The Preface to Codification of Statements on Auditing Standards, the first of the Clarified Auditing Standards effective for periods ending after December 15, 2012, contains information regarding financial reporting frameworks. Among them is a “fair-presentation framework:”
Fair-presentation framework— Refers to a financial reporting framework that requires compliance with the requirements of the framework and acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be necessary for management to provide disclosures beyond those specifically required by the framework; or acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework to achieve fair presentation of the financial statements. Such departures are expected to be necessary only in extremely rare circumstances.
Underpinning the principles in this audit standard, the concepts of professional skepticism and professional judgment are discussed in the application material. Professional skepticism includes being alert for contradictory audit evidence, information that brings doubt as to the reliability of documents and managements responses to inquiries and errors or fraud that indicate the need for additional substantive procedures. Professional judgment is necessary on every engagement when considering audit risk and materiality, the nature, extent and timing of audit procedures, evaluating the appropriateness and reasonableness of financial statement assertions and the applicable financial reporting framework. Such matters are also discussed in the FRF for SMEs.
Fair Presentation in Accordance With the FRF for SMEs
As with other reporting frameworks, financial statements should fairly present the financial position, results of operations, and cash flows of an entity in accordance with the elements of financial statements and the recognition and measurement criteria applicable to this framework. A fair presentation framework includes providing clear, understandable, appropriate information and disclosures about transactions and events that have a material effect on financial statements.
Related to the discussion above regarding the Clarified Auditing Standards, management is first responsible for exercising professional judgment in preparing financial statements in accordance with this framework. Auditors, then, are responsible for evaluating the appropriateness and reasonableness of management’s selection of the framework and their application of its principles.
Going Concern Issues
When preparing financial statements, management is responsible for making an assessment of whether a going concern basis of accounting is appropriate. A going concern basis of accounting is appropriate unless a significant part of management’s decision-making concerns discontinuance or liquidation of the entity’s business. An entity that is not a going concern should use only the liquidation basis of accounting.
If an entity has profitable operations and adequate financing, a going concern basis of accounting normally is appropriate. On the other hand, management must consider all future information up to 12 months from the date of the statement of financial position. If there are significant threats to the continuance of the entity’s business, currently or in this future period, management is required to disclose the threats and its plans to overcome them in the notes to its financial statements. Auditors, of course, would be required to evaluate the effects of the threats and management’s plans, and to determine an appropriate audit report.
Live webcasts covering the FRF for SMEs can be accessed by clicking on the box on the left side of my home page, www.cpafirmsupport.com. In 2014, Wiley & Sons will publish my book on performing audits, reviews and compilations for entities using this framework.