Planning an Audit
AU-C Section 200, Overall
Objectives of the Independent Auditor and the Conduct of an Audit in Accordance
with Generally Accepted Auditing Standards, paragraph 20, http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-C-00200.pdf,
requires an auditor to comply with all applicable AU-C sections when performing
an audit. AU-C Section 315, Understanding the Entity and Its Environment
and Assessing the Risks of Material Misstatements, paragraph 12c, http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-C-00315.pdf,
requires the auditor to obtain an understanding of an entity’s selection and
application of accounting policies.
These requirements apply to all financial reporting frameworks, including
special purpose frameworks.
This series of blogs will focus both on general audit
requirements applicable to all financial reporting frameworks, as well as
specific requirements relevant to two special purpose frameworks, the income
tax basis and the AICPA’s FRF for SMEs basis.
Because an auditor is required to understand the applicable financial
reporting framework used by an entity as part of engagement planning, summaries
of the basic accounting policies for these two special purpose frameworks will
be presented to illustrate the first step of the planning process. These part includes some of the significant
tax basis policies which are summarized below.
Summary of Some Basic
Principles for the Tax Basis of Accounting
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Account
classification
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aCCOUNTING
POLICIES
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1. Accounts Receivable
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1. The specific charge-off method is required
uncollectible trade and notes receivable.
Uncollectible balances are charged to bad debt expense when they are
considered worthless, ordinarily when no more collection efforts are
possible.
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2. Inventories
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2. Inventories are generally valued at cost using the
lower of cost or market method or the retail method. Most cost flow methods can be used with a
reasonable allocation of manufacturing overhead to inventories. Losses are recognized when incurred.
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3. Investments
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3. The cost basis is used for investments in equity and
debt securities. Dividends are
included in income when received and the equity method is not permitted.
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4. Prepaid expenses
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4. Advance payments of expenses generally are deductible
in the period to which they apply unless the related services will be
consumed within 12 months of the date of payment or within the next tax year.
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More accounting policies for the income tax basis of
accounting will be presented in the next part.
Since this series will cover all commonly applicable requirements of the
auditing standards applicable to all financial reporting frameworks, with
emphasis on special purpose frameworks, the materials will be useful for
reference. Storing each of the blogs in
electronic or hardcopy format will facilitate their use as non-authoritative,
practical guidance for auditing engagements.
Some practitioners may also find them useful for internal discussions or
training within their CPA firms. As you read along with me through this series,
I invite your questions and comments, either in the comment box or directed to
my personal email address, larry@cpafirmsupport.com. Thank you for joining me in this blog
experience!
