Omitting the MD&A in Governments
By Charles Hall | Auditing , Local Governments
Omitting the MD&A in governments is not common, but it does occur.
According to AU-C 730, the auditor’s report on the financial statements should include an other-matter paragraph that refers to the required supplementary information (RSI). In governmental financial statements, the management, discussion, and analysis (MD&A) is considered RSI. Though the MD&A is “required” supplementary information, governments can–strangely enough–exclude it from the financial statements.
Omitting the MD&A – Effect on an Audit Opinion
If the required supplementary information is omitted, the auditor should include an other-matter paragraph in the opinion such as the following:
Management has omitted the management, discussion, and analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.
Notice the omission of the MD&A does not affect the opinion rendered (in other words, it does not result in a modified report).
RSI Audit Standard
AU-C 730 is the audit standard for required supplementary information. Click here for an overview of the supplementary information audit standards. The former supplementary information standards were SASs 118, 119 and 120; those standards are now–under the Clarity Standards–AU-C sections 720, 725, and 730.
Omitting the MD&A – Effect on a Compilation Report
The MD&A is sometimes omitted in financial statements subject to a compilation report.
In compilation reports, the relevant language when omitting the MD&A is as follows:
Management has omitted the management, discussion and analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board which considers it to be an essential part of financial reporting and for placing the basic financial statements in an appropriate operational, economic, or historical context.