A client has consistently used the cash basis of accounting, which is a special purpose framework, for its financial statements. The auditor has determined that the financial statements are presented fairly in accordance with this framework. The auditor's report should include:
- AA qualified opinion due to the departure from GAAP.
- BAn adverse opinion, as cash basis is not GAAP.
- CAn unmodified opinion that includes an emphasis-of-matter paragraph.
- DAn unmodified opinion with no modifications or additional paragraphs.
Show answer & explanationAnswer & explanation
Correct answer: C. An unmodified opinion that includes an emphasis-of-matter paragraph.
When financial statements are prepared in accordance with a special purpose framework (like the cash basis), and the auditor concludes they are presented fairly under that framework, an unmodified opinion is appropriate. However, an emphasis-of-matter paragraph is required to draw users' attention to the fact that the statements are prepared using a special purpose framework and to refer to the note describing that framework.
Why the other options are wrong
- A. A qualified opinion is issued for a material misstatement or scope limitation, not simply because a non-GAAP framework is used appropriately.
- B. An adverse opinion is for pervasive material misstatements, which is not the case if the statements are fair under the *specified* framework.
- D. An unmodified opinion is correct, but an emphasis-of-matter paragraph is required for special purpose frameworks.
Unmodified Opinion with SPF
An unmodified opinion is issued when financial statements are presented fairly in accordance with a special purpose framework, but an emphasis-of-matter paragraph is added to highlight the framework used.
- Unmodified opinion expresses fairness under the SPF.
- Emphasis-of-matter is mandatory.
- Paragraph refers to the framework description note.
Memory trick: Special Frameworks need Special Attention.