A partnership keeps its books on cash receipts and disbursements and asks for an audit. The auditor evaluates the selected basis, its presentation and disclosures, and the evidence before choosing the report elements.
A special purpose framework is one of the recognized cash, tax, regulatory, contractual or other logical and reasonable bases designed for specific financial information needs. It is not every alternative to U.S. generally accepted accounting principles (GAAP). The auditing standards for nonissuers recognize five: the cash basis, the tax basis, the regulatory basis, the contractual basis, and an other basis of accounting built on a definite set of logical, reasonable criteria.
NOTE: A cash basis with modifications that have substantial support, such as recording fixed assets and depreciation, remains the cash basis and is called the modified cash basis. A modification without substantial support requires reassessment of framework acceptability. It does not automatically convert the statements into a GAAP presentation. An unacceptable framework may prevent engagement acceptance or require further action under the engagement and reporting standards.
Common mistakes
- Opinion selected from the basis alone. The selected framework determines the presentation criteria; sufficient evidence and conformity are still required for an unmodified opinion.
- Ordinary basis disclosures confused with modified-opinion requirements. A tax-basis policy note describes differences from GAAP without a compulsory dollar reconciliation. Example 2 instead concerns a general-use regulatory report with an adverse GAAP opinion. Its basis section describes and quantifies the financial effects of the material departures unless doing so is impracticable.
- Tax basis report restricted. Only a contractual basis, a regulator-only regulatory basis, and an other basis with private criteria carry the other-matter restriction. Cash and tax basis reports are general use.
Bottom line
- Five bases: cash (including modified cash with substantial support), tax, regulatory, contractual, and an other basis built on definite logical criteria.
- Acceptability factors: purpose, intended users, management's steps to judge the framework acceptable, management's acknowledged responsibility, and contract interpretations for a contractual basis.
- Evaluate the actual title and its basis qualifier; "Balance Sheet, Income Tax Basis" can be suitable while a title lacking that qualifier may mislead.
- Select purpose, management-choice wording, basis emphasis, suitability language and restriction by basis and intended use; general-use regulatory reporting has separate rules.
Exam shortcut
Classify the framework before selecting report elements. Cash or tax does not itself require modification, but presentation and evidence still determine the opinion. Contractual and regulator-only reports add the relevant purpose, suitability and restriction language. General-use regulatory reporting requires two nonissuer opinions with fact-dependent conclusions; the issuer's additional regulatory opinion is optional. Evaluate a title's actual basis qualifier and distinguish a permitted framework difference from a departure under that framework.
The full lesson (about 4,304 words, 29 min read) adds 3 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- IV.E6
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