CPA Exam — AUDForming Conclusions and ReportingEasy
A CPA is reporting on financial statements prepared in accordance with the income tax basis of accounting. This is an example of which type of financial reporting framework?
- AContractual Basis Framework
- BRegulatory Basis Framework
- CSpecial Purpose Framework
- DGeneral Purpose Framework
Show answer & explanationAnswer & explanation
Correct answer: C. Special Purpose Framework
The income tax basis of accounting is a specific set of principles designed to meet the needs of a specific user group (tax authorities) and is not intended for general purpose use. Therefore, it falls under the definition of a special purpose framework.
Why the other options are wrong
- A. A contractual basis framework is a type of special purpose framework specifically established by a contract or agreement, which is not necessarily the case for the income tax basis.
- B. While the income tax basis is a regulatory basis, 'special purpose framework' is the broader and more appropriate classification within auditing standards.
- D. A general purpose framework (like GAAP or IFRS) is designed to meet the common information needs of a wide range of users.
Special Purpose Framework
A financial reporting framework other than a general purpose framework, designed to meet the financial information needs of specific users.
- Examples include cash basis, income tax basis, regulatory basis, contractual basis.
- Reports require an emphasis-of-matter paragraph identifying the framework.
- Not intended for general public use.
Memory trick: If it's not GAAP/IFRS, and it serves a specific group, it's 'Special Purpose'.