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Clarified Auditing Standards: Audits of Financial Statements Prepared in Accordance with Special-Purpose Frameworks – Part 1

Jan 14th 2016
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Under AU-C Section 800, Special Considerations—Audits of Financial Statements Prepared in Accordance with Special-Purpose Frameworks,auditors are responsible for evaluating the appropriateness of an entity's applicable financial reporting framework. The evaluation should take into account financial statement users' needs and whether the framework appropriately presents the entity's financial position and results of operations.

Pre-Engagement Planning: Special-Purpose Framework Audit Procedures
Here are some general questions management, users, and auditors could ask when considering the appropriateness of using the Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs) or another special-purpose framework:

  • Is US GAAP required by financial statement users? Obviously, a “yes” answer to this question would preclude the use of a special-purpose framework.
  • Are prescribed-format financial statements required by users? This also would prevent the use of a special-purpose framework.
  • Does the current financial reporting framework meet the needs of users, or would another special-purpose framework be more appropriate? This question will focus attention on the accounting policies and principles of various special-purpose frameworks. A document entitled Financial Reporting Framework for Small- and Medium-Sized Entities, containing accounting policies and principles, is available via free download from the American Institute of CPAs (AICPA).
  • Would a special-purpose framework, such as the FRF for SMEs, be cost-efficient for financial reporting?

If the questions above indicate a special-purpose framework can appropriately present the financial position and results of operations of a reporting entity, accounting and reporting under the special-purpose framework should also create efficiencies in the financial statement- and footnotes-preparation process to be an appropriate choice by management.

A detailed Decision Tool, including additional questions for considering changes to the FRF for SMEs, cash, modified cash, and income tax basis of accounting, is also available via free download from the AICPA website.

Management and auditors should document the decision-making for selecting a special-purpose framework.

1. Hold pre-planning meeting with the in-charge accountant and engagement leader (partner, shareholder, sole practitioner).

  • Discuss client changes in business, organization, accounting, financial reporting framework, internal control, personnel, and current events that may affect this year's audit.
  • Discuss any effects of the current economic climate, any going-concern issues, and the need for management to develop plans to overcome potential threats to the continuing existence of the entity.
  • Discuss findings, questions, and other issues from the review of the prior year's working papers (outlined above).
  • Schedule due dates, interim and year-end fieldwork, and assign staff personnel.
  • Discuss fees, billing policies, budgets, and other administrative issues.
  • Begin engagement leader participation memo documenting involvement and supervision, or plan to describe involvement in more detail on electronic time slips or timesheets.

Other Pre-Engagement Planning Special-Purpose Framework Audit Procedures
When US GAAP or a special-purpose framework is being used as the applicable financial reporting framework, all engagement personnel must understand applicable accounting principles. For the FRF for SMEs, toolkits have been made available by the AICPA for statement preparers, users, and CPA firms containing these documents:

  • Introduction to the Financial Reporting Framework for Small- and Medium-Sized Entities (a 200-plus page documentation of framework policies).
  • Illustrative Financial Statements.
  • Presentation and Disclosure Checklist for FRF for SMEs.
  • Numerous other aids to facilitate understanding of the framework and to communicate it to clients and others, such as bankers and lawyers.

2. Schedule time for engagement leader to meet with the management or governance person that engaged the firm to deliver the engagement letter.

  • Reach an understanding about the nature of the engagement, as well as client and CPA firm responsibilities. Discuss management's responsibility to select the most appropriate financial reporting framework.
  • Discuss current client issues, including any effects of economic climate.
  • Make fraud inquiries.
  • Arrange for proper workspace.
  • Arrange for client assistance.
  • Finalize dates for interim and year-end fieldwork.
  • Discuss target dates.
  • Discuss range of audit fees and effects of variables (problems, no client assistance, etc.).
  • Document discussions in the leader participation memo, on electronic time slips, or in some other way.
  • If possible, prepare a rough draft or block out financial statements and footnotes.

In addition to the items above that should be discussed in a meeting (or other means of oral communication, such as Skype, FaceTime, or telephone) between the engagement leader and the client management and governance persons, financial statement users' reporting requirements should be discussed. The pre-planning discussions and evaluation of an applicable reporting framework should include discussions with financial statement users. Their needs and preferences should be given priority in management's decisions to use a special-purpose framework. As mentioned above, a special-purpose framework will not be acceptable when the user requires a US GAAP or prescribed-format financial reporting framework.

The planning and completions phases of the audit will be discussed in the second part of this article.

Visit my website for more resources, including my new Small Audit Case Study with illustrative practice aids and working papers.


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