AU-C 725 is the AICPA auditing standard that governs how an auditor reports on supplementary information presented alongside audited financial statements. Under this section, the auditor performs specific reconciliation and inquiry procedures and then expresses an opinion on whether the supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole.1Federal Student Aid. Financial Responsibility Supplemental Schedule Audit Requirement That opinion is what sets AU-C 725 apart from the standards that cover other categories of information published with the financials.
What Counts as Supplementary Information
Supplementary information is data presented outside the basic financial statements that is not necessary for those statements to be fairly presented under the applicable reporting framework. It sits alongside the audited financials for additional analysis but is not part of the balance sheet, income statement, or required footnotes. Typical examples include a detailed breakdown of operating expenses by department, a schedule showing revenue by product line, or an employee headcount summary by payroll period.
The defining feature is that supplementary information is derived from the same accounting records used to prepare the financial statements. It expands on or reorganizes data that already exists in the general ledger. That direct link to the underlying records is what makes an “in relation to” opinion possible in the first place, and it is what separates supplementary information from the broader category of other information that a different standard covers.
How AU-C 725 Differs From AU-C 720 and AU-C 730
Three AICPA standards deal with information presented outside the basic financial statements, and each carries a different level of auditor responsibility.2Public Company Accounting Oversight Board. Find an Analogous Standards Mixing them up is the most common source of confusion in practice.
- AU-C 725 covers supplementary information. The auditor is engaged to apply procedures and issue an opinion on whether the information is fairly stated in relation to the financial statements as a whole.
- AU-C 720 covers other information, such as management commentary or a shareholder letter included in an annual report. The auditor reads it and considers whether it is materially inconsistent with the financial statements. No opinion or assurance is expressed.
- AU-C 730 covers required supplementary information, meaning information that a body like FASB or GASB requires to accompany the financial statements. The auditor applies limited procedures but does not opine on it.
The practical gap between these is wide. A preparer who treats a supplementary schedule as mere “other information” would deprive the auditor of the engagement scope needed to reconcile the data and issue the AU-C 725 opinion, and users of the report would receive far less assurance than the schedule’s placement seems to promise.
Conditions the Auditor Must Verify Before Reporting
Before an auditor can express an opinion under AU-C 725, several conditions have to be met. If any is missing, the “in relation to” opinion cannot be issued.
- The supplementary information is derived from the same accounting records used to prepare the audited financial statements.
- It relates to the same reporting period as the financial statements.
- Its form and content are consistent with how the financial statements are presented.
- It was prepared under relevant preparation criteria.
- The auditor has obtained the supplementary information and confirmed that it will be included in a document containing the audited financial statements.
- The auditor’s report on the financial statements themselves is expected to be issued.
That last condition matters more than it looks. The “in relation to” opinion is anchored to the opinion on the financial statements. If the auditor disclaims an opinion on the financial statements, the auditor generally cannot opine on the supplementary information either, because the benchmark for “fairly stated in relation to” no longer exists.
Procedures the Auditor Performs
Work under AU-C 725 goes well beyond reading the schedules. The auditor compares and reconciles the supplementary data directly to the underlying accounting records or to the financial statements themselves. Tracing figures from a supplementary expense schedule back to the general ledger entries supporting the corresponding line items in the income statement is a typical example.
The auditor also inquires of management about the methods used to prepare the supplementary information: how it was compiled, what criteria governed its presentation, and whether the same internal controls that apply to the financial statements apply to the schedules. Management is responsible for acknowledging, typically through a written representation letter, that the supplementary information was derived from the accounting records and is complete.
These procedures are not a separate audit of the supplementary information. The auditor is not applying the full range of substantive testing used in the financial statement audit. The work is designed to give the auditor a reasonable basis for concluding whether the supplementary information, taken as a whole, is fairly stated when measured against the audited financial statements.
What the Report Says
The auditor’s report on supplementary information can appear either as a separate paragraph within the report on the financial statements or as a standalone report accompanying the financial statement opinion. Either way, specific elements are required.
The report states that management is responsible for the supplementary information and that the data was derived from the accounting records used to prepare the financial statements. It describes the procedures the auditor performed and expresses an opinion on whether the supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole.1Federal Student Aid. Financial Responsibility Supplemental Schedule Audit Requirement
When the auditor identifies a material misstatement in the supplementary information that management refuses to correct, the auditor modifies the opinion on the supplementary information. That modification does not automatically affect the opinion on the financial statements themselves, since the core financial data may still be fairly presented. If the problem in the supplementary information reveals an issue with the underlying accounting records, though, the auditor has to evaluate whether the financial statement opinion also requires modification.
When the Financial Statement Opinion Is Modified
A modified opinion on the financial statements complicates the supplementary information report. If the auditor issues a qualified opinion on the financials, the report on supplementary information must address whether the qualification also affects the supplementary data. If the qualification concerns misstated inventory, and the supplementary information includes an inventory detail schedule, that schedule is directly affected.
If the auditor disclaims an opinion or issues an adverse opinion on the financial statements, an unmodified “in relation to” opinion on the supplementary information generally is not available. You cannot conclude that supplementary data is fairly stated in relation to financial statements when you have concluded those financial statements are not fairly stated, or when you lack the evidence to form an opinion on them.
Common Mistakes in Practice
The most frequent error is treating supplementary schedules as “other information” under AU-C 720. Preparers assume the auditor’s only job is to read the material for consistency. That sells the engagement short. If the information is derived from the accounting records and the entity wants the auditor’s name associated with it, AU-C 725 applies and the auditor needs to be engaged to perform reconciliation and opinion procedures.
A related problem is presenting supplementary information without a clear engagement understanding. If the auditor was never engaged under AU-C 725, but the schedules appear in the same document as the audited financial statements, the auditor’s responsibility defaults to reading them under the other information standard. That produces weaker involvement than users of the report typically expect from schedules that look like they carry the auditor’s imprimatur. A clean engagement letter at the start prevents the gap.
A third pitfall involves supplementary information that does not actually trace to the accounting records. If a schedule includes data from outside the general ledger, such as industry benchmarks or forward-looking estimates, AU-C 725 may not be the right framework. The auditor should evaluate whether the data meets the definition of supplementary information before agreeing to report on it.
Amendments Under SAS No. 140
SAS No. 140 amended AU-C 725, along with several other sections, to incorporate the auditor reporting changes introduced by SAS Nos. 134 and 137.3AICPA & CIMA. AICPA Statement on Auditing Standards No. 140 The amendments updated the report formatting and language requirements for supplementary information reports to align with the revised auditor reporting model. They did not change the fundamental nature of the procedures or the “in relation to” opinion framework, but they did affect the structure of the auditor’s report so it stays consistent with the reporting standards across the other AICPA audit sections.