Section Considering Whether There is a Material - ASA 720 - The Auditor's Responsibilities Relating to Other Information - December 2015 - Considering Whether There is a Material Inconsistency between the Other Information and the Financial Report (Ref: Para. 14(a)) | Zoe
ASA 720 - The Auditor's Responsibilities Relating to Other Information - December 2015
Considering Whether There is a Material Considering Whether There is a Material Inconsistency between the Other Information and the Financial Report (Ref: Para. 14(a))
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Considering Whether There is a Material Inconsistency between the Other Information and the Financial Report (Ref: Para. 14(a))
Other information may include amounts or other items that are intended to be the same as, to summarise, or to provide greater detail about, the amounts or other items in the financial report. Examples of such amounts or other items may include:
Tables, charts or graphs containing extracts of the financial report.
A disclosure providing greater detail about a balance or account shown in the financial report, such as “Revenue for 20X1 comprised XXX million from product X and YYY million from product Y.”
Descriptions of the financial results, such as “Total research and development expense was XXX in 20X1.”
In evaluating the consistency of selected amounts or other items in the other information with the financial report, the auditor is not required to compare all amounts or other items in the other information that are intended to be the same as, to summarise, or to provide greater detail about, the amounts or other items in the financial report, with such amounts or other items in the financial report.
Selecting the amounts or other items to compare is a matter of professional judgement. Factors relevant to this judgement include:
The significance of the amount or other item in the context in which it is presented, which may affect the importance that users would attach to the amount or other item (for example, a key ratio or amount).
If quantitative, the relative size of the amount compared with accounts or items in the financial report or the other information to which they relate.
The sensitivity of the particular amount or other item in the other information, for example, share based payments for senior management.
Determining the nature and extent of procedures to address the requirement in paragraph 14(a) is a matter of professional judgement, recognising that the auditor’s responsibilities under this Auditing Standard do not constitute an assurance engagement on the other information or impose an obligation to obtain assurance about the other information. Examples of such procedures include:
For information that is intended to be the same as information in the financial report, comparing the information to the financial report.
For information intended to convey the same meaning as disclosures in the financial report, comparing the words used and considering the significance of differences in wording used and whether such differences imply different meanings.
Obtaining a reconciliation between an amount within the other information and the financial report from management and:
Comparing items in the reconciliation to the financial report and the other information; and
Checking whether the calculations within the reconciliation are arithmetically accurate.
Evaluating the consistency of selected amounts or other items in the other information with the financial report includes, when relevant given the nature of the other information, the manner of their presentation compared to the financial report.
Considering Whether There Is a Material Inconsistency between the Other Information and the Auditor’s Knowledge Obtained in the Audit (Ref: Para. 14(b))
Other information may include amounts or items that are related to the auditor’s knowledge obtained in the audit (other than those in paragraph 14(a)). Examples of such amounts or items may include:
A disclosure of the units produced, or a table summarising such production by geographical region.
A statement that “The company introduced product X and product Y during the year.”
A summary of the locations of the entity’s major operations, such as “the entity’s major centre of operation is in country X, and there are also operations in countries Y and Z.”
The auditor’s knowledge obtained in the audit includes the auditor’s understanding of the entity and its environment, the applicable financial reporting framework, and the entity’s system of internal control, obtained in accordance with ASA 315.[12] ASA 315 sets out the auditor’s required understanding, which includes such matters as obtaining an understanding of:
The entity’s organisational structure, ownership and governance, and its business model, including the extent to which the business model integrates the use of IT;
Relevant industry, regulatory, and other external factors;
The relevant measures used, internally and externally, to assess the entity’s financial performance.
The auditor’s knowledge obtained in the audit may also include matters that are prospective in nature. Such matters may include, for example, business prospects and future cash flows that the auditor considered when evaluating the assumptions used by management in performing impairment tests on intangible assets such as goodwill, or when evaluating management’s assessment of the entity’s ability to continue as a going concern.
In considering whether there is a material inconsistency between the other information and the auditor’s knowledge obtained in the audit, the auditor may focus on those matters in the other information that are of sufficient importance that a misstatement of the other information in relation to that matter could be material.
In relation to many matters in the other information, the auditor’s recollection of the audit evidence obtained and conclusions reached in the audit may be sufficient to enable the auditor to consider whether there is a material inconsistency between the other information and the auditor’s knowledge obtained in the audit. The more experienced and the more familiar with the key aspects of the audit the auditor is, the more likely it is that the auditor’s recollection of relevant matters will be sufficient. For example, the auditor may be able to consider whether there is a material inconsistency between the other information and the auditor’s knowledge obtained in the audit in light of the auditor’s recollection of discussions held with management or those charged with governance or findings from procedures carried out during the audit such as the reading of board minutes, without the need to take further action.
The auditor may determine that referring to relevant audit documentation or making enquiries of relevant members of the engagement team, including relevant component auditors, is appropriate as a basis for the auditor’s consideration of whether a material inconsistency exists. For example:
When the other information describes the planned cessation of a major product line and, although the auditor is aware of the planned cessation, the auditor may make enquiries of the relevant engagement team member who performed the audit procedures in this area to support the auditor’s consideration of whether the description is materially inconsistent with the auditor’s knowledge obtained during the audit.
When the other information describes important details of a lawsuit addressed in the audit, but the auditor cannot recall them adequately, it may be necessary to refer to the audit documentation where such details are summarised to support the auditor’s recollection.
Whether, and if so the extent to which, the auditor refers to relevant audit documentation, or makes enquiries of relevant members of the engagement team, including relevant component auditors, is a matter of professional judgement. However, it may not be necessary for the auditor to refer to relevant audit documentation, or to make enquiries of relevant members of the engagement team, including relevant component auditors, about any matter included in the other information.