Section AU-C 800 of the AICPA Professional Standards includes the Clarified Auditing Standard, Special Consideration—Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks. Special purpose frameworks (SPF) include:
- Cash or modified cash basis
- Tax basis
- Regulatory basis
- Contractual basis
- AICPA’s FRF for SMEs
- Other commonly accepted basis of accounting
This series of blogs will discuss special considerations concerning:
- Engagement acceptance.
- The planning and performance phase of this type of engagement.
- Determining an opinion and reporting on the audit.
This standard references the clarified SAS, Terms of Engagement, which requires and auditor to evaluate the appropriateness of an entity’s applicable financial reporting framework. For special purpose frameworks, this requires an auditor to consider the purpose for which the financial statements are prepared, the known users of the financial statements and what management has done to determine the applicable reporting framework is appropriate for these circumstances.
In an engagement letter, the auditor should obtain management’s agreement that it is responsible for all providing all informative disclosures (a fair presentation framework) in the financial statements and footnotes applicable to the financial reporting framework it has decided to use (its applicable reporting framework). Among those disclosures are:
- A description of the SPF, its significant accounting policies and the main differences from U.S. GAAP.
- Informative disclosures similar to those required by U.S. GAAP.
- Contractual frameworks, in addition, would include any significant interpretations of the contract used in preparing the financial statements.
- Any additional disclosures necessary to comply with the requirements for a fair presentation framework in the clarified auditing standards.
The client acceptance and continuance decision-making requirements originated in the quality control standards first published in the 1980’s and are now required by current auditing standards. Obtaining and documenting relevant organizational, environmental and operating information as a part of engagement acceptance or continuance is, of course, a condition precedent to obtaining an engagement letter and planning an engagement.
As for audits of any framework, the engagement leader (sole practitioner or partner) should deliver and discuss the engagement letter contents, along with other engagement planning subjects, with the management or governance person of the reporting entity that has engaged the CPA firm. Performing a client acceptance and continuance evaluation and delivering an engagement letter are often the first steps for compliance with the leadership involvement requirements of the AICPA’s Statement of Quality Control Standards No. 8.
My next blog will begin discussing considerations for planning and performing an audit of a special purpose framework.