ISA 720 (Revised)

The Auditor's Responsibilities Relating to Other Information

1Objective and scope

ISA 720 (Revised) deals with the auditor's responsibilities relating to other information, whether financial or non-financial (other than financial statements and the auditor's report thereon), included in an entity's annual report. The auditor's opinion does not cover the other information and the auditor gives no assurance on it, but because users may reasonably expect the auditor to have read it and because a material inconsistency may undermine the credibility of the audited financial statements, the auditor must read and consider it. The 2015 revision extended the responsibility beyond inconsistency with the financial statements to inconsistency with the auditor's knowledge obtained in the audit, and added a required section in the auditor's report. Kenyan annual reports include the directors' report (whose consistency with the financial statements is also a Companies Act reporting requirement), the chairman's statement, the chief executive's review, the corporate governance statement, financial highlights and key ratios, and sustainability content.

The objectives, having read the other information, are to consider whether there is a material inconsistency between the other information and the financial statements; to consider whether there is a material inconsistency between the other information and the auditor's knowledge obtained in the audit; to respond appropriately when the auditor identifies that such material inconsistencies appear to exist, or when the auditor otherwise becomes aware that other information appears to be materially misstated; and to report in accordance with the standard.

2Key definitions

3Requirements

Obtaining the other information

• Determine, through discussion with management, which document(s) comprise the annual report and the entity's planned manner and timing of their issuance.
• Make appropriate arrangements with management to obtain in a timely manner, and if possible prior to the date of the auditor's report, the final version of the document(s) comprising the annual report.
• When some or all of the other information will not be available until after the date of the auditor's report, request management to provide a written representation that the final version will be provided to the auditor when available and prior to its issuance, so that the auditor can complete the procedures.

Reading and considering the other information

The auditor reads the other information and, in doing so, considers whether there is a material inconsistency between the other information and the financial statements, by comparing selected amounts or other items in the other information that are intended to be the same as, to summarise, or to provide greater detail about, the amounts or items in the financial statements (revenue and profit in the highlights, the dividend in the chairman's statement, employee numbers in the directors' report), with those amounts or items in the financial statements. The auditor also considers whether there is a material inconsistency between the other information and the auditor's knowledge obtained in the audit (a claim of full order books when the audit evidence showed a lost major customer; a statement that a factory is fully insured when the insurance schedule reviewed shows otherwise). While reading, the auditor remains alert for indications that the other information not related to the financial statements or the auditor's knowledge appears to be materially misstated. The auditor is not required to perform procedures beyond reading, or to verify information outside the financial statements.

Responding to an apparent material inconsistency

• If a material inconsistency appears to exist, or the other information appears to be materially misstated, discuss the matter with management and, if necessary, perform other procedures to conclude whether a material misstatement of the other information exists, whether a material misstatement of the financial statements exists, or whether the auditor's understanding of the entity needs to be updated.
• If the auditor concludes that a material misstatement of the other information exists, request management to correct it; if management agrees, determine that the correction has been made; if management refuses, communicate the matter with those charged with governance and request the correction.
• If the other information obtained before the report date is still materially misstated after communication with those charged with governance, take appropriate action: consider the implications for the report and communicate in the report as required below, or withdraw from the engagement where possible under law and regulation (consulting legal counsel), or, where the material misstatement is in the directors' report, report under the Companies Act as required.
• If a material misstatement exists in other information obtained after the report date and management refuses to correct it, take appropriate action to seek to have the uncorrected misstatement appropriately brought to the attention of users, for example by communicating it to those charged with governance and, where law permits, to a regulator or at the general meeting.
• If a material misstatement in the financial statements is discovered through reading the other information, or the auditor's understanding needs updating, respond under ISA 315, ISA 450, ISA 560 and ISA 705 as appropriate: the financial statements must be amended or the opinion modified; reading the annual report is a genuine audit procedure, not a formality.

4Documentation and reporting

The auditor's report includes a separate section headed 'Other Information' (or another appropriate heading) when the auditor has obtained, or expects to obtain, some or all of the other information, unless the opinion is a disclaimer. The section identifies the other information obtained prior to the report date (and, for a listed entity, the other information expected to be obtained after it), states that management is responsible for it, that the opinion does not cover it and the auditor expresses no form of assurance conclusion on it, describes the auditor's responsibilities as above, and states either that the auditor has nothing to report, or, if the auditor has concluded that an uncorrected material misstatement of the other information exists, a description of that misstatement. Where law or regulation requires the auditor to report on the other information (the Companies Act consistency statement on the directors' report), the report addresses it in the Report on Other Legal and Regulatory Requirements section, with the ISA 720 section cross-referring. The file records the documents comprising the annual report, the procedures performed (the comparisons made and the items considered against the auditor's knowledge), the final version read, the discussions on any inconsistency and the resolution, and the representations obtained.

5Examinable focus