Auditing Special Purpose Frameworks - Part 9: Clarified Auditing Standard

Read more from Larry Perry here and in the Today’s World of Audits archive.

AU-C Section 800, Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks (SPFs), establishes the guidelines for audits of financial statements prepared using SPFs. Frameworks identified in the standard include:

  • Cash (and modified cash)
  • Income tax
  • Regulatory
  • Contractual
  • Other comprehensive basis of accounting

SAS No. 127, Omnibus Statement on Auditing Standards, added the AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs) to AU-C 800 referenced above.

The SPF Audit Process
Following generally accepted auditing standards applicable to all financial reporting frameworks (FRFs), AU-C 800 addresses special considerations that relate to:

  • Acceptance and continuance of the engagement
  • Planning and performing the engagement
  • Reporting on the engagement

This material will present a practical, chronological approach to performing small audits of financial statements prepared using SPFs. To begin, the special considerations presented in AU-C 800 will be discussed briefly.

Evaluating the FRF
Among an auditor’s first responsibilities in accepting or continuing an engagement is the requirement to evaluate the appropriateness and reasonableness of the FRF (AU-C 210, Terms of Engagement). AU-C 800 specifically requires the auditor of special purpose financial statements to obtain understanding of the following:

  • The purpose or use of the financial statements
  • Known users that may rely on the statements
  • Management’s process for determining whether the FRF is acceptable

Management of SMEs often select an FRF based on time and cost considerations, such as the time required to prepare financial statements and footnotes and the related audit costs.  While this selection criteria is obviously prudent management decision making, it may not always result in selecting the most appropriate and reasonable FRF for all reporting entities.

Selecting a Fair Presentation Framework
A fair presentation framework is required for all audited financial statements. Among the definitions in AU-C 200.14, a fair presentation framework is referred to as one that complies with a framework’s requirements and provides all additional disclosures necessary to achieve a fair presentation of the financial statements. In extremely rare circumstances, fair presentation may also require departing from a requirement of the applicable FRF.

Selecting an applicable FRF that will also be a fair presentation framework will extend beyond time and cost considerations. Considering the facts and circumstances related to each audit engagement, the applicable FRF should be one that appropriately and reasonably presents an entity’s financial position and results of operations, and satisfies the needs of financial statement users.

Some questions management of a reporting entity and their auditors may ask in selecting an applicable FRF that will be a fair presentation framework include:

  • Are GAAP-based financial statements required by users?
  • Does the entity’s industry require complex accounting guidance not provided by non-GAAP frameworks?
  • Does the applicable FRF currently used by the entity meet the needs of financial statement users, or would another framework be more appropriate?
  • Are there additional practical reasons that affect the decision to use another comprehensive basis of accounting, such as cash, income tax, or the FRF for SMEs?

Before we begin discussing specific auditing procedures for SPFs, the next article in this series will present some special considerations from AU-C 800 related to planning, performing, and reporting on such engagements.

As a reminder, my free one-hour webcast presenting an overview of the FRF for SMEs is on February 25, 2014; you can register for the webinar here.

You may like these other stories...

Koskinen warns filing season could be most complicated yetImplementation of the Foreign Account Tax Compliance Act and the Affordable Care Act, combined with a tight budget and the possibility of Congress passing a late...
Curious as to what the fastest-growing accounting and finance jobs might be for the next several years? According to the new 2015 Salary Guide from staffing firm Accounting Principles, some of those jobs include bookkeeping...
Read more from Larry Perry here and in the Today's World of Audits archive.The first part discussed the principles of revenue recognition under the FRF for SMEs. This part will focus on auditing issues, including some...

Already a member? log in here.

Upcoming CPE Webinars

Oct 23Amber Setter will show the value of leadership assessments as tools for individual and organizational leadership development initiatives.
Oct 30Many Excel users have a love-hate relationship with workbook links.
Nov 5Join CPA thought leader and peer reviewer Rob Cameron and learn ways to improve the outcome of your peer reviews while maximizing the value of your engagement workflow.
Nov 12This webcast presents basic principles of revenue recognition, including new ASU 2014-09 for the contract method. Also, CPAs in industries who want a refresher on revenue accounting standards will benefit.