Scope and objectives
The auditing standards are a set of guidelines that auditors must follow when conducting an audit of financial statements. This SA 800 specifically deals with audits of financial statements that have been prepared using a special purpose financial reporting framework.
A special purpose financial reporting framework is a framework that has been designed to meet the financial information needs of specific users. It may be a fair presentation framework, which means that it presents the financial statements fairly in accordance with the applicable financial reporting framework, or a compliance framework, which means that it meets the requirements of a specific set of regulations or contracts.
This SA 800 provides examples of special purpose frameworks, such as financial reporting provisions established by regulators, or financial reporting provisions of a contract, such as a bond indenture or a loan agreement. It also explains that there may be situations where a special purpose framework is based on a financial reporting framework established by an authorized or recognized standards setting organization, but does not comply with all the requirements of that framework.
The objective of this SA 800 is to ensure that the auditor appropriately addresses the special considerations that are relevant to accepting, planning, performing, and reporting on the financial statements prepared using a special purpose financial reporting framework. The requirements of the applicable financial reporting framework determine the form and content of the financial statements, and what constitutes a complete set of financial statements. The related notes typically include significant accounting policies and other explanatory information.
It’s important to note that this SA 800 does not override the requirements of other SAs, nor does it cover all special considerations that may be relevant in a particular audit engagement. The auditor must use their professional judgement to determine the appropriate audit procedures based on the specific circumstances of the engagement.
Considerations When Accepting the Engagement
The auditors must take into account when accepting an engagement to audit special purpose financial statements. Specifically, the auditor must determine the acceptability of the financial reporting framework applied in the preparation of the financial statements.
The financial reporting framework refers to the set of criteria, principles, and rules used to prepare financial statements. In the case of special purpose financial statements, the financial information needs of the intended users are a key factor in determining the acceptability of the financial reporting framework.
The applicable financial reporting framework may be established by an organization that is authorized or recognized to promulgate standards for special purpose financial statements. In that case, those standards will be presumed acceptable for that purpose if the organization follows an established and transparent process involving deliberation and consideration of the views of relevant stakeholders.
However, some laws or regulations may prescribe the financial reporting framework to be used by management in the preparation of special purpose financial statements for a certain type of entity. In the absence of indications to the contrary, such a financial reporting framework is presumed acceptable for special purpose financial statements prepared by such an entity.
The auditor must also determine whether any conflicts between the financial reporting standards and additional requirements exist and take appropriate actions if such conflicts exist. The acceptability of the financial reporting framework in the circumstances of the engagement is determined by considering whether the framework exhibits attributes normally exhibited by acceptable financial reporting frameworks.
In the case of a special purpose framework, the relative importance to a particular engagement of each of the attributes normally exhibited by acceptable financial reporting frameworks is a matter of professional judgment. Finally, the auditor should consider the purpose for which the financial statements are prepared, the intended users, and the steps taken by management to determine that the applicable financial reporting framework is acceptable in the circumstances.
Considerations When Planning and Performing the Audit
The considerations of those auditors should keep in mind when planning and performing an audit of special purpose financial statements. SA 200 requires auditors to comply with all relevant SAs (Statements on Auditing) when performing an audit. In the case of special purpose financial statements, the auditor must determine whether the application of SAs requires special consideration in the context of the engagement.
The excerpt also mentions that auditors must comply with all ethical requirements, including independence, and comply with each requirement of an SA 800 unless it is not relevant or the condition does not exist. However, in exceptional circumstances, the auditor may depart from a relevant requirement in an SA 800 by performing alternative audit procedures to achieve the aim of that requirement.
In an audit of special purpose financial statements, some requirements of SAs 800 may require special consideration by the auditor. For example, judgments about materiality in SA 320 are based on the common financial information needs of users as a group. However, in the case of special purpose financial statements, those judgments are based on the financial information needs of the intended users.
The excerpt also notes that in the case of special purpose financial statements prepared in accordance with a contract, management may agree with intended users on a threshold below which misstatements identified during the audit will not be corrected or adjusted. However, the existence of such a threshold does not relieve the auditor from the requirement to determine materiality in accordance with SA 320 for the purposes of planning and performing the audit.
Finally, SA 315 requires the auditor to obtain an understanding of the entity’s selection and application of accounting policies. In the case of financial statements prepared in accordance with a contract, the auditor must obtain an understanding of any significant interpretations of the contract that management made in the preparation of those financial statements. An interpretation is significant when adoption of another reasonable interpretation would have produced a material difference in the information presented in the financial statements.
Forming an Opinion and Reporting Considerations
The auditing standard provides guidance to auditors on the form and content of the auditor’s report on financial statements. When reporting on special purpose financial statements, the auditor must comply with the requirements in SA 700.
The auditor’s report on special purpose financial statements should include a clear statement of the auditor’s opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. The auditor’s report should also include a description of the responsibilities of management and the auditor, as well as a statement about the auditor’s independence.
In addition, SA 700 (Revised) contains illustrations of auditors’ reports on special purpose financial statements, which can serve as a helpful guide for auditors when preparing their reports. These illustrations provide examples of the various sections that should be included in the auditor’s report and the language that can be used to express the auditor’s opinion.
It is important for the auditor to carefully consider the specific circumstances of the engagement when preparing the auditor’s report on special purpose financial statements. For example, if the auditor has identified a material misstatement in the financial statements that has not been corrected, the auditor’s report should include a qualification or adverse opinion, depending on the materiality and pervasiveness of the misstatement.
Overall, the auditor’s report on special purpose financial statements should provide users of the financial statements with a clear and transparent understanding of the auditor’s opinion and the scope of the audit.
Description of the Applicable Financial Reporting Framework
In auditing standards provides guidance on the form and content of the auditor’s report, including the description of the applicable financial reporting framework. In the case of financial statements prepared in accordance with a contract, the auditor should evaluate whether the financial statements adequately describe any significant interpretations of the contract on which the financial statements are based.
The auditor’s report on special purpose financial statements should include an Emphasis of Matter paragraph to alert users that the financial statements are prepared in accordance with a special purpose framework and may not be suitable for another purpose. This paragraph should be included under an appropriate heading.
Furthermore, the auditor’s report should also describe the purpose for which the financial statements are prepared and, if necessary, the intended users, or refer to a note in the special purpose financial statements that contains that information. If management has a choice of financial reporting frameworks in the preparation of such financial statements, the explanation of management’s responsibility for the financial statements should also make reference to its responsibility for determining that the applicable financial reporting framework is acceptable in the circumstances.
It is important to note that special purpose financial statements may be used for purposes other than those for which they were intended. To avoid misunderstandings, the auditor alerts users of the auditor’s report that the financial statements are prepared in accordance with a special purpose framework and, therefore, may not be suitable for another purpose.
Restriction on Distribution or Use
This objective, “Restriction on Distribution or Use,” refers to situations where the auditor believes that the report should only be distributed or used by specific users. In some jurisdictions, the law or regulations may allow the auditor to restrict the distribution or use of the report in such cases.
If the auditor decides to restrict the distribution or use of the report, they should indicate this in the report itself. The paragraph referred to in the previous objective (Emphasis of Matter paragraph alerting users that the financial statements are prepared in accordance with a special purpose framework) may be expanded to include this additional information, and the heading modified accordingly.
For example, the auditor may include a statement in the report indicating that it is intended solely for the use of the entity and its management, and should not be distributed to third parties without the prior written consent of the auditor. This can help to ensure that the report is only used by those who are authorized to do so, and can help to prevent misunderstandings or misuse of the report.
Special Considerations— Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks
The specific example of a special purpose framework, namely “a tax basis of accounting for a set of financial statements that accompany an entity’s tax return,” has been deleted from the International Standards on Auditing (ISA) 800 (now referred to as SA 800) on audits of financial statements prepared in accordance with special purpose frameworks. This is because in India, financial statements prepared for filing with income tax authorities are considered to be general purpose financial statements, and mandatory accounting standards must be applied to them, as per an announcement issued by the Institute of Chartered Accountants of India in 1994. Therefore, this example is no longer relevant to Indian auditors.
Quiz: Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks
1. Which of the following best describes a special purpose financial reporting framework?
a) A framework that meets the financial information needs of specific users
b) A framework that applies to all financial statements
c) A framework established by recognized standards setting organizations
d) A framework that complies with all requirements of the applicable financial reporting framework
Answer: a)
2. SA 800 provides examples of special purpose frameworks, except:
a) Financial reporting provisions established by regulators
b) Financial reporting provisions of a contract
c) Financial statements prepared in accordance with the International Financial Reporting Standards (IFRS)
d) Financial reporting provisions of a loan agreement
Answer: c)
3. What is the objective of SA 800?
a) To ensure auditors appropriately address special considerations in audits of financial statements prepared using special purpose frameworks
b) To override the requirements of other auditing standards
c) To cover all special considerations relevant in any audit engagement
d) To provide guidance on the form and content of the auditor’s report
Answer: a)
4. True or False: SA 800 overrides the requirements of other Statements on Auditing (SAs).
Answer: False
5. When accepting an engagement to audit special purpose financial statements, auditors should consider:
a) The financial information needs of the intended users
b) The personal preferences of the auditor
c) The complexity of the financial reporting framework
d) The financial performance of the entity
Answer: a)
6. How does the auditor determine the acceptability of the financial reporting framework?
a) By following an established and transparent process involving deliberation and consideration of relevant stakeholders’ views
b) By relying solely on the management’s determination
c) By reviewing the financial statements prepared using the framework
d) By consulting with other auditors in the industry
Answer: a)
7. True or False: Auditors must comply with all relevant SAs when performing an audit of special purpose financial statements.
Answer: True
8. In special purpose financial statements, materiality judgments are based on:
a) The common financial information needs of users as a group
b) The financial information needs of the intended users
c) The auditor’s personal opinion
d) The audited entity’s financial performance
Answer: b)
9. What should the auditor’s report on special purpose financial statements include?
a) A clear statement of the auditor’s opinion, description of responsibilities, and statement about independence
b) A summary of the financial statements, including the auditor’s opinion
c) A list of potential risks and issues identified during the audit
d) Recommendations for improvement in the financial reporting framework
Answer: a)
10. When there is a restriction on the distribution or use of the auditor’s report, the auditor should:
a) Include a statement in the report indicating the restriction and obtain written consent
b) Exclude the Emphasis of Matter paragraph from the report
c) Inform the intended users about the restriction orally
d) Seek approval from the regulatory authority before distributing the report
Answer: a)
Additional questions:
11. Which of the following is an example of a fair presentation framework mentioned in SA 800?
a) Financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP)
b) Financial statements prepared in accordance with International Financial Reporting Standards (IFRS)
c) Financial statements prepared in accordance with contractual requirements
d) Financial statements prepared in accordance with the tax basis of accounting
Answer: d)
12. True or False: SA 800 covers all special considerations that may be relevant in any audit engagement.
Answer: False
13. When planning and performing an audit of special purpose financial statements, auditors must comply with:
a) Ethical requirements, including independence
b) Legal requirements imposed by the tax authorities
c) Additional auditing standards specific to special purpose frameworks
d) Only the requirements of SA 800
Answer: a)
14. In special purpose financial statements, how are materiality judgments different from common financial statements?
a) They are based on the audited entity’s financial performance.
b) They are based on the financial information needs of the intended users.
c) They are determined solely by the auditor’s professional judgment.
d) They are set by regulatory bodies.
Answer: b)
15. The auditor’s report on special purpose financial statements should provide users with a clear understanding of:
a) The auditor’s personal opinion on the financial statements.
b) The material misstatements identified during the audit.
c) The auditor’s opinion on whether the financial statements are prepared in accordance with the applicable financial reporting framework.
d) The financial performance of the entity.
Answer: c)
16. When there is a restriction on the distribution or use of the auditor’s report, it is important for the auditor to:
a) Clearly communicate the restriction in the report.
b) Exclude the description of responsibilities from the report.
c) Obtain approval from the management of the audited entity.
d) Notify the regulatory authority about the restriction.
Answer: a)
17. Which auditing standard provides guidance on the form and content of the auditor’s report on financial statements?
a) SA 700
b) SA 800
c) SA 315
d) SA 320
Answer: a)
18. In the auditor’s report on special purpose financial statements, what should be included under the Emphasis of Matter paragraph?
a) The description of the applicable financial reporting framework.
b) The auditor’s opinion on the financial statements.
c) The financial performance of the entity.
d) The statement about the auditor’s independence.
Answer: a)
19. True or False: In the case of special purpose financial statements prepared in accordance with a contract, the auditor is not required to obtain an understanding of any significant interpretations made by management.
Answer: False
20. What is the purpose of the auditor’s report on special purpose financial statements?
a) To provide a detailed analysis of the financial statements.
b) To highlight any conflicts between the financial reporting standards and additional requirements.
c) To express the auditor’s opinion on whether the financial statements are prepared in accordance with the applicable financial reporting framework.
d) To list all the audit procedures performed during the engagement.
Answer: c)
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