The International standards on auditing envisage situations where financial statements will be prepared using a special purpose framework. Special purpose accounting frameworks are alternative accounting standards that are tailored to meet the specific needs of certain stakeholders. These frameworks may deviate from Generally Accepted Accounting Principles (GAAP) due to the inappropriateness or irrelevance of GAAP to the intended use of financial statements. Examples of special purpose accounting frameworks include:
- Cash basis accounting – transactions are recorded when cash is received or paid, rather than when they are earned or incurred.
- Tax basis accounting – use of tax rules and regulations to determine the timing and amount of income and expense recognition.
- Regulatory basis accounting – used by entities that are subject to specific regulatory requirements, such as insurance companies or public utilities.
- Contractual basis accounting – used for a specific contractual agreement, such as a construction contract or a lease.
- Fund basis accounting – used by non-profit organizations to account for contributions and expenses related to specific programs or projects. (This is a very common use of special purpose accounting due to donor contractual requirements).
- Modified accrual accounting – used to recognize revenues and expenditures in a manner that differs from generally accepted accounting principles.
The choice of framework used will depend on the nature of the entity and the purpose of the financial statements. To cover for instances where an audit opinion is required for financial statements have been prepared in accordance with a special purpose framework rather than a generally accepted one, the auditor has to place reliance on ISA 800, ISA 805 and ISA 700.
ISA 800 is an auditing standard that provides guidance to auditors on their responsibility when forming an opinion on financial statements prepared in accordance with a special purpose framework. It sets out the auditor’s responsibilities in planning, executing, and reporting on the audit, as well as guidance on the assessment of the appropriateness of the special purpose framework used and the adequacy of disclosures in the financial statements. The standard aims to ensure that auditors understand their responsibilities and conduct the audit in accordance with applicable standards and ethical requirements.
ISA 805 provides guidance for independent auditors on the audit of single financial statements and specific elements, accounts or items of a financial statement. The standard is titled “Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement,” and it is designed to provide auditors with guidance when they are auditing individual financial statements or specific items within financial statements. The objective of ISA 805 is to ensure that auditors have a clear understanding of their responsibilities when auditing a single financial statement or specific element, account or item of a financial statement.
Applying ISA 800
When applying ISA 800, the auditor needs to consider several issues to ensure that the audit is performed in accordance with applicable auditing standards and ethical requirements. The following are key considerations:
- Understanding the entity’s financial reporting framework and the special purpose framework used in preparing the financial statements.
- Assessing the appropriateness of the special purpose framework used and the consistency of its application throughout the financial statements.
- Evaluating whether the financial statements provide adequate disclosures of the purpose of the special purpose framework, the significant accounting policies used, and any material departures from the framework.
- Understanding the nature of the entity’s operations and the intended users of the financial statements to assess the impact of the special purpose framework on the financial statements’ usefulness.
- Planning and performing audit procedures that are appropriate for the specific financial reporting framework used.
- Evaluating whether the financial statements are free from material misstatement, including any misstatements resulting from the use of the special purpose framework.
- Forming an appropriate opinion on the financial statements in accordance with applicable auditing standards and ethical requirements.
The auditor should ensure that they meet their responsibilities and perform the audit in accordance with ISA, thereby providing users of the financial statements with assurance about the financial information.
Applying ISA 805
ISA 805 is a standard that auditors apply when they are engaged to provide assurance on specific non-financial information, such as an entity’s compliance with laws and regulations or the effectiveness of its internal control over non-financial information. In order to properly carry out the engagement, the auditor must first gain a comprehensive understanding of its nature and objectives, as well as the criteria used to prepare the information.
By applying ISA 805, the auditor can provide valuable assurance to stakeholders that the non-financial information provided is reliable and accurate. This helps to promote transparency and accountability, which are essential in building trust between an entity and its stakeholders. The key issues to consider when applying ISA 805 are:
- Understanding the nature and purpose of the engagement and the criteria used to prepare the financial information, including the suitability of the criteria for the intended purpose.
- Obtaining an understanding of the entity’s control environment and the processes used to prepare the financial information.
- Assessing the risks of material misstatement in the financial information and designing appropriate audit procedures to address those risks.
- Evaluating the adequacy and appropriateness of the financial information and any related disclosures.
- Communicating with those charged with governance and management about significant findings and issues identified during the engagement.
- Considering whether the auditor has obtained sufficient appropriate audit evidence to support the conclusions reached and whether the audit evidence obtained is reliable and relevant to the engagement.
- Forming an appropriate conclusion and reporting on the engagement in accordance with applicable auditing standards and ethical requirements.
The auditor must also evaluate the risks of material misstatement related to the non-financial information and design audit procedures to address those risks effectively. This may include using specialized techniques to test the information, such as reviewing documentation, interviewing personnel, and conducting site visits.
Primacy of ISA 700
ISA 700 outlines the requirements for the auditor’s report on financial statements. It specifies the content and format of the auditor’s report, including the responsibilities of the auditor and management, the scope of the audit, and the auditor’s opinion on the financial statements.
The standard also requires the auditor to evaluate the presentation of the financial statements, including the consistency of accounting policies and the adequacy of disclosures, and to express an opinion on the financial statements as a whole.
the International Standards on Auditing (ISA) play a crucial role in ensuring the quality, consistency, and credibility of audit engagements. Adherence to these standards helps ensure that auditors provide consistent and high-quality services to their clients, enhancing the credibility and reliability of financial information used by stakeholders to make informed decisions.