A bank covenant requires a borrower to maintain a current ratio of 1.25 and report annually on compliance. A state insurance regulator requires a positive opinion that the insurer followed its statutory rules. A federal grant recipient must confirm that funds were used only for allowable activities. Three requests, three standards, three different assurance levels. The exam question is rarely whether you know one of them; it is whether you can match the engagement to the right standard and issue a report with the right words.
HIGH-FREQUENCY: AU-C 806 applies when a client has audited financial statements and is contractually or legally required to report on compliance with aspects of contractual agreements or regulatory requirements that relate to those statements. The classic case: a loan agreement requires the borrower to maintain working capital, a current ratio, and a debt-to-equity ratio, and to deliver an auditor's letter each year confirming compliance.
The auditor performs no new procedures. The report is issued in connection with the audit and is grounded in the work already done to opine on the financial statements.
Common mistakes
- Calling AU-C 806 an "opinion on compliance." AU-C 806 produces negative assurance, not an opinion. The phrase "nothing came to our attention" is the cue. Answer choices that describe AU-C 806 as "the auditor opines that the entity complied" are wrong.
- Issuing an AU-C 806 report when the financial statement opinion is adverse or disclaimed. AU-C 806 piggybacks on the audit and requires an unmodified or qualified opinion. An adverse opinion or disclaimer disqualifies the AU-C 806 letter. The underlying audit conclusions do not support the negative assurance.
- Confusing AT-C 315 with AU-C 935. AT-C 315 is a stand-alone attestation engagement under attestation standards (no GAAS audit needed). AU-C 935 is a compliance audit performed under GAAS plus a governmental audit requirement.
Bottom line
- AU-C 806 reports negative assurance ("nothing came to our attention") on compliance with contractual agreements or regulatory requirements in connection with a financial statement audit.
- AU-C 806 applies only when the matters relate to accounting and the audit opinion is unmodified or qualified; an adverse opinion or disclaimer disqualifies it.
- AT-C 315 is an attestation examination expressing a positive opinion at the reasonable assurance level on compliance with specified requirements or on internal control over compliance.
- A request for a positive opinion on compliance moves the engagement out of AU-C 806 into AT-C 315 (stand-alone) or AU-C 935 (layered onto an audit).
Exam shortcut
When a question mentions a debt covenant letter or regulatory letter alongside the financial statement audit, the answer is AU-C 806. Look for "negative assurance," "nothing came to our attention," "in connection with the audit," and "restricted to the parties to the contract." When a question asks for a positive opinion on compliance with a specified law, regulation, contract, or grant, and there is no companion financial statement audit driving...
The full lesson (about 2,220 words, 15 min read) adds 1 worked example, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- IV.D1
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