8033 Reading and considering other information

Apr-2018

CAS Guidance

The auditor is required by CAS 200 to plan and perform the audit with professional skepticism. Maintaining professional skepticism when reading and considering the other information includes, for example, recognizing that management may be overly optimistic about the success of its plans, and being alert to information that may be inconsistent with (CAS 720.A23):

(a) The financial statements; or

(b) The auditor’s knowledge obtained in the audit.

In accordance with CAS 220, the engagement partner is required to take responsibility for the direction and supervision of the members of the engagement team and the review of their work, and determine that the nature, timing and extent of direction, supervision and review is planned and performed in accordance with the firm's policies or procedures, professional standards and applicable legal and regulatory requirements. In the context of this CAS, factors that may be taken into account when determining the appropriate engagement team members to address the requirements of paragraphs 14-15, include (CAS 720.A24):

• The relative experience of engagement team members.

• Whether the engagement team members to be assigned the tasks have the relevant knowledge obtained in the audit to identify inconsistencies between the other information and that knowledge.

• The degree of judgment involved in addressing the requirements of paragraphs 14-15. For example, performing procedures to evaluate the consistency of amounts in the other information that are intended to be the same as amounts in the financial statements may be carried out by less experienced engagement team members.

• Whether, in the case of a group audit, it is necessary to make inquiries of a component auditor in addressing the other information related to that component.

CAS Guidance

Other information may include amounts or other items that are intended to be the same as, to summarize, or to provide greater detail about, the amounts or other items in the financial statements. Examples of such amounts or other items may include (CAS 720.A25):

• Tables, charts or graphs containing extracts of the financial statements.

• A disclosure providing greater detail about a balance or account shown in the financial statements, 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 statements, 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 summarize, or to provide greater detail about, the amounts or other items in the financial statements, with such amounts or other items in the financial statements (CAS 720.A26).

Selecting the amounts or other items to compare is a matter of professional judgment. Factors relevant to this judgment include (CAS 720.A27):

• 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 statements 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 judgment, recognizing that the auditor’s responsibilities under this CAS 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 (CAS 720.A28):

• For information that is intended to be the same as information in the financial statements, comparing the information to the financial statements.

• For information intended to convey the same meaning as disclosures in the financial statements, 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 statements from management and:

  • Comparing items in the reconciliation to the financial statements 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 statements includes, when relevant given the nature of the other information, the manner of their presentation compared to the financial statements (CAS 720.A29).

CAS Guidance

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 (CAS 720.A30):

• A disclosure of the units produced, or a table summarizing 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 center 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 CAS 315. CAS 315 sets out the auditor's required understanding, which includes such matters as obtaining an understanding of (CAS 720.A31):

(a) The entity's organizational structure, ownership and governance, and its business model, including the extent to which the business model integrates the use of IT;

(b) Relevant industry, regulatory, and other external factors;

(c) The relevant measures used, internally and externally, to assess the entity's financial performance; and

(d) The entity’s internal control.

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 (CAS 720.A32).

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 (CAS 720.A33).

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 (CAS 720.A34).

The auditor may determine that referring to relevant audit documentation or making inquiries of relevant members of the engagement team or relevant component auditors is appropriate as a basis for the auditor’s consideration of whether a material inconsistency exists. For example (CAS 720.A35):

• 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 inquiries 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 summarized to support the auditor’s recollection.

Whether, and if so the extent to which, the auditor refers to relevant audit documentation, or makes inquiries of relevant members of the engagement team or relevant component auditors is a matter of professional judgment. However, it may not be necessary for the auditor to refer to relevant audit documentation, or to make inquiries of relevant members of the engagement team or relevant component auditors about any matter included in the other information (CAS 720.A36).

CAS Guidance

Other information may include discussion of matters that are not related to the financial statements and may also extend beyond the auditor’s knowledge obtained in the audit. For example, the other information may include statements about the entity’s greenhouse gas emissions (CAS 720.A37).

Remaining alert for other indications that the other information not related to the financial statements or the auditor’s knowledge obtained in the audit appears to be materially misstated assists the auditor in complying with relevant ethical requirements that require the auditor to avoid being associated with other information that the auditor knows or should know is false or misleading. Remaining alert for other indications that the other information appears to be materially misstated could potentially result in the auditor identifying such matters as (CAS 720.CA38):

• Differences between the other information and the general knowledge, apart from the knowledge obtained in the audit, of the engagement team member reading the other information that lead the auditor to believe that the other information appears to be materially misstated; or

• An internal inconsistency in the other information that leads the auditor to believe that the other information appears to be materially misstated.

[In ISA 720, the first sentence of this paragraph states: Remaining alert for other indications that the other information not related to the financial statements or the auditor’s knowledge obtained in the audit appears to be materially misstated assists the auditor in complying with relevant ethical requirements that require the auditor to avoid being knowingly associated with other information that the auditor believes contains a materially false or misleading statement, a statement furnished recklessly, or omits or obscures necessary information such that the other information is misleading.]