SA 720 (Revised): How Auditors Should Read and Report on Other Information

An auditor’s work does not end with the numbers inside the financial statements. Annual reports often contain a directors’ report, management commentary, chairman’s statement, governance information and other narrative or financial material that sits outside the audited financial statements. SA 720 (Revised), The Auditor’s Responsibilities Relating to Other Information, explains what the auditor must do with that material and, just as importantly, what the auditor is not doing.

ICAI lists Revised SA 720 in its current Engagement and Quality Control Standards repository. The detailed requirements are in ICAI’s official SA 720 (Revised) text, and the Institute also provides an Implementation Guide to SA 720 (Revised).

What counts as “other information”?

For SA 720, other information means financial or non-financial information, other than the financial statements and the auditor’s report on them, that is included in the entity’s annual report. The annual report may be one document or a combination of documents that together serve the same purpose.

Depending on law, regulation or custom, examples may include a directors’ report or management report, a chairman’s statement and corporate governance information. The label is less important than whether the document forms part of the annual report as understood under SA 720.

The standard does not automatically apply to every public document issued by the entity. It specifically excludes preliminary announcements of financial information and securities-offering documents such as prospectuses. A standalone regulatory, CSR or sustainability report is also not automatically “other information” merely because it is publicly available; whether it forms part of the annual report depends on the applicable circumstances.

The auditor is reading, not auditing, the other information

A common misunderstanding is that once the auditor reads the annual report, the auditor is giving assurance on every page. SA 720 says otherwise. The audit opinion on the financial statements does not cover the other information, and the standard does not create a separate assurance engagement over that material.

The auditor’s responsibility is to read and consider the other information because a material inconsistency can signal one of three problems: the other information may be materially misstated, the audited financial statements may be materially misstated, or the auditor’s understanding of the entity may need to be updated.

A practical SA 720 workflow

1. Identify the annual-report documents. Discuss with management which documents will comprise the annual report and when they are expected to be issued.
2. Get final versions as early as possible. Arrange to receive the final documents in time and, if possible, before the auditor’s report date.
3. If information will come later, obtain the required commitment. Where some or all annual-report documents will not be available until after the auditor’s report date, SA 720 requires the auditor to request a written representation that the final version will be provided when available and before the entity issues it, so the required procedures can be completed.
4. Compare selected financial information. For amounts or items intended to be the same as, summarise, or provide greater detail about financial-statement information, compare selected items with the audited financial statements.
5. Use audit knowledge as a second filter. Consider whether narrative claims are materially inconsistent with what the audit team learned about the business, risks, transactions and results.
6. Stay alert beyond direct financial-statement comparisons. Even information not directly tied to a financial-statement line item may appear materially misstated.
7. Investigate apparent inconsistencies. Discuss the matter with management and perform further procedures when necessary before deciding what is actually wrong.
8. Document the work and retain the final version reviewed. SA 720 specifically requires documentation of the procedures performed and the final version of the other information on which the auditor performed the required work.

Worked example: an annual-report claim conflicts with the audit

Assume a company’s directors’ report says that the business had “no significant customer concentration risk” during the year. During the audit, however, the team established that one customer represented a very large portion of year-end receivables and revenue, and that management itself treated the customer as a major commercial dependency in internal risk discussions.

The auditor should not simply rewrite the directors’ report. The first step is to discuss the apparent inconsistency with management and understand whether the annual-report statement is supportable, whether wording needs correction, or whether the audit evidence or the auditor’s understanding needs reconsideration. If the statement is materially misleading and management corrects it, the auditor verifies the correction. If management refuses, the escalation and reporting response depends on when the other information was obtained and the circumstances.

What happens if the other information is materially misstated?

If the auditor concludes that a material misstatement of the other information exists, the auditor asks management to correct it. If management agrees, the auditor determines that the correction has been made. If management refuses, the auditor communicates the matter with those charged with governance and requests correction.

Where materially misstated other information was obtained before the auditor’s report date and remains uncorrected after governance communication, SA 720 requires appropriate action. That can include considering the implications for the auditor’s report and explaining how the matter will be addressed there, or withdrawing from the engagement where withdrawal is legally possible.

If the materially misstated other information is obtained only after the auditor’s report date and remains uncorrected, the auditor takes appropriate action, considering legal rights and obligations, to seek to bring the matter to the attention of users for whom the auditor’s report was prepared.

When does the auditor’s report contain an “Other Information” section?

SA 720 distinguishes listed and unlisted corporate entities. For listed entities, the auditor’s report includes an Other Information section when, at the report date, the auditor has obtained or expects to obtain the other information. For an unlisted corporate entity, the section is required when the auditor has obtained some or all of the other information by the report date.

When that section is required, it identifies management’s responsibility for the other information, identifies the other information obtained and, for listed entities, relevant other information expected after the report date. It also states that the auditor’s opinion does not cover the other information, describes the auditor’s SA 720 responsibilities, and states either that there is nothing to report or describes an uncorrected material misstatement where one has been concluded.

Common SA 720 mistakes

• Treating the annual report as audited. Reading and considering other information is not the same as expressing an assurance conclusion on it.
• Checking only arithmetic agreement. SA 720 also requires comparison with knowledge obtained during the audit.
• Waiting until after signing to ask for the annual report. The auditor should identify the documents and expected timing early and seek final versions before the report date where possible.
• Ignoring narrative overstatement. A misleading claim can matter even when it does not directly repeat a number from the financial statements.
• Assuming every sustainability or regulatory report is automatically within scope. The question is whether the material forms part of the annual report under the relevant circumstances.
• Failing to preserve the final version reviewed. The standard expressly requires the final other-information version used for the auditor’s work to be included in audit documentation.

Completion checklist for the audit file

1. List every document that management says comprises the annual report.
2. Record when each document is expected and whether it will be available before the auditor’s report date.
3. Obtain the written representation required for documents that will be received later.
4. Compare selected repeated or summarised financial amounts with the audited financial statements.
5. Read narrative claims against the audit team’s knowledge of the entity and its environment.
6. Investigate apparent material inconsistencies rather than assuming which document is wrong.
7. Track corrections requested from management and communications with those charged with governance.
8. Confirm whether an Other Information section is required in the auditor’s report and draft it using the applicable SA 720 requirements.
9. Retain the final version reviewed and document the procedures and conclusion.

Practical takeaway

SA 720 is a credibility check around the audited financial statements, not a second audit of the annual report. Identify the annual-report documents early, obtain final versions promptly, compare repeated financial information with the statements, challenge narrative claims that conflict with audit knowledge, escalate material misstatements that are not corrected, and make the auditor’s reporting transparent. A strong SA 720 file shows not only that the annual report was “read”, but exactly what was compared, what inconsistencies were investigated and how the final reporting conclusion was reached.