AU-C 725 is the AICPA auditing standard that governs how an auditor reports on supplementary information presented alongside audited financial statements. When an auditor is engaged under this section, the work goes beyond reading the material: the auditor performs 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
What Counts as Supplementary Information
Supplementary information is data presented outside the basic financial statements that is not considered necessary for those statements to be fairly presented under the applicable reporting framework. It accompanies the audited financials for additional analysis but is not part of the core 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 characteristic 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 lives in the general ledger. That direct connection to the underlying records is what makes an “in relation to” opinion possible. If a schedule pulls in data from outside the general ledger, such as industry benchmarks or forward-looking estimates, it probably does not meet the definition, and AU-C 725 may not be the right framework for reporting on it.
Conditions the Auditor Must Verify Before Reporting
Several conditions must be satisfied before the auditor can issue an opinion on supplementary information under AU-C 725. Miss one, and the “in relation to” opinion is not available.
- 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 has been prepared under relevant 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 final condition carries weight. 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, because the benchmark for the “fairly stated in relation to” conclusion no longer exists.
Procedures the Auditor Performs
The work goes well beyond reading. The auditor compares and reconciles the supplementary data directly to the underlying accounting records or to the financial statements themselves. In practice, that means tracing figures from a supplementary expense schedule back to the general ledger entries that support the corresponding line items in the income statement.
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 also apply to the supplementary 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 an independent audit of the supplementary information. The auditor is not applying the full range of substantive testing that goes into 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. The schedules should tell the same story the financial statements tell, in more detail.
What the Report Says
The auditor’s report on supplementary information can appear either as a separate paragraph within the auditor’s report on the financial statements or as a standalone report issued alongside the financial statement opinion. Either format must include specific elements.
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. It 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
If 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, since the core financial data may still be fairly presented. However, if the problem in the supplementary information points to an issue with the underlying accounting records, the auditor must evaluate whether the financial statement opinion also requires modification.
When the Financial Statement Opinion Is Modified
A modified opinion on the financial statements creates complications for the supplementary information report. If the auditor issues a qualified opinion on the financial statements, the supplementary information report must address whether the qualification also affects the supplementary data. For example, if the auditor qualifies the opinion because inventory is misstated and the supplementary information includes an inventory detail schedule, that schedule is directly affected.
If the auditor disclaims an opinion on the financial statements or issues an adverse opinion, the auditor generally cannot express an unmodified “in relation to” opinion on the supplementary information. The reasoning is straightforward. You cannot conclude that supplementary data is fairly stated in relation to financial statements when you have concluded that those financial statements are not fairly stated, or when you lack sufficient evidence to form an opinion on them at all.
How AU-C 725 Differs From AU-C 720 and AU-C 730
Three AICPA standards deal with information outside the basic financial statements, and each carries a different level of auditor responsibility.2Public Company Accounting Oversight Board. Find an Analogous Standards Confusing them produces audit reports that reference the wrong standard entirely.
- AU-C 725 (Supplementary Information): the auditor is engaged to report on whether the supplementary data is fairly stated in relation to the financial statements as a whole, applies specific procedures to it, and issues an opinion.
- AU-C 720 (Other Information): the auditor reads other information included in annual reports and considers whether it is materially inconsistent with the financial statements. No opinion or assurance is expressed.
- AU-C 730 (Required Supplementary Information): this covers information that an accounting standards body such as FASB or GASB requires to accompany the financial statements. The auditor applies limited procedures but does not opine on it.
The practical difference is large. A preparer who mistakenly treats a supplementary schedule as mere “other information” under AU-C 720 deprives the auditor of the engagement scope needed to perform the reconciliation and opinion procedures, and the resulting report will be weaker than users expect. Getting the engagement letter right at the outset is what prevents the gap.
Amendments Under SAS No. 140
SAS No. 140 amended AU-C 725, along with several other sections, to incorporate 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 current auditor reporting model. They did not alter the fundamental nature of AU-C 725’s procedures or the “in relation to” opinion framework. They did change the structure of the auditor’s report so it reads consistently with the revised reporting standards across the AICPA audit sections.