By CPA Emmanuel Mugabi
Founding Partner,
Mugabi & Mawanda Associates
ISA 800 - Audit of Financial Statements Prepared in Accordance with Special Purpose Framework
The world’s financial system has evolved over time and requires companies to hire an individual external auditor to audit their financial statements.
A company’s management prepares the financial statements while the auditor expresses an opinion showing that reasonable assurance has been obtained that the financial statements are free from material misstatement and are fairly presented according to the relevant international financial reporting standards.
International Standards on Auditing (ISA) 800 is applicable where an audit opinion (that is reasonable rather than limited assurance) is given on a complete set of financial statements but the financial statements have been prepared in accordance with a special purpose framework rather than a generally accepted one.
A special purpose framework is one designed to meet the financial information needs of specific users and will usually be based on a generally accepted framework but deviate from it in one or more material respects because the information required by the framework is either inappropriate or irrelevant for the special purpose for which the financial statements are prepared.
Examples of such frameworks include:
- A tax basis of accounting for a set of financial statements accompanying an entity’s tax return;
- Cash receipts and payments basis of accounting for cash flow information that an entity may be requested to prepare for creditors;
- The financial reporting provisions established by a regulator to meet the requirements of that regulator; and
- The financial reporting provisions of a contract, such as a bond indenture, loan agreement, or a project grant.
Scope of ISA 800
- Deals with special considerations in the application of ISAs to audit financial statements prepared in accordance with a special purpose framework.
- Written in the context of a complete set of financial statements prepared in accordance with a special purpose framework.
- Does not override the requirements of the other ISAs.
- May not deal with all special considerations relevant in the circumstances of the engagement
Objectives
Address appropriately considerations relevant to:
- Engagement acceptance
- Engagement planning & performance
- Forming opinion & reporting on Financial Statement
Rationale for engagement acceptance
Key considerations – Obtain an understanding of:
- Purpose for which Financial Statements are prepared
- Intended Users
· Steps taken by Management to determine that applicable Financial Reporting Framework is acceptable
Acceptability of financial reporting framework - Scenarios for consideration
- Acceptability of financial reporting framework laid down by the regulator/authority
- Conflict between Ffinancial reporting standards and additional requirements
- Financial reporting standards prescribed by law and regulation are unacceptable
Planning and Performing an Audit
Obtain understanding of:
- Whether the Standard on Auditing relevant to the audit have been complied with
- Determine whether the application of the Standard on Auditing requires special considerations in circumstances of the engagement
What if all the requirements of a particular SA are not met with?
The auditor cannot state that the Special Purpose Financial Statement complies with the SAs.
Exception: If the requirements of the SA are conditional and such conditions do not exist.
Special Considerations in (b) depends on 2 factors
- Purpose for which Financial Statements are prepared
- Intended Users
Forming an opinion and reporting and reporting considerations
In forming an opinion and reporting on special purpose financial statements, the auditor still applies the requirements of ISA 700 Forming an Opinion and Reporting on Financial Statements, as well as reporting requirements contained in other ISAs as appropriate. This includes evaluating whether the financial statements adequately refer to or describe the applicable financial reporting framework. In the case of financial statements prepared in accordance with the provisions of a contract, the auditor evaluates whether the financial statements adequately describe any significant interpretations of the contract on which the financial statements are based.
Considerations while framing an opinion – Apply requirements of ISA 700 revised
- Whether the report describes the Acceptable Financial Reporting Framework
- Purpose for which the special purpose financial statements are prepared
- 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 shall also make reference to its responsibility for determining that the applicable financial reporting framework is acceptable in the circumstances.
- The auditor specifically describes the financial reporting framework as a special purpose framework in the auditor’s report.
- Restriction on use.
ISA 805 - Audit of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement
ISA 805 deals with special considerations in the application of ISAs to an audit of a single financial statement or of a specific element, account or item of a financial statement. The single financial statement or the specific element, account or item of a financial statement may be prepared in accordance with a general or special purpose framework.
Scope of ISA 805
- ISA 100 - 700 series applicable and to be adopted as necessary in the audit of the financial statement.
- Deals with the Audit of single financial statements (SFS) or specific element / account/ item of financial statements
Does not:
- Apply to report of component auditor
- Override requirements of other ISAs
· Deal with special considerations that may be relevant in circumstances of the engagement
Objectives
Address appropriately considerations relevant to:
- Engagement acceptance
- Engagement planning & performance
- Forming opinion & reporting on Single Financial Statements & Elements of Financial Statements
Examples of SFS or EFS
- Accounts receivable, allowance for doubtful accounts receivable, inventory, the liability for accrued benefits of a private pension plan, the recorded value of identified intangible assets, or the liability for “incurred but not reported” claims in an insurance portfolio, including related notes.
- A schedule of externally managed assets and income of a private pension plan, including related notes
- A schedule of net tangible assets, including related notes
- A schedule of disbursements in relation to a lease property, including explanatory notes
- A schedule of profit participation or employee bonuses, including explanatory notes
Rationale for Accepting the engagement
Key considerations – Obtain an understanding of:
- Application of SA
- Acceptability of Financial Reporting Framework
· Form of Opinion
Application of SA
- Whether Independence requirements are complied with
- Whether the auditor is engaged to audit the complete set of financial statement or appointment only for the audit of SFS / EFS
Acceptability of Financial Reporting Framework
- Whether any restrictions imposed by the standard setting organisation/law and regulation
- Whether application of FRF will result in presentation that provides adequate disclosure to enable intended users to understand information conveyed in SFS/EFS
- Effects of material transactions and events on information conveyed in SFS / EFS
Form of Opinion
- Whether form and content is appropriate
- Fair presentation framework / Compliance framework
- Usage of “presents fairly in all material respects” / “true and fair view”
Planning and performing the audit
Although the audit must be conducted in accordance with all ISAs in planning and performing the audit of a single financial statement or of a specific element of a financial statement, the auditor shall adapt ISAs relevant to the audit as necessary in the circumstances of the engagement. The relevance of each ISA requires careful consideration.
Critical pointers to consider:
- Careful consideration of the relevance of each SA is necessary
- Audit evidence obtained as a part of an audit of complete FS may be useful, but the auditor to plan and perform an audit of SFS should obtain sufficient and appropriate audit evidence
- Interrelated items in audit of EFS. The auditor would need to perform audit procedures on such interrelated items as well.
· Materiality of SFS. Materiality of complete FS. Evaluate the nature, timing and extent of audit procedures to be applied for evaluation of uncorrected misstatements.
Forming an opinion and reporting considerations
In forming an opinion and reporting on a single financial statement or on a specific element of a financial statement, the auditor still applies the requirements of ISA 700 Revised, and where applicable the requirements of ISA 800.
- If appointed for both – complete FS as well as SFS / EFS
- Auditor expresses a separate opinion for each engagement
- Entity publishes SFS along with the complete FS
- Differentiation should be made between both. If it is not met with then management to rectify the same
- Differentiation in the opinion issued
- Do not issue the audit report on SFS until satisfied with the differentiation
- Qualified opinion / Emphasis of Matter / Other Matter paragraph in Complete FS
- Determine the effect of SFS
- If necessary, modify the SFS and include the modified opinion in SFS / EFS
- Adverse Opinion / Disclaimer of Opinion on complete FS
- Auditor cannot issue unmodified opinion on the SFS since SFS forms a major part of the complete FS.
- Contradictory to issue unmodified opinion in such scenario
- Adverse Opinion / Disclaimer of Opinion on complete FS
Unmodified opinion on EFS only if:
- Not prohibited by laws & regulations
- Audit report of EFS should not be published with the audit report on complete FS
- Specific element does not constitute a major portion of entity’s complete FS
