If you issue an annual report that includes or accompanies audited financial information, pay close attention! The AICPA’s Auditing Standards Board (ASB) issued Statement on Auditing Standards (SAS) No. 137, The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports, which will become effective for periods ending on or after December 15, 2021.
The new SAS addresses what procedures an auditor must perform regarding financial and nonfinancial information found in an annual report. As an auditee, you will be required to provide written representations acknowledging which documents comprise the annual report and to provide the reports to the auditors to review in a timely manner. These documents must be provided prior to issuance of the annual report.
What Constitutes an Annual Report?
Under SAS No. 137, an annual report is defined as “a document, or combination of documents, typically prepared 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, accompanies, or incorporates by reference 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. Annual reports include annual reports of governments and organizations for charitable or philanthropic purposes that are available to the public.”
It may be difficult in some cases to determine which documents constitute the annual report. As such, the auditor and auditee should have a discussion to ensure that both parties understand the documents that are considered an entity’s annual report and are therefore subject to additional auditor procedures.
What is My Auditor Required to Do?
In accordance with the new SAS, the auditor should read the other information within the annual report and consider whether a material inconsistency exists between information in the annual report and the financial statements, and they should compare selected amounts with the financial statements.
The auditor is also required to communicate with those charged with governance concerning the auditor’s responsibility with respect to information in annual reports, the procedures performed, and the results.
Does My Auditor Have to Review the Annual Report Prior to Issuance of the Audited Financial Statements?
No, the annual report does not have to be prepared and reviewed by the auditor prior to issuance of the audited financial statements. In fact, in most cases, annual reports are typically prepared and issued subsequently.
However, in cases when the auditor has obtained all the other information at the date of the auditor’s report, SAS No. 137 does require the auditor to include a separate section in the auditor’s report with the heading “Other Information.”
If you issue an annual report, communicate early on with your audit team regarding the planned timing and issuance. The auditor will most likely want to reference the annual report in the annual audit engagement letter. Your internal publishing team will also need to be made aware of the requirements and plan accordingly. As a reminder, the auditee bears the burden of providing the annual report to the auditor in a timely manner for review, so don’t forget about this important new requirement.
If you have questions on the new auditing standard, reach out to a Clark Nuber professional.
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