Case 4

Case 4: Aaron Jones, CPA, is auditing the current year’s financial statements of Low Company, a publicly traded company. Aaron notices some major fluctuations in Low’s fourth quarter of the previous year’s financial statement balances. He is aware that security holders of publicly traded company stock that does not separately report fourth quarter results often “impute” such results by subtracting data based on third quarter interim balances from the year-end balances. Thus, companies should report such significant events as disposals of segments and other unusual items for that quarter as a note to the annual financial statements. Aaron notices that Low makes such disclosures, but is unsure if his firm should audit these additional, supplementary disclosures.

Problem Identification: Is it mandated that the CPA audit supplementary fourth quarter disclosures of publicly traded companies? What other steps should the CPA perform in this regard?

Keywords: Association with the financial statements; interim reporting; auditor independence.

Conclusion: AU Section 9504, pars. 4 & 5 (an Interpretation of AU Section 504, Association With Financial Statements) states that auditors have no obligation to audit fourth quarter data, unless he or she was engaged to do so. However, the auditor should ascertain that management makes this separate disclosure, in which case the auditor can ask management if it wants him or her to audit or review it. In most cases, the auditor would state that such information was “unaudited” or “not covered by the auditor’s report”. Moreover, if management refuses to make such a disclosure, this “exception” is not material enough to warrant the auditor modifying his or hr “unqualified” opinion.