CPA Quiz: Special Reporting Frameworks
20 questions · exam conditions
0:00
Special Reporting FrameworksQuestion 1 of 20

A nonissuer real estate partnership engages a CPA to review tax-basis financial statements intended for use by the partners and the partnership's tax preparer. The financial statements appropriately describe the tax basis but omit a required disclosure about related-party transactions that is material. Which opinion should the accountant express in the review report?

An adverse opinion because the financial statements are not prepared in accordance with generally accepted accounting principles
A disclaimer of opinion because review engagements cannot be performed on special-purpose frameworks
A modified conclusion (qualified conclusion) due to the material omission of required disclosure under the tax-basis framework
An unmodified conclusion with an emphasis-of-matter paragraph describing the related-party omission
← Back to quizzes

CPA Quiz

CPA Quiz: Special Reporting Frameworks

Practice Special Reporting Frameworks in CPA with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Special Reporting Frameworks, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

A nonissuer real estate partnership engages a CPA to review tax-basis financial statements intended for use by the partners and the partnership's tax preparer. The financial statements appropriately describe the tax basis but omit a required disclosure about related-party transactions that is material. Which opinion should the accountant express in the review report?

  1. An adverse opinion because the financial statements are not prepared in accordance with generally accepted accounting principles
  2. A disclaimer of opinion because review engagements cannot be performed on special-purpose frameworks
  3. A modified conclusion (qualified conclusion) due to the material omission of required disclosure under the tax-basis framework (correct answer)
  4. An unmodified conclusion with an emphasis-of-matter paragraph describing the related-party omission
Explanation: AR-C 90 governs reviews of special-purpose framework financial statements and requires the same disclosure standards as GAAP-basis reviews. When tax-basis financial statements omit a material required disclosure (related-party transactions), the accountant must modify the review conclusion. The modification is a qualified conclusion because the omission represents a departure from the tax-basis framework's requirements, not from GAAP. An adverse opinion applies to audits, not reviews, and disclaimers are used when scope limitations prevent completion of review procedures. An emphasis-of-matter paragraph cannot cure a material departure from the applicable framework. The professional standard requires accountants to evaluate whether omitted disclosures materially affect the statements' fair presentation under the chosen framework, with qualified conclusions appropriate for material but not pervasive departures.

Question 2

A nonissuer construction company engages a CPA to audit cash-basis financial statements. In drafting the auditor's report, the auditor plans to refer to the cash basis in the opinion paragraph but not include any additional paragraph highlighting the special-purpose framework note. What modification is required for the auditor's report?

  1. No modification is required if the opinion paragraph identifies the cash basis as the applicable financial reporting framework
  2. Add an other-matter paragraph stating the auditor is not independent due to the use of a special-purpose framework
  3. Add a basis-for-qualified-opinion section because cash basis is not generally accepted accounting principles
  4. Add an emphasis-of-matter paragraph that refers to the note describing the cash basis and states that the cash basis is a special-purpose framework (correct answer)
Explanation: AU-C 800 mandates that all audit reports on special-purpose framework financial statements include an emphasis-of-matter paragraph, regardless of whether the framework is identified in the opinion paragraph. This paragraph must refer to the note describing the framework and explicitly state that the financial statements are prepared in accordance with a special-purpose framework. Simply mentioning the cash basis in the opinion paragraph does not satisfy this requirement. The emphasis-of-matter paragraph serves to alert users that they are reading special-purpose statements that differ from GAAP. This is not a basis for qualification (cash basis is acceptable), nor does it affect auditor independence. The professional standard prioritizes transparency and user understanding by requiring prominent disclosure of the special-purpose nature of the financial statements through both the notes and the auditor's report.

Question 3

A nonissuer S corporation engages a CPA to prepare (not compile) tax-basis financial statements for inclusion with the entity's tax return. Management requests that no disclosures be included, and the statements will not be provided to third parties other than the taxing authority as part of the return package. What factor should the accountant consider when forming a conclusion about the appropriate reporting action?

  1. Whether preparation of tax-basis financial statements is prohibited unless the accountant also performs an audit under generally accepted auditing standards
  2. Whether the accountant must issue a review report because tax-basis statements are a special-purpose framework
  3. Whether each page of the prepared financial statements (or a transmittal) includes a clear legend stating that no assurance is provided (correct answer)
  4. Whether a Public Company Accounting Oversight Board engagement quality review is required for any tax-basis financial statements
Explanation: AR-C 70 governs preparation engagements, which involve no assurance and no report. The key requirement is that each page of prepared financial statements must include a legend stating "no assurance is provided" or the accountant must issue a disclaimer on letterhead. This requirement applies regardless of the accounting framework used (GAAP or special-purpose like tax basis). Preparation services are not prohibited for special-purpose frameworks, and no review report is required simply because tax basis is used. PCAOB engagement quality reviews do not apply to nonissuer preparation engagements. The professional standard recognizes preparation as a non-assurance service where the accountant assists management in presenting financial information without performing verification procedures. The legend requirement ensures users understand the accountant has not audited, reviewed, or compiled the statements.

Question 4

A nonissuer professional services firm engages a CPA to compile cash-basis financial statements to submit to a state licensing board. The accountant becomes aware that management omitted substantially all disclosures, and the compilation report properly states that disclosures are omitted. The licensing board requires that the report indicate the statements are prepared on the cash basis. What modification is required for the accountant's compilation report?

  1. Add a critical audit matters section describing the cash receipts testing performed
  2. Express a qualified opinion due to omission of substantially all disclosures
  3. Disclaim an opinion because a compilation cannot be performed on a cash basis
  4. Add a paragraph describing the cash basis of accounting (special-purpose framework) used to prepare the financial statements (correct answer)
Explanation: AR-C 80 permits compilation of special-purpose framework financial statements, including cash-basis statements. When management omits substantially all disclosures, the compilation report must state this fact, which the question indicates has been done. However, when the intended user (state licensing board) requires identification of the accounting basis, the accountant must add a paragraph describing the special-purpose framework used. This is not a qualified opinion (compilations don't express opinions), nor is it a disclaimer or critical audit matters section (which apply to audits). The professional standard recognizes that compilation reports may need modification to meet specific user requirements while maintaining clarity about the level of service provided. The additional paragraph ensures users understand both the accounting basis and the accountant's limited involvement in a compilation engagement.

Question 5

A nonissuer retailer is audited under AICPA standards and prepares cash-basis financial statements that include a note stating "The cash basis is the same as the tax basis." The auditor determines this statement is misleading because significant tax-basis differences exist and the intended users rely on the note to understand the framework. What factor should the auditor consider when forming an opinion?

  1. Whether the financial statements include adequate disclosure of the special-purpose framework and are not misleading. (correct answer)
  2. Whether the auditor can omit all notes because special-purpose frameworks do not require disclosures.
  3. Whether the auditor can reclassify the framework to U.S. GAAP by adding a management representation letter.
  4. Whether the auditor must communicate critical audit matters regarding the misleading note.
Explanation: This question tests AU-C Section 800, which requires auditors to consider if special-purpose framework financial statements are misleading, including note disclosures. The key facts are that the cash-basis statements include a misleading note equating cash and tax bases despite significant differences, affecting user reliance. The correct answer aligns with AU-C 800 by focusing on adequate disclosure of the framework to prevent misleading statements. Choice B is incorrect because special-purpose frameworks require appropriate disclosures, not omission, per AU-C 800, while Choice C is wrong as reclassification to GAAP requires actual conformity. Choice D is incorrect because critical audit matters are not required in AICPA audits. Auditors evaluate if disclosures accurately reflect the framework to ensure fair presentation. A judgment framework is to assess potential user misunderstanding from notes, requesting corrections if material misrepresentations exist.

Question 6

A nonissuer community bank is audited under AICPA auditing standards and prepares its financial statements on a contractual basis required by its primary lender, which omits the statement of cash flows and uses a non-GAAP loan-loss methodology specified in the debt agreement. Management adequately discloses the contractual basis and the significant differences from U.S. GAAP in the notes, and the auditor concludes the statements are fairly presented in accordance with that contractual basis. What modification is required for the auditor's report?

  1. Express a qualified opinion due to the omission of the statement of cash flows.
  2. Add an emphasis-of-matter paragraph describing that the financial statements are prepared in accordance with a contractual basis of accounting and restricting the report's use to the parties to the agreement. (correct answer)
  3. Issue a PCAOB-style report that includes a critical audit matters section because a lender is a third-party user.
  4. Add an other-matter paragraph stating the financial statements are not prepared in accordance with U.S. GAAP and disclaim an opinion on U.S. GAAP.
Explanation: This question tests AU-C Section 800, which addresses audits of financial statements prepared in accordance with special-purpose frameworks, including contractual bases of accounting. The key facts are that the financial statements are prepared on a contractual basis required by the lender, with adequate disclosures of the basis and differences from U.S. GAAP, and the auditor concludes fair presentation under that basis. The correct answer aligns with AU-C 800 by requiring an emphasis-of-matter paragraph to describe the contractual basis and a restriction on the report's use to the parties involved, as the statements are not intended for general use. Choice A is incorrect because the omission of the statement of cash flows is in accordance with the contractual basis, not a departure warranting qualification, while Choice C is wrong as PCAOB standards and critical audit matters apply only to issuer audits, not AICPA audits of nonissuers. Choice D is incorrect because AU-C 800 does not require disclaiming an opinion on U.S. GAAP but instead focuses on opining on the special-purpose framework. When auditing special-purpose frameworks, auditors should evaluate whether the framework is acceptable for the intended purpose and ensure the report clearly distinguishes it from general-purpose frameworks like U.S. GAAP. A useful decision rule is to always include an emphasis-of-matter paragraph for special-purpose frameworks and restrict use when the statements are prepared solely for specific parties.

Question 7

A nonissuer utility company is audited under AICPA standards and prepares financial statements on a regulatory basis required by a state public utility commission. The regulatory basis is acceptable for the purpose, and disclosures are adequate. What modification is required for the auditor's report?​​

  1. Include an emphasis-of-matter paragraph identifying the regulatory basis and describing that the financial statements are prepared in accordance with that special-purpose framework. (correct answer)
  2. Replace the basis-for-opinion section with a basis-for-qualified-opinion section because regulatory bases are departures from U.S. GAAP.
  3. Add an other-matter paragraph stating the auditor also audited U.S. GAAP financial statements.
  4. Issue the report under PCAOB standards because a regulatory commission is a governmental user.
Explanation: This question tests AU-C Section 800, which requires modifications to the auditor's report for special-purpose frameworks like regulatory bases. The key facts are that the regulatory basis is acceptable for the state commission, with adequate disclosures. The correct answer aligns with AU-C 800 by requiring an emphasis-of-matter paragraph to describe the regulatory basis as the applicable framework. Choice B is incorrect because regulatory bases are not departures from GAAP but alternative frameworks under AU-C 800, while Choice C is wrong as no U.S. GAAP audit is mentioned. Choice D is incorrect because PCAOB standards apply to issuers, not nonissuer utilities under AICPA standards. Report modifications highlight the framework to distinguish from general-purpose reporting. A professional judgment framework is to include emphasis when the basis differs from GAAP, ensuring the report reflects the framework's purpose.

Question 8

A nonissuer distribution company is audited under AICPA standards and prepares cash-basis financial statements for a state tax authority. The tax authority requires the statements to exclude depreciation entirely, even for cash purchases of equipment, and management complies and discloses the policy. The auditor concludes the statements are fairly presented under that cash basis as modified by the filing requirement. Which aspect of the financial statements requires emphasis due to the special-purpose framework?

  1. An emphasis-of-matter paragraph describing the cash basis (and the regulatory filing requirement, if necessary for clarity) as the applicable financial reporting framework. (correct answer)
  2. A qualification paragraph because excluding depreciation is always a GAAP departure.
  3. A scope limitation paragraph because the auditor cannot audit equipment under the cash basis.
  4. A critical audit matters section describing the depreciation policy.
Explanation: This question tests AU-C Section 800, which requires emphasis for key aspects of special-purpose frameworks, including modifications like excluding depreciation in cash basis. The key facts are that the cash-basis statements exclude depreciation per regulatory requirements, with disclosures, and are fairly presented. The correct answer aligns with AU-C 800 by requiring an emphasis-of-matter paragraph describing the cash basis and filing requirement. Choice B is incorrect because exclusions per the framework are not GAAP departures, while Choice C is wrong as no scope limitation exists. Choice D is incorrect because critical audit matters are not AICPA requirements. Emphasis clarifies framework specifics. A decision rule is to highlight modifications to the basis if they aid user understanding, especially in regulatory contexts.

Question 9

A nonissuer broker-dealer (not an SEC issuer) is audited under AICPA standards and prepares financial statements on a regulatory basis prescribed by its self-regulatory organization for filing. Disclosures are adequate and the auditor expects an unmodified opinion. What modification is required for the auditor's report?

  1. Issue a PCAOB audit report because broker-dealers are always subject to PCAOB reporting requirements.
  2. Include an emphasis-of-matter paragraph describing the regulatory basis of accounting used to prepare the financial statements. (correct answer)
  3. Express a qualified opinion because regulatory basis is a departure from U.S. GAAP.
  4. Add an other-matter paragraph stating the auditor does not provide assurance on the regulatory filing.
Explanation: This question tests AU-C Section 800, which applies to audits of nonissuer broker-dealers using regulatory bases, requiring report emphasis on the basis. The key facts are that the regulatory-basis statements have adequate disclosures for filing, with an expected unmodified opinion. The correct answer aligns with AU-C 800 by requiring an emphasis-of-matter paragraph describing the regulatory basis. Choice A is incorrect because nonissuer broker-dealers are audited under AICPA, not necessarily PCAOB standards, while Choice C is wrong as regulatory basis is not a GAAP departure. Choice D is incorrect because the audit provides assurance on the statements, including for filings. Emphasis distinguishes the framework from GAAP. A professional judgment framework is to include basis descriptions in reports for regulatory filings, ensuring clarity for specialized users.

Question 10

A nonissuer manufacturing company is audited on financial statements prepared on a contractual basis required by a bank loan agreement (e.g., excluding certain noncash expenses and using a lender-defined depreciation method). Management includes a note describing the contractual basis but does not state that the basis is a special-purpose framework. What factor should the auditor consider when forming an opinion?

  1. Whether the bank's agreement constitutes a regulatory requirement that overrides the need for any framework description in the notes
  2. Whether the company's securities are publicly traded, requiring the auditor to apply Public Company Accounting Oversight Board standards
  3. Whether the contractual basis can be treated as a change in accounting principle requiring a preferability letter from the bank
  4. Whether the contractual basis is an acceptable special-purpose framework and is adequately described in the financial statements, including how it differs from generally accepted accounting principles (correct answer)
Explanation: AU-C 800 establishes that contractual-basis accounting is an acceptable special-purpose framework when financial statements are prepared to comply with an agreement between the entity and third parties. The critical evaluation factor is whether the contractual basis is adequately described in the financial statements, including how it differs from GAAP, not merely whether it exists. Management's failure to identify the framework as "special-purpose" in the notes could result in inadequate disclosure if users cannot understand the basis of accounting. The bank agreement does not override disclosure requirements, and this is not a change in accounting principle. PCAOB standards are irrelevant for nonissuers. The professional standard requires auditors to ensure that special-purpose framework statements contain sufficient information for users to understand the basis of presentation and its effects on the financial statements.

Question 11

A nonissuer closely held corporation engages a CPA to audit tax-basis financial statements prepared for income tax compliance and to provide to shareholders. The financial statements appropriately describe the tax-basis framework and include required disclosures. Based on the entity's reporting framework, which is the most appropriate reporting action?

  1. Issue a review report with limited assurance because tax-basis financial statements cannot be audited under generally accepted auditing standards
  2. Issue a PCAOB audit report referring to the tax basis as a "non-GAAP framework" and include a critical audit matters section
  3. Refuse the engagement because only generally accepted accounting principles are acceptable for audited financial statements
  4. Issue an auditor's report with an opinion that the financial statements are presented fairly, in all material respects, in accordance with the tax basis of accounting (correct answer)
Explanation: AU-C 800 explicitly permits audits of special-purpose framework financial statements, including tax-basis statements. The tax basis of accounting is one of the four recognized special-purpose frameworks under GAAS (cash, tax, regulatory, and contractual). When financial statements are properly prepared under a special-purpose framework with adequate disclosures, the auditor issues an unmodified opinion stating the statements are fairly presented in accordance with that specific framework. PCAOB standards and critical audit matters do not apply to nonissuers, and review reports are inappropriate when an audit has been performed. The professional standard requires auditors to evaluate whether the special-purpose framework is acceptable for the intended users and whether the statements achieve fair presentation within that framework. Tax-basis statements for a closely held corporation's tax compliance and shareholder needs represent an appropriate use of a special-purpose framework.

Question 12

A nonissuer construction contractor is audited under AICPA standards and prepares cash-basis financial statements for a state licensing renewal. The statements include a statement of assets and liabilities and a statement of revenues and expenses but omit substantially all disclosures. The auditor concludes the cash-basis statements are otherwise fairly presented. Which opinion should the auditor express?

  1. Unmodified opinion because disclosures are not required under the cash basis of accounting.
  2. Qualified opinion due to a departure from the cash basis of accounting for omitted disclosures, unless the omission is so pervasive that an adverse opinion is warranted. (correct answer)
  3. Adverse opinion because any omission of disclosures in a special-purpose framework requires an adverse opinion.
  4. Disclaimer of opinion because cash-basis statements cannot be audited under AICPA standards.
Explanation: This question tests AU-C Section 800, which covers audits of special-purpose frameworks such as the cash basis, including requirements for disclosures. The key facts are that the cash-basis statements omit substantially all disclosures but are otherwise fairly presented for state licensing purposes. The correct answer aligns with AU-C 800 by requiring a qualified opinion for material departures from the framework, such as omitted disclosures, or an adverse opinion if pervasive. Choice A is incorrect because disclosures are required under AU-C 800 for special-purpose frameworks to achieve fair presentation, while Choice C is wrong as an adverse opinion is not automatic but depends on pervasiveness. Choice D is incorrect because cash-basis statements can be audited under AICPA standards, provided the framework is acceptable. When omissions in special-purpose frameworks are material, auditors evaluate pervasiveness to decide between qualified and adverse opinions. A decision rule is to consider if omitted information prevents users from understanding the statements in context of the framework, potentially leading to modified opinions.

Question 13

A nonissuer manufacturing company is audited under AICPA standards and prepares financial statements on a regulatory basis in accordance with a state insurance department's prescribed accounting practices. The prescribed practices differ from U.S. GAAP in several material respects, and management's note disclosures clearly describe the basis and the differences. What factor should the auditor consider when forming an opinion?

  1. Whether the regulatory basis is an acceptable financial reporting framework for the intended users and purpose of the statements. (correct answer)
  2. Whether management can assert the regulatory basis is in conformity with U.S. GAAP.
  3. Whether the auditor can eliminate all references to the regulatory basis and refer only to U.S. GAAP in the opinion paragraph.
  4. Whether critical audit matters must be communicated because prescribed practices differ from U.S. GAAP.
Explanation: This question tests AU-C Section 800, which requires auditors to evaluate the acceptability of special-purpose frameworks like regulatory bases for the intended users and purpose. The key facts are that the regulatory basis differs materially from U.S. GAAP, with clear disclosures of the basis and differences, for a state insurance department filing. The correct answer aligns with AU-C 800 by focusing on whether the framework is acceptable for the specific regulatory purpose and users. Choice B is incorrect because management cannot assert conformity with U.S. GAAP for a differing special-purpose framework under AU-C 800, while Choice C is wrong as the opinion must reference the regulatory basis, not eliminate it. Choice D is incorrect because critical audit matters are PCAOB-specific and not required in AICPA audits. Auditors should assess if the special-purpose framework meets the needs of intended users without being misleading. A professional judgment framework is to verify that disclosures prevent confusion with GAAP and that the framework's use is justified by the reporting objective.

Question 14

A nonissuer franchised restaurant chain is audited under AICPA standards and prepares contractual-basis financial statements that follow the franchisor's required accounting policies. The franchisor is the only intended user and the statements are not intended for general use. What modification is required for the auditor's report?

  1. Include an emphasis-of-matter paragraph describing the contractual basis and restrict the use of the auditor's report to the franchisor and the entity. (correct answer)
  2. Issue a standard unmodified U.S. GAAP audit report because franchisors are sophisticated users.
  3. Add a CAM section to highlight franchisor-related accounting policies.
  4. Express a qualified opinion because contractual-basis statements are not a fair presentation framework.
Explanation: This question tests AU-C Section 800, which requires report modifications for contractual-basis audits, including emphasis and use restriction for limited users. The key facts are that statements follow franchisor policies solely for the franchisor, not general use. The correct answer aligns with AU-C 800 by requiring emphasis on the contractual basis and report restriction. Choice B is incorrect because a standard GAAP report would misrepresent the basis, while Choice C is wrong as CAMs are PCAOB-specific. Choice D is incorrect because contractual bases can be fair presentation frameworks if acceptable. Restrictions limit use to intended parties. A decision rule is to restrict reports when special-purpose statements are not for general distribution, preventing unintended reliance.

Question 15

A nonissuer technology startup requests a review of contractual-basis financial statements required by a venture debt agreement. The agreement requires capitalization of certain costs that would be expensed under U.S. GAAP, and the notes adequately describe the contractual basis and the significant differences. What modification is required for the accountant's review report?

  1. Include an emphasis-of-matter paragraph describing that the financial statements are prepared in accordance with a contractual basis of accounting. (correct answer)
  2. Express a qualified conclusion because contractual-basis statements differ from U.S. GAAP.
  3. Add a basis-for-adverse-conclusion paragraph because capitalization differs from U.S. GAAP.
  4. Issue the review report under PCAOB standards because the lender is a financial institution.
Explanation: This question tests AR-C Section 90, which governs review reports on special-purpose frameworks, requiring modifications like emphasis-of-matter paragraphs. The key facts are that the contractual-basis statements capitalize costs differently from GAAP, with adequate disclosures. The correct answer aligns with AR-C 90 by requiring an emphasis-of-matter paragraph to describe the contractual basis. Choice B is incorrect because differences from GAAP do not warrant qualification if the framework is fairly applied, while Choice C is wrong as adverse conclusions are for pervasive issues. Choice D is incorrect because PCAOB standards do not apply to nonissuer reviews. Emphasis highlights the special-purpose nature in reviews. A judgment framework is to include descriptions of the basis in reports, ensuring users understand deviations from general-purpose accounting.

Question 16

A nonissuer entity is audited under AICPA standards using a regulatory basis required by a state agency. The auditor's draft report includes an emphasis-of-matter paragraph describing the regulatory basis, but the opinion paragraph still states the financial statements are presented fairly "in accordance with U.S. generally accepted accounting principles." What modification is required for the auditor's report?

  1. Revise the opinion paragraph to refer to the regulatory basis of accounting, not U.S. GAAP. (correct answer)
  2. Remove the emphasis-of-matter paragraph because the opinion paragraph already refers to U.S. GAAP.
  3. Add an other-matter paragraph stating that regulatory basis is equivalent to U.S. GAAP for regulatory users.
  4. Change to a disclaimer of opinion because the opinion paragraph cannot reference a special-purpose framework.
Explanation: This question tests AU-C Section 800, which requires the opinion paragraph in special-purpose framework audits to reference the applicable basis, not U.S. GAAP. The key facts are that the opinion paragraph incorrectly references U.S. GAAP despite an emphasis paragraph on the regulatory basis. The correct answer aligns with AU-C 800 by requiring revision of the opinion paragraph to the regulatory basis. Choice B is incorrect because removing emphasis would eliminate necessary description under AU-C 800, while Choice C is wrong as regulatory basis is not equivalent to GAAP. Choice D is incorrect because disclaimers are for scope limitations, not framework references. Opinion paragraphs must accurately state the framework. A professional judgment framework is to align all report sections with the basis, correcting inconsistencies to avoid misleading opinions.

Question 17

A nonissuer private school is audited under AICPA standards and prepares tax-basis financial statements for filing with a state grantor that accepts tax-basis reporting. The auditor notes the statements are intended for general distribution on the school's website, not solely for the grantor. What factor should the auditor consider when forming an opinion?

  1. Whether the tax basis is appropriate given the broader intended use and whether additional disclosures are needed to prevent misunderstanding by general users. (correct answer)
  2. Whether the auditor should automatically restrict use of the report whenever a special-purpose framework is used.
  3. Whether the auditor must convert the statements to U.S. GAAP if they will be posted online.
  4. Whether the auditor must include a critical audit matters section because the statements are publicly available.
Explanation: This question tests AU-C Section 800, which requires consideration of the special-purpose framework's appropriateness for broader intended uses. The key facts are that tax-basis statements are for a grantor but also general website distribution, potentially requiring more disclosures. The correct answer aligns with AU-C 800 by evaluating suitability for general users and need for additional disclosures. Choice B is incorrect because report restriction is optional and not automatic for special-purpose frameworks, while Choice C is wrong as conversion to GAAP requires actual changes. Choice D is incorrect because critical audit matters are PCAOB-specific. Auditors assess user needs for framework acceptability. A decision rule is to consider intended distribution; if broad, ensure disclosures prevent GAAP misconceptions.

Question 18

A nonissuer entity engages a CPA to compile regulatory-basis financial statements for submission to a state gaming commission. The accountant's compilation report is otherwise standard, but it omits any reference to the regulatory basis and reads as if the statements were prepared in accordance with U.S. GAAP. What modification is required for the accountant's report?

  1. No modification is required because compilation reports do not refer to the financial reporting framework.
  2. Revise the report to describe the regulatory basis of accounting used to prepare the financial statements. (correct answer)
  3. Change the engagement to an audit and express an unmodified opinion on U.S. GAAP.
  4. Add a critical audit matters section to clarify the regulatory basis.
Explanation: This question tests AR-C Section 80, which requires compilation reports to describe the applicable financial reporting framework, especially for special-purpose ones. The key facts are that the compilation report omits reference to the regulatory basis, implying U.S. GAAP. The correct answer aligns with AR-C 80 by requiring revision to describe the regulatory basis accurately. Choice A is incorrect because compilation reports must identify the framework to avoid misleading users per AR-C 80, while Choice C is wrong as changing to an audit is unnecessary. Choice D is incorrect because critical audit matters are not part of compilation reports. Report modifications ensure transparency about the basis used. A professional judgment framework is to include framework descriptions in reports, modifying if omissions could mislead intended users.

Question 19

When an auditor's report is issued on financial statements prepared on a special purpose framework, such as the income tax basis, the report must include an emphasis-of-matter paragraph. What is the primary purpose of this paragraph?

  1. To restrict the distribution of the auditor's report to specified parties who understand the basis of accounting.
  2. To communicate a significant deficiency in the entity's internal control over financial reporting.
  3. To indicate that the financial statements are prepared on a basis of accounting other than generally accepted accounting principles. (correct answer)
  4. To justify the auditor's decision to issue a qualified opinion due to the departure from GAAP.
Explanation: Auditing standards require the auditor's report on special purpose financial statements to include an emphasis-of-matter paragraph. This paragraph's purpose is to highlight that the statements are prepared under a special purpose framework, state that the basis is different from GAAP, and refer to the note in the financial statements that describes the framework.

Question 20

An auditor's report on financial statements prepared in accordance with which of the following special purpose frameworks would most likely require an other-matter paragraph restricting the use of the report?

  1. The cash basis of accounting used to prepare financial statements for a creditor.
  2. The income tax basis of accounting used by a corporation to file its tax return.
  3. A basis of accounting that uses a definite set of criteria having substantial support, such as the cash basis.
  4. A basis of accounting established in a private loan agreement between the entity and its bank. (correct answer)
Explanation: A report on financial statements prepared on a contractual basis of accounting (such as a loan agreement) must include an other-matter paragraph restricting its use to the parties of the contract (the entity and its bank). The cash basis and tax basis are generally considered acceptable for general use and do not require restriction.