Other Reporting Considerations — Evaluate Other Information And Consistency - CPA Aud

SECTION 1

Historical Context & Motivation

The concept of evaluating other information accompanying audited financial statements has evolved alongside the profession's understanding of information asymmetry between management and stakeholders. In the early decades of modern auditing, the auditor's responsibility was narrowly confined to the financial statements themselves. However, as companies began publishing increasingly elaborate annual reports—complete with management discussion and analysis sections, operational highlights, and forward-looking commentary—regulators and standard-setters recognized that users often consumed this other information in tandem with audited figures. A material inconsistency between the audited financial statements and accompanying narratives could erode the credibility of both, misleading investors who reasonably assumed coherence across the entire document.

1972 • SAS No. 8 — Other Information

The AICPA issued Statement on Auditing Standards No. 8, formally establishing an auditor's responsibility to read other information in documents containing audited financial statements and consider whether it was materially inconsistent with those statements.

2006 • ISA 720 Introduced Globally

The International Auditing and Assurance Standards Board (IAASB) issued ISA 720, providing a global framework for evaluating other information in documents containing audited financial statements, influencing subsequent revisions worldwide.

2015 • ISA 720 (Revised) — Strengthened Requirements

The IAASB significantly revised ISA 720, expanding the auditor's work effort and requiring explicit statements in the auditor's report about other information, including the auditor's conclusion or any uncorrected material misstatements identified.

2021 • SAS No. 137 (AU-C 720) Effective in the U.S.

The AICPA's ASB issued SAS No. 137, converging U.S. standards with ISA 720 (Revised). This standard, codified as AU-C Section 720, became effective for audits of periods ending on or after December 15, 2021, requiring enhanced reporting on other information.

2023 • PCAOB Guidance for Issuers

The PCAOB continued to maintain AS 2710 (Other Information in Documents Containing Audited Financial Statements) for public company audits, requiring auditors to read and consider other information for material inconsistencies and material misstatements of fact.

The fundamental question these standards address is straightforward yet critically important: when users read an annual report or other document that contains audited financial statements alongside unaudited information, how does the auditor ensure that the unaudited content does not contradict or undermine the audited figures? This is not about extending the audit opinion to cover the other information, but rather about maintaining the integrity of the financial reporting package as a whole. The auditor's responsibility here sits at the intersection of professional skepticism and user protection—two pillars that define the auditing profession's social contract.

SECTION 2

Core Principles & Definitions

Before examining the mechanics of evaluating other information and consistency, it is essential to establish the foundational definitions and principles that govern this area. The relevant standards—AU-C 720 for nonissuer audits and AS 2710 for issuer audits—share a common conceptual architecture, though they differ in certain procedural details. At their core, both standards rest on the premise that the auditor has a professional obligation to read information that accompanies audited financial statements and to respond appropriately when that information appears materially inconsistent with the financial statements or the auditor's knowledge obtained during the audit.

Other Information

Financial and non-financial information (other than the audited financial statements and the auditor's report) included in an entity's annual report or other document containing audited financial statements. Examples include the MD&A, chairman's letter, operating statistics, and selected financial data.

Material Inconsistency

A discrepancy between the other information and the audited financial statements that could reasonably be expected to influence users' economic decisions. For example, the annual report narrative states revenue grew 15% while audited figures show 8% growth.

Material Misstatement of Fact

Information in the other information that is incorrectly stated or misleading and is unrelated to the financial statements but may undermine the credibility of the report. For instance, claiming an environmental certification that the company never received.

Consistency of Financial Statements

Under AU-C 708, the auditor evaluates whether the accounting principles used in the current period are consistent with those of the preceding period. A change in accounting principle, entity, or correction of a material misstatement requires an emphasis-of-matter paragraph.

Annual Report

A document, or combination of documents, prepared typically on an annual basis by management or those charged with governance, that provides owners or similar stakeholders with information on the entity's operations and financial position. The auditor identifies which documents constitute the annual report.

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KEY TAKEAWAY

Think of the auditor's role with other information like a fact-checker at a newspaper. The journalist (management) writes the story (annual report), and the fact-checker (auditor) does not rewrite the article or vouch for every claim, but reads the story alongside verified data (audited financial statements) to flag any contradictions or obvious factual errors. The fact-checker's name appears on a note at the end of the article (the auditor's report section on other information), signaling that the check was performed—but the story remains management's responsibility.

SECTION 3

Visual Explanation — The Auditor's Workflow

This flowchart traces the auditor's decision path under AU-C 720. Starting with obtaining the other information, the auditor reads and compares it with the audited financial statements. If no inconsistency is found, the auditor includes a standard other-information section in the report. If an inconsistency or material misstatement of fact is identified, the auditor escalates to management or those charged with governance (TCWG). Unresolved matters result in a modified other-information section describing the uncorrected material misstatement.

The diagram above illustrates the decision tree that auditors navigate when evaluating other information. Notice that the auditor's responsibilities are read-and-consider in nature, not an extension of audit assurance. The auditor does not opine on the other information, nor does the auditor perform additional audit procedures on it. Instead, the auditor leverages knowledge already obtained during the audit to assess whether a material inconsistency exists. When one is identified, the escalation path involves discussion with management and, if necessary, those charged with governance. Only when management refuses to correct the inconsistency does the auditor modify the other-information section of the report—a step that signals to readers that a credibility gap exists in the document.

SECTION 4

Detailed Mechanism — How Evaluation Works

AU-C 720: The Nonissuer Framework

Under AU-C Section 720, the auditor's objectives are twofold. First, the auditor must consider whether a material inconsistency exists between the other information and the audited financial statements. Second, the auditor must consider whether a material inconsistency exists between the other information and the auditor's knowledge obtained during the audit. The standard distinguishes between other information obtained prior to the date of the auditor's report and other information obtained after that date. For information obtained before the report date, the auditor must complete the evaluation before issuing the report. For information obtained after the report date, the auditor has no obligation to perform procedures but must read it and respond to any identified material inconsistency.

AU-C 708: Consistency of Financial Statements

While AU-C 720 addresses other information in documents, AU-C Section 708 addresses consistency of financial statements—a related but distinct concept. Consistency pertains to whether the accounting principles used in the current period are consistent with those of the preceding period. The auditor evaluates whether a change in accounting principle has occurred, whether the method of applying an accounting principle has changed, and whether a material misstatement in previously issued financial statements has been corrected. If any of these conditions exist, the auditor includes an emphasis-of-matter paragraph in the auditor's report that references the change and the relevant footnote disclosure.

AS 2710: The Issuer Framework (PCAOB)

For public company (issuer) audits, the PCAOB's AS 2710 governs the auditor's responsibility regarding other information in documents containing audited financial statements. The standard requires the auditor to read the other information and consider whether it is materially inconsistent with the audited financial statements. If a material inconsistency is identified, the auditor determines whether the financial statements, the auditor's report, or the other information requires revision. Additionally, if the auditor becomes aware of information that appears to be a material misstatement of fact, the auditor should discuss the matter with management. The PCAOB framework does not require a separate section in the auditor's report about other information, which marks a notable difference from the AU-C 720 reporting model.

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ISSUER VS. NONISSUER: KEY DISTINCTION

Under AU-C 720 (nonissuer), the auditor's report must include a separate section titled "Other Information" describing the auditor's responsibilities and conclusions. Under AS 2710 (issuer), no such separate section is required in the auditor's report—the auditor's obligation is to read and consider, but reporting is triggered only when an inconsistency is found and remains unresolved.

SECTION 5

Classification of Auditor Responses

The auditor's response to identified inconsistencies or misstatements of fact depends on the nature of the issue and management's willingness to correct it. Understanding the taxonomy of possible responses is essential for the CPA exam, as questions frequently test the distinction between situations that require report modification and those that do not. The diagram below categorizes the auditor's possible findings and corresponding actions.

This classification diagram maps the auditor's findings to specific reporting responses. Note the three-way split in the upper section: when a material inconsistency is identified, the auditor must determine whether the financial statements need revision (potentially modifying the opinion) or whether the other information needs revision (leading to a modified other-information section if uncorrected). The bottom panel addresses AU-C 708 consistency considerations, which produce an emphasis-of-matter paragraph rather than a modification of the other-information section.

The diagram reinforces a critical distinction that CPA candidates must internalize. When the other information contradicts the financial statements, the auditor's first step is to determine which is wrong—the financial statements or the other information. If the financial statements require revision and management refuses, the audit opinion itself may need modification (qualified or adverse). If the other information requires revision and management refuses, the auditor modifies the other-information section. These are fundamentally different reporting consequences, and the exam frequently tests whether candidates can distinguish between them.

SECTION 6

Worked Example — Identifying and Responding to Inconsistencies

Scenario: Greenfield Corp. Annual Report

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Step 1 — Identify the Other Information

You are the engagement partner for the audit of Greenfield Corp., a nonissuer with a December 31, 2024, year-end. Greenfield's annual report includes the audited financial statements, your auditor's report, a letter from the CEO, an MD&A section, and a table of "Five-Year Financial Highlights." Under AU-C 720, the CEO letter, MD&A, and Five-Year Financial Highlights all constitute other information that you must read and evaluate.
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Step 2 — Read and Compare

While reading the MD&A, you notice management states: "Revenue in 2024 increased 22% over the prior year, driven by our successful expansion into Asian markets." You compare this with the audited income statement, which shows revenue of $85 million in 2024 and $78 million in 2023. The actual percentage increase is ($85M − $78M) ÷ $78M = 8.97%, approximately 9%. This represents a significant discrepancy—the MD&A claim of 22% is materially inconsistent with the audited figure of approximately 9%.

Material inconsistency identified: 22% claimed vs. 9% per audited F/S.
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Step 3 — Determine Which Is Wrong

You review your audit workpapers, confirming that revenue testing, including substantive analytical procedures and detailed testing of transactions, supports the $85 million and $78 million figures. There is no indication that the audited financial statements are incorrect. You conclude that the other information—the MD&A—contains the error.

Conclusion: The other information (MD&A) is materially misstated.
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Step 4 — Communicate with Management

You discuss the discrepancy with Greenfield's CFO. The CFO acknowledges that the 22% figure was based on an early draft of revenue figures that included a since-eliminated product line. The CFO agrees to revise the MD&A to state that revenue increased approximately 9%.

Management agrees to revise the other information.
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Step 5 — Evaluate Reporting Implications

Because management corrected the MD&A before the annual report was finalized, no modification to the other-information section of your auditor's report is necessary. You include the standard other-information section describing your responsibilities and stating that you have nothing to report. Had management refused to correct the error, you would have described the uncorrected material misstatement of the other information in the other-information section of your report. Importantly, this would not have affected your opinion on the financial statements themselves, which remain fairly stated.

Standard (unmodified) other-information section included in the auditor's report.

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EXAM TIP

CPA exam questions often present a scenario where the auditor identifies an inconsistency and ask: "What effect does this have on the auditor's report?" Remember the two-track analysis: if the F/S are wrong, the opinion may be modified. If the other information is wrong and uncorrected, the other-information section is modified—but the opinion on the F/S remains unaffected, provided they are fairly stated.

SECTION 7

Comparing Frameworks: AU-C 720 vs. AS 2710 vs. AU-C 708

Feature	AU-C 720 (Nonissuer)	AS 2710 (Issuer / PCAOB)	AU-C 708 (Consistency)
Scope	Other information in annual report	Other information in documents containing audited F/S	Consistency of accounting principles between periods
Auditor Action	Read and consider; compare with F/S and audit knowledge	Read and consider for material inconsistency	Evaluate changes in accounting principle, entity, or correction of error
Reporting Requirement	Mandatory separate "Other Information" section in auditor's report	No mandatory separate section; report only if unresolved inconsistency	Emphasis-of-matter paragraph when change/correction exists
Effect on Opinion	None; OI section is separate from the opinion	None directly; but if F/S need revision, opinion may be modified	None; emphasis-of-matter does not modify the opinion
Timing Sensitivity	Pre-report date vs. post-report date procedures differ	Applies whenever auditor reads documents containing audited F/S	Evaluated as part of the audit of current period F/S

Comparison of the three primary standards governing other information and consistency evaluations

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KEY TAKEAWAY

Think of the annual report as a research paper: the financial statements are the data tables (verified through the audit), the other information is the narrative discussion (the auditor's read-and-consider duty under AU-C 720 or AS 2710), and the consistency evaluation (AU-C 708) is like ensuring the methodology section has not changed between experiments without proper disclosure. The auditor's report is the peer reviewer's note—attesting to the data, flagging narrative contradictions, and noting methodology changes, but never rewriting the paper itself.

SECTION 8

Connection to Broader Reporting Framework

The evaluation of other information and consistency does not exist in isolation—it connects to several advanced reporting topics that CPA candidates should recognize. Understanding these linkages is essential for navigating complex exam scenarios and, more importantly, for performing competently in practice.

This Concept	Advanced / Related Concept	Connection
AU-C 720 Other Information	AU-C 935 — Compliance Audits	In governmental audits, the schedule of expenditures of federal awards is other information requiring evaluation for consistency with audited F/S.
Material Inconsistency	AU-C 560 — Subsequent Events	Other information obtained after the report date may reveal subsequent events that require consideration under AU-C 560.
AU-C 708 Consistency	AU-C 706 — Emphasis-of-Matter Paragraphs	A consistency change triggers an emphasis-of-matter paragraph under AU-C 706 framework, referencing the nature of the change and the related footnote.
Uncorrected Misstatement of OI	AU-C 260 — Communication with TCWG	If management refuses to correct, the auditor communicates the matter to those charged with governance as required by AU-C 260.
AS 2710 (PCAOB)	SEC Regulations — Form 10-K	For SEC registrants, the 10-K filing contains extensive other information including Item 7 (MD&A) that auditors must read under AS 2710.

Linkages between other information/consistency standards and the broader audit reporting framework

Looking forward, the profession continues to grapple with expanding the scope of the auditor's responsibility for other information. The rise of integrated reporting, ESG disclosures, and key performance indicators in annual reports means that the volume and complexity of other information will only grow. Some regulators are already exploring whether auditors should provide limited assurance on certain categories of other information—a development that would fundamentally transform the current read-and-consider model into a more active assurance engagement. For CPA candidates, understanding the current framework is essential, but remaining aware of its evolving boundaries will distinguish competent practitioners from merely compliant ones.

SECTION 9

Practice Problems

Question 1: CONCEPTUAL

Under AU-C 720, what is the auditor's primary objective when evaluating other information included in an entity's annual report? Does the auditor provide assurance on the other information?

Show answer

The auditor's primary objective is to consider whether there is a material inconsistency between the other information and the audited financial statements, or between the other information and the auditor's knowledge obtained during the audit. The auditor does not provide any form of assurance (opinion or conclusion) on the other information. The responsibility is limited to reading and considering the other information, and responding appropriately if a material inconsistency or apparent material misstatement of fact is identified. The auditor's report includes a separate 'Other Information' section that describes these responsibilities and states the auditor's conclusion, but this section does not extend the audit opinion.

Question 2: BASIC CALCULATION

An entity's audited financial statements report net income of $4.2 million for 2024 and $3.8 million for 2023. The CEO's letter in the annual report states that 'net income grew by approximately 15% in 2024.' Is this a material inconsistency? Show your calculation.

Show answer

The actual growth rate is ($4.2M − $3.8M) ÷ $3.8M = $0.4M ÷ $3.8M ≈ 10.53%. The CEO's letter states approximately 15%, while the actual figure is approximately 10.5%. The difference of roughly 4.5 percentage points (15% vs. 10.5%) represents a significant overstatement of the growth rate—nearly 43% higher than the actual percentage. Whether this constitutes a material inconsistency depends on qualitative factors, including whether a reasonable user's economic decisions could be influenced by this discrepancy. Given that profitability growth rates are key metrics for investors and creditors, this difference would likely be considered material, and the auditor should discuss the discrepancy with management and request correction of the CEO's letter.

Question 3: INTERMEDIATE

During the audit of a nonissuer, the auditor identifies that management changed its depreciation method from straight-line to double-declining balance for all fixed assets. Management has properly disclosed this change in the notes to the financial statements, and the auditor has concluded the financial statements are fairly stated. What reporting implications arise under (a) AU-C 708, and (b) AU-C 720 if the MD&A fails to mention this change?

Show answer

(a) Under AU-C 708, a change in accounting principle requires the auditor to include an emphasis-of-matter paragraph in the auditor's report. This paragraph references the change in depreciation method and directs the reader to the relevant note disclosure. The emphasis-of-matter paragraph does not modify the audit opinion—the opinion remains unmodified if the financial statements are fairly stated and the change is properly disclosed. (b) Under AU-C 720, the MD&A's failure to mention a significant change in depreciation method may constitute a material inconsistency between the other information and the audited financial statements, or at minimum an omission that could mislead users. The auditor should discuss this omission with management and request that the MD&A be revised to address the depreciation method change. If management refuses, the auditor would describe the uncorrected material inconsistency in the other-information section of the report.

Question 4: APPLIED

You are auditing a public company (issuer) under PCAOB standards. While reading the Form 10-K, you notice that Item 1 (Business) states the company operates in 14 countries. During the audit, your testing of foreign subsidiary consolidation revealed operations in only 11 countries—three subsidiaries listed in the prior year were closed. Management insists the 10-K language is aspirational, referring to markets where the company 'has a presence through distributors.' How should you respond under AS 2710?

Show answer

Under AS 2710, the auditor's obligation is to read the other information and consider whether it is materially inconsistent with the audited financial statements. The claim of 14 countries versus 11 actual operating countries could constitute a material misstatement of fact, particularly if investors rely on geographic diversification metrics. You should first consider whether this discrepancy is material to a reasonable user's economic decisions. If you conclude it is, you should discuss the matter with management, explaining that 'presence through distributors' is meaningfully different from 'operating in' and that the current language could mislead users about the company's operational footprint. If management refuses to revise, AS 2710 directs the auditor to consider consulting legal counsel about further action. Unlike AU-C 720, AS 2710 does not require a separate other-information section in the report, but the auditor cannot simply ignore the discrepancy—documentation of the matter and management's response is critical.

Question 5: CRITICAL THINKING

Consider a hypothetical scenario in which an auditor of a nonissuer obtains the annual report after the date of the auditor's report. The annual report includes a newly added sustainability section claiming the company reduced carbon emissions by 40% in 2024. The audited financial statements include no environmental liabilities, and the auditor's knowledge from the audit neither supports nor contradicts this sustainability claim. Analyze the auditor's responsibilities under AU-C 720. Should the auditor perform additional procedures? What are the limitations of the current standard in addressing non-financial other information?

Show answer

Under AU-C 720, when other information is obtained after the auditor's report date, the auditor has no obligation to perform procedures to determine whether the other information is properly stated. However, the auditor is still required to read the other information and consider whether a material inconsistency exists between it and the audited financial statements or the auditor's knowledge obtained during the audit. In this case, because the sustainability claim pertains to non-financial operational data that was not within the scope of the financial statement audit, the auditor likely has no audit knowledge that directly supports or contradicts the 40% emissions reduction claim. The auditor is not required to perform additional procedures such as inspecting emissions data. If the auditor becomes aware that the claim appears to be a material misstatement of fact—for example, if the auditor knows the company acquired a new manufacturing plant that would logically increase emissions—the auditor should discuss the matter with management. This scenario exposes a significant limitation of the current read-and-consider model: as companies increasingly include non-financial metrics in their annual reports, the auditor's knowledge base may be insufficient to identify inconsistencies in areas outside the financial reporting framework. This is precisely why regulators are exploring expanded assurance requirements for ESG and sustainability disclosures.

SUMMARY

Summary — Evaluating Other Information and Consistency

Summary

The auditor's responsibility to evaluate other information in documents containing audited financial statements is governed by AU-C 720 for nonissuers and AS 2710 for issuers. The auditor reads and considers the other information for material inconsistencies with the audited financial statements and for material misstatements of fact. When an inconsistency is found, the auditor determines whether the financial statements or the other information is wrong. If the other information is wrong and management refuses to correct it, the auditor includes a description of the uncorrected material misstatement in the other-information section of the report. Under AU-C 720, this section is mandatory in every auditor's report; under AS 2710, reporting is triggered only when an inconsistency remains unresolved.

Separately, AU-C 708 addresses the consistency of accounting principles between reporting periods. A change in accounting principle, a change in the reporting entity, or the correction of a material misstatement in previously issued financial statements requires an emphasis-of-matter paragraph in the auditor's report. Critically, neither the other-information section nor the emphasis-of-matter paragraph modifies the audit opinion—they are informational additions that enhance user understanding of the financial reporting package.