financial statements, such as annual reports, MD&A, and press releases, which is not part of the financial statements themselves.
• Auditor’s Responsibilities: Auditors are required to read and consider this other information to identify any material inconsistencies or material misstatements of fact. Their goal is to ensure that the other information does not contradict or undermine the audited financial statements.
• Procedures and Reporting: Auditors must perform specific procedures to review other information and, if necessary, communicate findings in the audit report. This may involve adding an emphasis of matter paragraph or modifying the audit opinion if significant issues are identified.
• Ethical and Professional Considerations: Auditors must maintain integrity, objectivity, and professional skepticism when evaluating other information, ensuring that their judgment is not influenced by external pressures.

Importance for CPA Exam Candidates

For CPA exam candidates, particularly those preparing for the AUD section, a thorough understanding of the auditor’s responsibilities related to other information is crucial. This topic not only represents a significant area of focus on the exam but also reflects real-world auditing practices that candidates will encounter in their professional careers.

Mastering these responsibilities will enable candidates to:

• Answer Exam Questions Effectively: The AUD section of the CPA exam includes questions related to auditing standards, including those governing the treatment of other information. Understanding these standards will help candidates answer questions accurately and confidently.
• Apply Knowledge in Practice: Beyond the exam, auditors frequently encounter other information in their professional work. Knowing how to approach, evaluate, and report on this information is critical to maintaining the quality and credibility of audit engagements.

Final Thoughts

As you prepare for the AUD section of the CPA exam, it’s important to not only memorize the relevant standards but also understand their practical application. The responsibilities related to other information are a key aspect of the auditor’s role in safeguarding the accuracy and reliability of financial reporting.

By internalizing these concepts and applying them during the exam, you will be better equipped to handle similar situations in your future career as a CPA. Stay focused on the importance of ethical considerations, maintain professional skepticism, and remember that your role as an auditor is crucial to upholding the trust that users place in financial statements. Good luck with your studies and the exam!