Other reporting considerations

Welcome to Other Reporting Considerations!

You’ve already learned how to audit a standard set of financial statements, but what happens when things get a little... "non-standard"? In this chapter, we explore the "special" assignments an auditor might face. This includes reporting on prior years, looking at information outside the financial statements (like the "glossy" annual report), and dealing with special types of accounting like the "Cash Basis."

Don't worry if this seems like a lot of random rules at first. Think of this chapter as a "Swiss Army Knife" for auditors—it provides the specific tools you need for specific, less common situations. Let's dive in!

1. Comparative Financial Statements: Looking Back

Most companies show this year’s numbers right next to last year’s numbers. As an auditor, you have to decide what to say about those prior years.

Updated Opinions: If you find something this year that makes you change your mind about last year's opinion, you must disclose that in an Emphasis-of-Matter or Other-Matter paragraph. We use a handy mnemonic to remember what to include when updating an opinion:

DORCS helps you remember the required disclosures:
D - Date of the auditor's previous report.
O - Opinion type previously issued.
R - Reason for the prior opinion.
C - Changes that have occurred since.
S - Statement that the "opinion... is different."

Predecessor Auditors

What if a different firm audited the company last year? You (the "successor") have two choices:
1. Ask the old firm to reissue their report (they have to perform certain "due diligence" steps first).
2. Include an Other-Matter paragraph in your report stating that another auditor did the prior year, the date of their report, and the type of opinion they gave.

Key Takeaway: When reporting on comparative statements, the auditor’s report must cover all periods presented. If you change your mind about a prior year, remember your DORCS!

2. Other Information (OI) in Documents

Think of a big corporation’s annual report. It has the audited financial statements, but it also has a lot of "fluff"—letters from the CEO, pictures of happy employees, and graphs of market share. This is Other Information.

Your Responsibility: You are not required to audit this fluff. However, you are required to read it to make sure it doesn't contradict the financial statements.
Example: If the financial statements say the company lost \$1 million, but the CEO's letter says "We had our most profitable year ever!", you have a material inconsistency.

What if there is a mistake?

1. If the Financial Statements are wrong: Tell management to fix them. If they don't, modify your opinion.
2. If the Other Information is wrong: Tell management to fix it. If they refuse, notify those charged with governance and consider adding an Other-Matter paragraph or even withholding the report.

Quick Review: You read the other information, but you don't provide assurance on it unless you are specifically engaged to do so.

3. Supplementary Information (SI)

Supplementary information is extra detail (like a schedule of selling expenses) that isn't required but is helpful. The auditor can report on this "in relation to" the financial statements as a whole.

To report on SI, two conditions must be met:
1. The SI was derived from the same records as the FS.
2. The SI relates to the same period as the FS.

Analogy: If the Financial Statements are the "Main Course," Supplementary Information is the "Side Dish." You can't vouch for the side dish unless you've already cooked the main course!

4. Special Purpose Frameworks (OCBOA)

Not every company uses GAAP (Generally Accepted Accounting Principles). Some use Other Comprehensive Bases of Accounting (OCBOA), now called Special Purpose Frameworks.

The four most common are:
• Cash Basis: Recording only when cash moves.
• Tax Basis: Using the rules the IRS uses.
• Regulatory Basis: Using rules set by a government agency (like an insurance commission).
• Contractual Basis: Using rules agreed upon in a specific contract.

Reporting Rules for Special Purpose Frameworks:

For special-purpose statements, identify the actual reporting basis clearly in their titles and notes; a title such as “Balance Sheet—Tax Basis” may be appropriate. AU-C 800 generally requires an emphasis-of-matter paragraph identifying the framework and restricted use for contractual or regulatory bases. Exception: regulatory-basis statements intended for general use follow AU-C 800.22, with separate GAAP and regulatory-basis opinions instead of those paragraphs. Other restricted-use requirements may also apply.

Key Takeaway: Special Purpose Frameworks are totally fine, but the auditor must make it very clear that these are not GAAP statements.

5. Audits of Single Financial Statements or Specific Elements

Sometimes a client only wants you to audit their Accounts Receivable or just their Income Statement, rather than the whole package.

Determine materiality specifically for the single financial statement or element being audited. It may be lower than materiality for a complete set, affecting the nature, timing and extent of procedures; it is not an automatic fixed reduction. Consider relevant related items and disclosures.

The "Pie" Analogy: If you are checking a whole pizza for hair, you might be okay with one hair on the whole pizza. But if you are only checking one slice, you have to be much more strict!

Common Mistake to Avoid: If you gave a Disclaimer of Opinion or an Adverse Opinion on the full set of financial statements, you generally cannot give a "clean" (Unmodified) opinion on a major piece of those statements in the same report. That's called a "piecemeal opinion" and it’s usually not allowed because it confuses the reader.

6. Service Organizations (SOC Reports)

Many companies outsource their work (like payroll or data hosting). As their auditor (the User Auditor), you might need to know if the systems at the outside company (the Service Organization) are reliable.

You look for a Service Auditor's Report, specifically a SOC 1 report:

A SOC 1 Type 1 report addresses description and design at a point in time; it does not establish operating effectiveness. A suitable Type 2 report adds operating-effectiveness evidence over a period. It does not automatically reduce control risk: assess the report’s relevance, coverage, test results, service auditor and complementary user-entity controls. Alternatives include testing at the service organization or using another auditor to perform appropriate tests.

Did you know? A Type 1 report is like a photo (a point in time), while a Type 2 report is like a movie (it covers a whole period of time).

7. Comfort Letters

A Comfort Letter is a letter from the auditor to an underwriter (the people helping a company sell stock). It provides "comfort" to the underwriter that the financial data in the registration statement hasn't changed wildly since the last audit.

A comfort letter does not provide blanket assurance on unaudited information. Negative assurance on interim financial information requires an appropriate review under the applicable standards and satisfaction of the comfort-letter requirements. For information subjected only to specified procedures, describe those procedures and findings; do not turn that work into an audit opinion or review conclusion.

Quick Review: Comfort letters are restricted use. They are not for the public; they are just for the company and the underwriters.

Final Summary of Area IV: Other Reporting

For special-purpose statements, identify the actual reporting basis clearly in their titles and notes; a title such as “Balance Sheet—Tax Basis” may be appropriate. AU-C 800 generally requires an emphasis-of-matter paragraph identifying the framework and restricted use for contractual or regulatory bases. Exception: regulatory-basis statements intended for general use follow AU-C 800.22, with separate GAAP and regulatory-basis opinions instead of those paragraphs. Other restricted-use requirements may also apply.

You've got this! Reporting can feel technical, but if you remember the "Who, What, and Where" for each special report, you'll master these questions on the CPA exam!