The International Standard on Auditing (ISA) 720 (Revised), The Auditor’s Responsibilities Relating to Other Information, is effective for audits of financial statements for periods ending on or after 15 December 2016. What does this mean for an auditor, you may ask?
While keeping the possible impact on the auditor’s report at the back of your mind, ISA 720 (Revised) requires an auditor to read the other information. It also states that one of the auditor’s objectives is to consider whether there is a material inconsistency between the other information and the financial statements. Therefore, although not required to audit it, the auditor must read the other information for a bird’s eye view that will help when doing a comparison to the audit and ensuring that it is consistent with what is in the financial statements.
A question then arises as to what other information is. A clear definition of this is especially relevant in the South African context as nuances exist as a result of corporate reporting practices and legislation.
ISA 720 (Revised) defines other information as ‘financial or non-financial information (other than financial statements and the auditor’s report thereon) included in an entity’s annual report’. But what is an annual report, then?
ISA 720 (Revised) defines an annual report as ‘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, the purpose of which is to provide owners (or similar stakeholders) with information on the entity’s operations and the entity’s financial results and financial position as set out in the financial statements. An annual report contains or accompanies the financial statements and the auditor’s report thereon and usually includes information about the entity’s developments, its future outlook and risks and uncertainties, a statement by the entity’s governing body and reports covering governance matters.’ So, what are the considerations specific to South Africa?
The IRBA Staff Audit Practice Alert1 states that for a South African company whose financial statements are audited, the annual report, for purposes of ISA 720 (Revised), includes:
Annual financial statements
The integrated report (if prepared, and regardless of whether the annual financial statements and the auditor’s report thereon are contained therein), and
Any other documents that are described within the company’s annual financial statements or its integrated report as forming part of the company’s annual financial statements or its integrated report
In determining other information, the auditor also has to consider law, regulation and custom. This is clear from the definition of an annual report. In South Africa, the King IV Report on Corporate Governance, the JSE Limited Listings Requirements and the Companies Act (2008) require a listed entity to present various reports and information to stakeholders. All these reports and information may accompany the audited financial statements, or certain information may be presented in a separate document, for example a separate integrated report that does not accompany the audited financial statements.
Further, the Directors’ Report, the Audit Committee’s Report (when applicable) and the Company Secretary’s Certificate (when applicable) form part of the annual financial statements prescribed by the Companies Act that must be audited or reviewed. The South African Auditing Practice Statement 3, Illustrative Reports (Revised November 2015), concludes that the information in these reports is not in the form of an assertion and the subject matters are not identifiable and capable of consistent evaluation or measurement against identified criteria. Consequently, the opinion expressed on the financial statements does not extend to the information contained in these reports as the auditor has no basis for concluding that the information is properly stated. However, the auditor has responsibilities, in accordance with ISA 720 (Revised), which require the auditor to read the other information (the reports mentioned above) and in doing so consider whether there is a material inconsistency between the other information and the financial statements and between the other information and the auditor’s knowledge obtained in the audit.
It then stands to reason that if a report is a company’s annual report, for purposes of ISA 720 (Revised), all information contained therein, other than the financial statements and the auditor’s report thereon, constitute other information. As such, the auditor would have to read the other information in the annual report in order to comply with ISA 720 (Revised). In addition, the auditor would have to consider the impact of the other information on the auditor’s report and amend his or her report as appropriate in the circumstances.
AUTHOR l Ian Mtegha CA(SA) is a Professional Manager: Standards Independent Regulatory Board for Auditors (IRBA)
1 IRBA Staff Audit Practice Alert: Determining Other Information as Defined in ISA 720 (Revised) in the South African Context.