CPA Exam — AUDForming Conclusions and ReportingMedium
A CPA is reporting on financial statements prepared in accordance with the income tax basis of accounting. Which of the following elements must be included in the auditor's report?
- AA statement that the auditor is not independent of the client.
- BA separate paragraph describing the tax basis of accounting.
- CAn opinion that the financial statements are presented fairly in accordance with U.S. GAAP.
- DA statement that the financial statements are not intended to be presented in accordance with U.S. GAAP.
Show answer & explanationAnswer & explanation
Correct answer: D. A statement that the financial statements are not intended to be presented in accordance with U.S. GAAP.
When reporting on financial statements prepared using a special purpose framework, the auditor's report must include a statement indicating that the financial statements are not intended to be presented in accordance with U.S. GAAP or IFRS, as applicable. This clarifies the framework used.
Why the other options are wrong
- A. Independence is generally required for an audit; this statement is not a required element for SPF reports unless independence is actually impaired.
- B. While the basis is described, it's typically within the 'Basis for Opinion' section or a separate 'Basis of Accounting' paragraph, but the specific wording about not being GAAP is a key required element.
- C. Issuing an opinion on GAAP when a special purpose framework is used would be incorrect and misleading.
Special Purpose Framework Reporting
Auditor reporting on financial statements prepared using a framework other than U.S. GAAP or IFRS, such as cash basis, tax basis, regulatory basis, or contractual basis.
- Requires specific report elements to distinguish from GAAP/IFRS.
- Includes an Emphasis-of-Matter paragraph if the basis is not clearly identified.
- The opinion refers to the specific special purpose framework.
Memory trick: Special Reports Need Clear BASIS (Basis, Appropriateness, Scope, Intention, Statement)