SAS No. 137 explains auditor’s responsibilities with NFP annual reports. Further, Statement on Auditing Standards No. 137, The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports, clarifies the documents —financial or nonfinancial information — that are within the scope of the standard.
Auditors’ requirements under SAS No. 137 benefit all users of the NFP auditor's report due to the transparency of the report with respect to the other information included in an annual report.
Auditor’s responsibilities: Determine what constitutes an NFP annual report per SAS No. 137.
Many not-for-profit organizations publish an annual report; however, not all of these fit the criteria to be classified as such under SAS No. 137.
When making the determination, the primary consideration is whether the document “contains, accompanies, or incorporates by reference the financial statements and the auditor’s report thereon.” If not, regardless of whether it is referred to as an “annual report,” it does not meet the definition for SAS No. 137 purposes.
While it is typically straightforward to determine whether a document “contains” or “accompanies” the financial statements and auditor’s report, it can be more difficult to determine whether the document “incorporates [them] by reference.”
An example of incorporating by reference: The annual report does not contain the entire set of audited financial statements but includes a note to “scan a QR code to find the complete audited financial statements.”
If the organization publishes an annual report, the auditor should do the following during planning of the audit engagement:
Obtain management’s written acknowledgement of which document(s) comprise the annual report that will be subject to the auditor’s procedures
Obtain the organization’s planned manner and timing of the issuance of such document(s)
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
Note: When some or all the document(s) will not be available until after the date of the auditor’s report on the financial statements, request management to provide a written representation that the final version of the document(s) will be provided to the auditor when available, and prior to the issuance of the document(s) by the organization, such that the auditor can complete the required audit procedures.
Auditor’s responsibility: Consider whether a material inconsistency exists between the other information and the audited financial statements.
Auditors will need to stay alert for indications that there are material misstatements of fact, material inconsistencies between the other information and the auditor’s knowledge obtained during the audit, or the other information is otherwise misleading. The auditor is not responsible for searching for omitted information or for the completeness of the other information.
When the auditor has obtained all of the other information included in the organization’s annual report by the date of the auditor’s report, a separate section is included in the auditor’s report with the heading “Other information” or other appropriate heading and describing both management’s and the auditor’s responsibilities with respect to the other information, identifying the other information, stating that it does not include the financial statements and the auditor’s report thereon, and stating that the auditor’s opinion on the financial statements does not cover the other information and that the auditor does not express an opinion or any form of assurance thereon.
If an uncorrected material misstatement exists in the other information, the auditor is required to describe it in the auditor’s report.
In situations in which management is unable to provide the final version of the other information before the date of the auditor’s report, while the auditor would not be required to address the other information in the auditor’s report, the auditor is still required to apply the performance procedures required by the SAS.
If the other information is not obtained prior to the date of the auditor’s report, users still benefit by the auditor’s reading and consideration of the other information as the auditor may become aware of material misstatement of the financial statements or a material misstatement of the other information.
Understanding the requirements of this SAS will help auditors prepare for discussions as they plan for their audit engagements.
Additional resources:
Not-for-Profit illustrative auditor’s report: The following illustrative independent auditor’s report template is intended to assist not-for-profit financial statement auditors.
Management’s Discussion and Analysis: Best Practices for Not-for-Profit Entities: This practical, non-authoritative guide presents a framework and best practices to help a nonprofit prepare a management's discussion and analysis (MD&A).