Special Reports 2291
AU Section 623
Special Reports
(Supersedes section 621.)
Source: SAS No. 62; SAS No. 77.
See section 9623 for interpretations of this section.
Effective for reports issued on or after July 1, 1989, unless otherwise indicated.
Introduction
.01 This section applies to auditors' reports issued in connection with the
following:
a. Financial statements that are prepared in conformity with a compre-
hensive basis of accounting other than generally accepted accounting
principles (paragraphs .02 through .10)
b. Specified elements, accounts, or items of a financial statement (para-
graphs .11 through .18)
c. Compliance with aspects of contractual agreements or regulatory re-
quirements related to audited financial statements (paragraphs .19
through .21)
d. Financial presentations to comply with contractual agreements or reg-
ulatory provisions (paragraphs .22 through .30)
e. Financial information presented in prescribed forms or schedules that
require a prescribed form of auditor's reports (paragraphs .32 and
.33)
Financial Statements Prepared in Conformity With a
Comprehensive Basis of Accounting Other Than
Generally Accepted Accounting Principles
.02 Generally accepted auditing standards are applicable when an audi-
tor conducts an audit of and reports on any financial statement. A financial
statement may be, for example, that of a corporation, a consolidated group
of corporations, a combined group of affiliated entities, a not-for-profit orga-
nization, a governmental unit, an estate or trust, a partnership, a proprietor-
ship, a segment of any of these, or an individual. The term financial statement
refers to a presentation of financial data, including accompanying notes, derived
from accounting records and intended to communicate an entity's economic re-
sources or obligations at a point in time or the changes therein for a period
of time in conformity with a comprehensive basis of accounting. For reporting
AU §623.02
2292 Other Types of Reports
purposes, the independent auditor should consider each of the following types
of financial presentations to be a financial statement:
a. Balance sheet
b. Statement of income or statement of operations
c. Statement of retained earnings
d. Statement of cash flows
e. Statement of changes in owners' equity
f. Statement of assets and liabilities that does not include owners' equity
accounts
g. Statement of revenue and expenses
h. Summary of operations
i. Statement of operations by product lines
j. Statement of cash receipts and disbursements
.03 An independent auditor's judgment concerning the overall presenta-
tion of financial statements should be applied within an identifiable framework.
Normally, the framework is provided by generally accepted accounting princi-
ples, and the auditor's judgment in forming an opinion is applied accordingly.
In some circumstances, however, a comprehensive basis of accounting other
than generally accepted accounting principles may be used. [Title of section
411 amended, effective for reports issued or reissued on or after June 30, 2001,
by Statement on Auditing Standards No. 93. Revised, October 2009, to reflect
conforming changes necessary due to the withdrawal of SAS No. 69.]
.04 For purposes of this section, a comprehensive basis of accounting other
than generally accepted accounting principles is one of the following—
a. A basis of accounting that the reporting entity uses to comply with the
requirements or financial reporting provisions of a governmental reg-
ulatory agency to whose jurisdiction the entity is subject. An example
is a basis of accounting insurance companies use pursuant to the rules
of a state insurance commission.
b. A basis of accounting that the reporting entity uses or expects to use
to file its income tax return for the period covered by the financial
statements.
c. The cash receipts and disbursements basis of accounting, and modifi-
cations of the cash basis having substantial support, such as recording
depreciation on fixed assets or accruing income taxes.
d. A definite set of criteria having substantial support that is applied
to all material items appearing in financial statements, such as the
price-level basis of accounting.
Unless one of the foregoing descriptions applies, reporting under the provisions
of paragraph .05 is not permitted.
Reporting on Financial Statements Prepared in Conformity With
an Other Comprehensive Basis of Accounting (OCBOA)
.05 When reporting on financial statements prepared in conformity with
a comprehensive basis of accounting other than generally accepted accounting
AU §623.03
Special Reports 2293
principles, as defined in paragraph .04, an independent auditor should include
in the report—
a. A title that includes the word independent.
1
b. A paragraph that—
(1) States that the financial statements identified in the report were
audited.
(2) States that the financial statements are the responsibility of the
Company's management
2
and that the auditor is responsible for
expressing an opinion on the financial statements based on the
audit.
c. A paragraph that—
(1) States that the audit was conducted in accordance with gener-
ally accepted auditing standards and includes an identification
of the United States of America as the country of origin of those
standards (for example, auditing standards generally accepted in
the United States of America or U.S. generally accepted auditing
standards).
(2) States that those standards require that the auditor plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
(3) States that an audit includes—
(a) Examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements,
(b) Assessing the accounting principles used and significant es-
timates made by management, and
(c) Evaluating the overall financial statement presentation (see
paragraph .09).
(4) States that the auditor believes that his or her audit provides a
reasonable basis for the opinion.
d. A paragraph that—
(1) States the basis of presentation and refers to the note to the
financial statements that describes the basis (see paragraphs
.09 and .10).
(2) States that the basis of presentation is a comprehensive basis of
accounting other than generally accepted accounting principles.
e. A paragraph that expresses the auditor's opinion (or disclaims an
opinion) on whether the financial statements are presented fairly, in
1
This section does not require a title for an auditor's report if the auditor is not independent. See
section 504, Association With Financial Statements, for guidance on reporting when the auditor is not
independent.
2
In some instances, a document containing the auditor's report may include a statement by man-
agement regarding its responsibility for the presentation of the financial statements. Nevertheless,
the auditor's report should state that the financial statements are management's responsibility. How-
ever, the statement about management's responsibility should not be further elaborated upon in the
auditor's standard report or referenced to management's report.
AU §623.05
2294 Other Types of Reports
all material respects, in conformity with the basis of accounting de-
scribed. If the auditor concludes that the financial statements are not
presented fairly on the basis of accounting described or if there has
been a limitation on the scope of the audit, he or she should disclose
all the substantive reasons for the conclusion in an explanatory para-
graph(s) (preceding the opinion paragraph) of the report and should
include in the opinion paragraph the appropriate modifying language
and a reference to such explanatory paragraph(s).
3
f. If the financial statements are prepared in conformity with the require-
ments or financial reporting provisions of a governmental regulatory
agency (see paragraph .04a), a separate paragraph at the end of the
report stating that the report is intended solely for the information and
use of those within the entity and the regulatory agencies to whose ju-
risdiction the entity is subject, and is not intended to be and should not
be used by anyone other than these specified parties. Such a paragraph
is appropriate even though by law or regulation the auditor's report
may be made a matter of public record.
4
The auditor may use this form
of report only if the financial statements and report are intended solely
for use by those within the entity and one or more regulatory agencies
to whose jurisdiction the entity is subject.
5
g. The manual or printed signature of the auditor's firm.
h. The date.
6
[As amended, effective for audits of financial statements for periods ended on or
after December 31, 1996, by Statement on Auditing Standards No. 77. Revised,
October 2000, to reflect conforming changes necessary due to the issuance of
Statement on Auditing Standards No. 93.]
.06 Unless the financial statements meet the conditions for presentation
in conformity with a "comprehensive basis of accounting other than generally
accepted accounting principles" as defined in paragraph .04, the auditor should
use the standard form of report (see section 508, Reports on Audited Financial
Statements, paragraph .08) modified as appropriate because of the departures
from generally accepted accounting principles.
.07 Terms such as balance sheet, statement of financial position, state-
ment of income, statement of operations, and statement of cash flows, or similar
3
Paragraph .31 discusses other circumstances that may require that the auditor add additional
explanatory language to the special report.
4
Public record, for purposes of auditor's reports on financial statements of a regulated entity
that are prepared in accordance with the financial reporting provisions of a government regulatory
agency, includes circumstances in which specific requests must be made by the public to obtain access
to or copies of the report. In contrast, the auditor would be precluded from using this form of report
in circumstances in which the entity distributes the financial statements to parties other than the
regulatory agency either voluntarily or upon specific request. [Footnote added, effective for audits
of financial statements for periods ended on or after December 31, 1996, by Statement on Auditing
Standards No. 77.]
5
If the financial statements and report are intended for use by parties other than those within
the entity and one or more regulatory agencies to whose jurisdiction the entity is subject, the auditor
should follow the guidance in section 544, Lack of Conformity With Generally Accepted Accounting
Principles. [Footnote renumbered and amended, effective for audits of financial statements for periods
ended on or after December 31, 1996, by the issuance of Statement on Auditing Standards No. 77.]
6
For guidance on dating the auditor's report, see section 530, Dating of the Independent Au-
ditor's Report. [Footnote renumbered by the issuance of Statement on Auditing Standards No. 77,
November 1995.]
AU §623.06
Special Reports 2295
unmodified titles are generally understood to be applicable only to financial
statements that are intended to present financial position, results of opera-
tions, or cash flows in conformity with generally accepted accounting princi-
ples. Consequently, the auditor should consider whether the financial state-
ments that he or she is reporting on are suitably titled. For example, cash
basis financial statements might be titled statement of assets and liabilities
arising from cash transactions,orstatement of revenue collected and expenses
paid, and a financial statement prepared on a statutory or regulatory basis
might be titled statement of income—statutory basis. If the auditor believes
that the financial statements are not suitably titled, the auditor should disclose
his or her reservations in an explanatory paragraph of the report and qualify
the opinion.
.08 Following are illustrations of reports on financial statements prepared
in conformity with a comprehensive basis of accounting other than generally
accepted accounting principles.
[7]
Financial Statements Prepared on a Basis Prescribed by a
Regulatory Agency Solely for Filing With That Agency
Independent Auditor's Report
We have audited the accompanying statements of admitted assets, liabilities,
and surplus—statutory basis of XYZ Insurance Company as of December 31,
20X2 and 20X1, and the related statements of income and cash flows—statutory
basis and changes in surplus—statutory basis for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally ac-
cepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the fi-
nancial statements are free of material misstatement. An audit includes exam-
ining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in Note X, these financial statements were prepared in confor-
mity with the accounting practices prescribed or permitted by the Insurance
Department of [State], which is a comprehensive basis of accounting other than
generally accepted accounting principles.
In our opinion, the financial statements referred to above present fairly, in all
material respects, the admitted assets, liabilities, and surplus of XYZ Insurance
Company as of December 31, 20X2 and 20X1, and the results of its operations
and its cash flows for the years then ended, on the basis of accounting described
in Note X.
This report is intended solely for the information and use of the board of di-
rectors and management of XYZ Insurance Company and [name of regulatory
agency] and is not intended to be and should not be used by anyone other than
these specified parties.
[7]
[Footnote deleted to reflect conforming changes necessary due to the issuance of Statement on
Auditing Standards No. 87.]
AU §623.08
2296 Other Types of Reports
Financial Statements Prepared on the Entity’s Income Tax Basis
Independent Auditor's Report
We have audited the accompanying statements of assets, liabilities, and
capital—income tax basis of ABC Partnership as of December 31, 20X2 and
20X1, and the related statements of revenue and expenses—income tax basis
and of changes in partners' capital accounts—income tax basis for the years
then ended. These financial statements are the responsibility of the Partner-
ship's management. Our responsibility is to express an opinion on these finan-
cial statements based on our audits.
We conducted our audits in accordance with auditing standards generally ac-
cepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the fi-
nancial statements are free of material misstatement. An audit includes exam-
ining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in Note X, these financial statements were prepared on the basis of
accounting the Partnership uses for income tax purposes, which is a comprehen-
sive basis of accounting other than generally accepted accounting principles.
In our opinion, the financial statements referred to above present fairly, in all
material respects, the assets, liabilities, and capital of ABC Partnership as of
[at] December 31, 20X2 and 20X1, and its revenue and expenses and changes in
partners' capital accounts for the years then ended, on the basis of accounting
described in Note X.
Financial Statements Prepared on the Cash Basis
Independent Auditor's Report
We have audited the accompanying statements of assets and liabilities arising
from cash transactions of XYZ Company as of December 31, 20X2 and 20X1,
and the related statements of revenue collected and expenses paid for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally ac-
cepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the fi-
nancial statements are free of material misstatement. An audit includes exam-
ining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in Note X, these financial statements were prepared on the basis of
cash receipts and disbursements, which is a comprehensive basis of accounting
other than generally accepted accounting principles.
AU §623.08
Special Reports 2297
In our opinion, the financial statements referred to above present fairly, in all
material respects, the assets and liabilities arising from cash transactions of
XYZ Company as of December 31, 20X2 and 20X1, and its revenue collected and
expenses paid during the years then ended, on the basis of accounting described
in Note X.
[Revised, October 2000, to reflect conforming changes necessary to reflect the
issuance of Statement on Auditing Standards No. 93.]
Evaluating the Adequacy of Disclosure in Financial Statements
Prepared in Conformity With an Other Comprehensive Basis of
Accounting
.09 When reporting on financial statements prepared on a comprehen-
sive basis of accounting other than generally accepted accounting principles,
the auditor should consider whether the financial statements (including the
accompanying notes) include all informative disclosures that are appropriate
for the basis of accounting used. The auditor should apply essentially the same
criteria to financial statements prepared on an other comprehensive basis of
accounting as he or she does to financial statements prepared in conformity
with generally accepted accounting principles. Therefore, the auditor's opinion
should be based on his or her judgment regarding whether the financial state-
ments, including the related notes, are informative of matters that may affect
their use, understanding, and interpretation. [Title of section 411 amended,
effective for reports issued or reissued on or after June 30, 2001, by Statement
on Auditing Standards No. 93. Revised, October 2009, to reflect conforming
changes necessary due to the withdrawal of SAS No. 69.]
.10 Financial statements prepared on an other comprehensive basis of ac-
counting should include, in the accompanying notes, a summary of significant
accounting policies that discusses the basis of presentation and describes how
that basis differs from generally accepted accounting principles. However, the
effects of the differences between generally accepted accounting principles and
the basis of presentation of the financial statements that the auditor is reporting
on need not be quantified. In addition, when the financial statements contain
items that are the same as, or similar to, those in financial statements prepared
in conformity with generally accepted accounting principles, similar informa-
tive disclosures are appropriate. For example, financial statements prepared on
an income tax basis or a modified cash basis of accounting usually reflect depre-
ciation, long-term debt and owners' equity. Thus, the informative disclosures for
depreciation, long-term debt and owners' equity in such financial statements
should be comparable to those in financial statements prepared in conformity
with generally accepted accounting principles. When evaluating the adequacy
of disclosures, the auditor should also consider disclosures related to matters
that are not specifically identified on the face of the financial statements, such
as (a) related party transactions, (b) restrictions on assets and owners' equity,
(c) subsequent events, and (d) uncertainties.
Specified Elements, Accounts, or Items of a
Financial Statement
.11 An independent auditor may be requested to express an opinion on
one or more specified elements, accounts, or items of a financial statement. In
such an engagement, the specified element(s), account(s), or item(s) may be
presented in the report or in a document accompanying the report. Examples
AU §623.11
2298 Other Types of Reports
of one or more specified elements, accounts, or items of a financial statement
that an auditor may report on based on an audit made in accordance with
generally accepted auditing standards include rentals, royalties, a profit par-
ticipation, or a provision for income taxes.
8
.12 When expressing an opinion on one or more specified elements, ac-
counts, or items of a financial statement, the auditor should plan and perform
the audit and prepare his or her report with a view to the purpose of the engage-
ment. With the exception of the first standard of reporting, the ten generally
accepted auditing standards are applicable to any engagement to express an
opinion on one or more specified elements, accounts, or items of a financial
statement. The first standard of reporting, which requires the auditor to state
in the auditor's report whether the financial statements are presented in con-
formity with generally accepted accounting principles, is applicable only when
the specified elements, accounts, or items of a financial statement are intended
to be presented in conformity with generally accepted accounting principles.
[Revised, November 2006, to reflect conforming changes necessary due to the
issuance of Statement on Auditing Standards No. 113.]
.13 An engagement to express an opinion on one or more specified ele-
ments, accounts, or items of a financial statement may be undertaken as a
separate engagement or in conjunction with an audit of financial statements.
In either case, an auditor expresses an opinion on each of the specified elements,
accounts, or items encompassed by the auditor's report; therefore, the measure-
ment of materiality must be related to each individual element, account, or item
reported on rather than to the aggregate thereof or to the financial statements
taken as a whole. Consequently, an audit of a specified element, account, or
item for purposes of reporting thereon is usually more extensive than if the
same information were being considered in conjunction with an audit of finan-
cial statements taken as a whole. Also, many financial statement elements are
interrelated, for example, sales and receivables; inventory and payables; and
buildings and equipment and depreciation. The auditor should be satisfied that
elements, accounts, or items that are interrelated with those on which he or she
has been engaged to express an opinion have been considered in expressing an
opinion.
.14 The auditor should not express an opinion on specified elements, ac-
counts, or items included in financial statements on which he or she has ex-
pressed an adverse opinion or disclaimed an opinion based on an audit, if such
reporting would be tantamount to expressing a piecemeal opinion on the fi-
nancial statements (see section 508, Reports on Audited Financial Statements,
paragraph .64). However, an auditor would be able to express an opinion on one
or more specified elements, accounts, or items of a financial statement provided
that the matters to be reported on and the related scope of the audit were not
intended to and did not encompass so many elements, accounts, or items as
to constitute a major portion of the financial statements. For example, it may
be appropriate for an auditor to express an opinion on an entity's accounts re-
ceivable balance even if the auditor has disclaimed an opinion on the financial
statements taken as a whole. However, the report on the specified element, ac-
count, or item should be presented separately from the report on the financial
statements of the entity.
8
See AT section 201, Agreed-Upon Procedures Engagements, for guidance when reporting on the
results of applying agreed-upon procedures to one or more specified elements, accounts, or items of a
financial statement. See AT section 101, Attest Engagements, for guidance when reporting on a review
of one or more specified elements, accounts, or items of a financial statement. [Footnote renumbered by
the issuance of Statement on Auditing Standards No. 77, November 1995. Footnote revised, January
2001, to reflect conforming changes necessary due to the issuance of Statement on Standards for
Attestation Engagements No. 10.]
AU §623.12
Special Reports 2299
Reports on One or More Specified Elements, Accounts, or Items
of a Financial Statement
.15 When an independent auditor is engaged to express an opinion on one
or more specified elements, accounts, or items of a financial statement, the
report should include—
a. A title that includes the word independent.
9
b. A paragraph that—
(1) States that the specified elements, accounts, or items identified in
the report were audited. If the audit was made in conjunction with
an audit of the company's financial statements, the paragraph
should so state and indicate the date of the auditor's report on
those financial statements. Furthermore, any departure from the
standard report on those statements should also be disclosed if
considered relevant to the presentation of the specified element,
account or item.
(2) States that the specified elements, accounts, or items are the re-
sponsibility of the Company's management and that the auditor
is responsible for expressing an opinion on the specified elements,
accounts or items based on the audit.
c. A paragraph that—
(1) States that the audit was conducted in accordance with gener-
ally accepted auditing standards and includes an identification
of the United States of America as the country of origin of those
standards (for example, auditing standards generally accepted in
the United States of America or U.S. generally accepted auditing
standards).
(2) States that those standards require that the auditor plan and
perform the audit to obtain reasonable assurance about whether
the specified elements, accounts, or items are free of material
misstatement.
(3) States that an audit includes—
(a) Examining, on a test basis, evidence supporting the amounts
and disclosures in the presentation of the specified elements,
accounts, or items,
(b) Assessing the accounting principles used and significant es-
timates made by management, and
(c) Evaluating the overall presentation of the specified elements,
accounts, or items.
(4) States that the auditor believes that his or her audit provides a
reasonable basis for the auditor's opinion.
d. A paragraph
10
that—
(1) Describes the basis on which the specified elements, accounts,
or items are presented (see paragraphs .09 and .10) and, when
9
See footnote 1. [Footnote renumbered by the issuance of Statement on Auditing Standards
No. 77, November 1995.]
10
Alternatively, this requirement can be met by incorporating the description in the introductory
paragraph discussed in paragraph .15b above. [Footnote renumbered by the issuance of Statement on
Auditing Standards No. 77, November 1995.]
AU §623.15
2300 Other Types of Reports
applicable, any agreements specifying such basis if the presen-
tation is not prepared in conformity with generally accepted ac-
counting principles.
11
If the presentation is prepared in confor-
mity with generally accepted accounting principles, the para-
graph should include an identification of the United States of
America as the country of origin of those accounting principles
(for example, accounting principles generally accepted in the
United States of America or U.S. generally accepted accounting
principles).
(2) If considered necessary, includes a description and the source of
significant interpretations, if any, made by the Company's man-
agement, relating to the provisions of a relevant agreement.
e. A paragraph that expresses the auditor's opinion (or disclaims an opin-
ion) on whether the specified elements, accounts, or items are fairly
presented, in all material respects, in conformity with the basis of
accounting described. If the auditor concludes that the specified el-
ements, accounts, or items are not presented fairly on the basis of
accounting described or if there has been a limitation on the scope of
the audit, the auditor should disclose all the substantive reasons for
that conclusion in an explanatory paragraph(s) (preceding the opinion
paragraph) of the report and should include in the opinion paragraph
appropriate modifying language and a reference to such explanatory
paragraph(s).
12
f. If the specified element, account, or item is prepared to comply with the
requirements or financial reporting provisions of a contract or agree-
ment that results in a presentation that is not in conformity with either
generally accepted accounting principles or an other comprehensive
basis of accounting, a separate paragraph at the end of the report stat-
ing that the report is intended solely for the information and use of
those within the entity and the parties to the contract or agreement,
13
and is not intended to be and should not be used by anyone other than
these specified parties. Such a restriction on the use of the report is
necessary because the basis, assumptions, or purpose of the presen-
tation (contained in the contract or agreement) is developed for and
directed only to the parties to the contract or agreement.
g. The manual or printed signature of the auditor's firm.
h. The date.
14
When expressing an opinion on one or more specified elements, accounts, or
items of a financial statement, the auditor, to provide more information as to
11
When the specified element, account, or item is presented in conformity with an other compre-
hensive basis of accounting, see paragraph .05d(2). [Footnote renumbered by the issuance of Statement
on Auditing Standards No. 77, November 1995.]
12
Paragraph 31 discusses other circumstances that may require that the auditor add additional
explanatory language to the special report. [Footnote renumbered by the issuance of Statement on
Auditing Standards No. 77, November 1995.]
13
If the presentation is prepared on a basis prescribed by a governmental regulatory agency
(which is also OCBOA), the auditor should restrict the distribution of the report on such presentation.
See paragraph .05f for further reporting guidance in this situation. [Footnote renumbered by the
issuance of Statement on Auditing Standards No. 77, November 1995.]
14
See footnote 6. [Footnote renumbered by the issuance of Statement on Auditing Standards
No. 77, November 1995.]
AU §623.15
Special Reports 2301
the scope of the audit, may wish to describe in a separate paragraph certain
other auditing procedures applied. However, no modification in the content
of paragraph .15c above should be made. [Revised, October 2000, to reflect
conforming changes necessary due to the issuance of Statement on Auditing
Standards No. 93.]
.16 If a specified element, account, or item is, or is based upon, an entity's
net income or stockholders' equity or the equivalent thereof, the auditor should
have audited the complete financial statements to express an opinion on the
specified element, account, or item.
.17 The auditor should consider the effect that any departure, including
additional explanatory language because of the circumstances discussed in sec-
tion 508, Reports on Audited Financial Statements, paragraph .11, from the
standard report on the audited financial statements might have on the report
on a specified element, account, or item thereof.
.18 Following are illustrations of reports expressing an opinion on one or
more specified elements, accounts, or items of a financial statement.
Report Relating to Accounts Receivable
Independent Auditor's Report
We have audited the accompanying schedule of accounts receivable of ABC
Company as of December 31, 20X2. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally ac-
cepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the sched-
ule of accounts receivable is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the schedule of accounts receivable. An audit also includes assessing the ac-
counting principles used and significant estimates made by management, as
well as evaluating the overall schedule presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the schedule of accounts receivable referred to above presents
fairly, in all material respects, the accounts receivable of ABC Company as of De-
cember 31, 20X2, in conformity with accounting principles generally accepted
in the United States of America.
15
Report Relating to Amount of Sales for the Purpose of
Computing Rental
Independent Auditor's Report
We have audited the accompanying schedule of gross sales (as defined in the
lease agreement dated March 4, 20XX, between ABC Company, as lessor, and
XYZ Stores Corporation, as lessee) of XYZ Stores Corporation at its Main Street
store, [City], [State], for the year ended December 31, 20X2. This schedule is
the responsibility of XYZ Stores Corporation's management. Our responsibility
is to express an opinion on this schedule based on our audit.
15
Since this presentation was prepared in conformity with generally accepted accounting princi-
ples, the report need not be restricted. [Footnote renumbered by the issuance of Statement on Auditing
Standards No. 77, November 1995.]
AU §623.18
2302 Other Types of Reports
We conducted our audit in accordance with auditing standards generally ac-
cepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the sched-
ule of gross sales is free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the sched-
ule of gross sales. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall schedule presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the schedule of gross sales referred to above presents fairly, in
all material respects, the gross sales of XYZ Stores Corporation at its Main
Street store, [City], [State], for the year ended December 31, 20X2, as defined
in the lease agreement referred to in the first paragraph.
This report is intended solely for the information and use of the boards of direc-
tors and managements of XYZ Stores Corporation and ABC Company and is
not intended to be and should not be used by anyone other than these specified
parties.
Report Relating to Royalties
Independent Auditor's Report
We have audited the accompanying schedule of royalties applicable to engine
production of the Q Division of XYZ Corporation for the year ended December
31, 20X2, under the terms of a license agreement dated May 14, 20XX, between
ABC Company and XYZ Corporation. This schedule is the responsibility of XYZ
Corporation's management. Our responsibility is to express an opinion on this
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally ac-
cepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the sched-
ule of royalties is free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the sched-
ule of royalties. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the over-
all schedule presentation. We believe that our audit provides a reasonable basis
for our opinion.
We have been informed that, under XYZ Corporation's interpretation of the
agreement referred to in the first paragraph, royalties were based on the num-
ber of engines produced after giving effect to a reduction for production re-
tirements that were scrapped, but without a reduction for field returns that
were scrapped, even though the field returns were replaced with new engines
without charge to customers.
In our opinion, the schedule of royalties referred to above presents fairly, in
all material respects, the number of engines produced by the Q Division of
XYZ Corporation during the year ended December 31, 20X2, and the amount
of royalties applicable thereto, under the license agreement referred to above.
This report is intended solely for the information and use of the boards of di-
rectors and managements of XYZ Corporation and ABC Company and is not
intended to be and should not be used by anyone other than these specified
parties.
AU §623.18
Special Reports 2303
Report on a Profit Participation
16
Independent Auditor's Report
We have audited, in accordance with auditing standards generally accepted in
the United States of America, the financial statements of XYZ Company for
the year ended December 31, 20X1, and have issued our report thereon dated
March 10, 20X2. We have also audited XYZ Company's schedule of John Smith's
profit participation for the year ended December 31, 20X1. This schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this schedule based on our audit.
We conducted our audit of the schedule in accordance with auditing stan-
dards generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the schedule of profit participation is free of material misstate-
ment. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall schedule presentation. We believe that our audit
provides a reasonable basis for our opinion.
We have been informed that the documents that govern the determination of
John Smith's profit participation are (a) the employment agreement between
John Smith and XYZ Company dated February 1, 20X0, (b) the production and
distribution agreement between XYZ Company and Television Network Incor-
porated dated March 1, 20X0, and (c) the studio facilities agreement between
XYZ Company and QRX Studios dated April 1, 20X0, as amended November 1,
20X0.
In our opinion, the schedule of profit participation referred to above presents
fairly, in all material respects, John Smith's participation in the profits of XYZ
Company for the year ended December 31, 20X1, in accordance with the provi-
sions of the agreements referred to above.
This report is intended solely for the information and use of the boards of di-
rectors and managements of XYZ Company and John Smith and is not in-
tended to be and should not be used by anyone other than these specified
parties.
Report on Federal and State Income Taxes Included in Financial
Statements
17
Independent Auditor's Report
We have audited, in accordance with auditing standards generally accepted in
the United States of America, the financial statements of XYZ Company, Inc.,
for the year ended June 30, 20XX, and have issued our report thereon dated
August 15, 20XX. We have also audited the current and deferred provision for
the Company's federal and state income taxes for the year ended June 30, 20XX,
included in those financial statements, and the related asset and liability tax
accounts as of June 30, 20XX. This income tax information is the responsibility
of the Company's management. Our responsibility is to express an opinion on
it based on our audit.
16
See paragraph .16. [Footnote renumbered by the issuance of Statement on Auditing Standards
No. 77, November 1995.]
17
See paragraph .16. [Footnote renumbered by the issuance of Statement on Auditing Standards
No. 77, November 1995.]
AU §623.18
2304 Other Types of Reports
We conducted our audit of the income tax information in accordance with au-
diting standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable as-
surance about whether the federal and state income tax accounts are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures related to the federal and state income
tax accounts. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the over-
all presentation of the federal and state income tax accounts. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the Company has paid or, in all material respects, made adequate
provision in the financial statements referred to above for the payment of all
federal and state income taxes and for related deferred income taxes that could
be reasonably estimated at the time of our audit of the financial statements of
XYZ Company, Inc., for the year ended June 30, 20XX.
[Revised, October 2000, to reflect conforming changes necessary due to the
issuance of Statement on Auditing Standards No. 93.]
Compliance With Aspects of Contractual Agreements
or Regulatory Requirements Related to Audited
Financial Statements
.19 Entities may be required by contractual agreements, such as certain
bond indentures and loan agreements, or by regulatory agencies to furnish
compliance reports by independent auditors.
18
For example, loan agreements
often impose on borrowers a variety of obligations involving matters such as
payments into sinking funds, payments of interest, maintenance of current
ratios, and restrictions of dividend payments. They usually also require the
borrower to furnish annual financial statements that have been audited by an
independent auditor. In some instances, the lenders or their trustees may re-
quest assurance from the independent auditor that the borrower has complied
with certain covenants of the agreement relating to accounting matters. The
independent auditor may satisfy this request by giving negative assurance rel-
ative to the applicable covenants based on the audit of the financial statements.
This assurance may be given in a separate report or in one or more paragraphs
of the auditor's report accompanying the financial statements. Such assurance,
however, should not be given unless the auditor has audited the financial state-
ments to which the contractual agreements or regulatory requirements relate
and should not extend to covenants that relate to matters that have not been
subjected to the audit procedures applied in the audit of the financial state-
ments.
19
In addition, such assurance should not be given if the auditor has
18
When the auditor is engaged to test compliance with laws and regulations in accordance with
Government Auditing Standards issued by the Comptroller General of the United States (Yellow Book)
and that engagement also requires the auditor to comply with generally accepted auditing standards
and a law or regulation that requires the auditor to express an opinion on compliance, he or she
should follow the requirements and guidance contained in section 801, Compliance Audits. However,
absent all three requirements, the auditor needs to determine the appropriate audit or attestation
section to follow. Paragraphs .01, .03, and .A1–.A2 of section 801 provide additional guidance. [Footnote
renumbered by the issuance of Statement on Auditing Standards No. 77, November 1995. Footnote
revised, December 2010, to reflect conforming changes necessary due to the issuance of SAS No. 117.]
19
When the auditor is engaged to provide assurance on compliance with contractual agreements
or regulatory provisions that relate to matters that have not been subjected to the audit procedures
applied in the audit of the financial statements, the auditor should refer to the guidance in AT sec-
tion 601, Compliance Attestation. [Footnote renumbered by the issuance of Statement on Auditing
(continued)
AU §623.19
Special Reports 2305
expressed an adverse opinion or disclaimed an opinion on the financial state-
ments to which these covenants relate.
.20 When an auditor's report on compliance with contractual agreements
or regulatory provisions is being given in a separate report, the report should
include—
a. A title that includes the word independent.
20
b. A paragraph that states the financial statements were audited in ac-
cordance with generally accepted auditing standards and includes an
identification of the United States of America as the country of origin of
those standards (for example, auditing standards generally accepted
in the United States of America or U.S. generally accepted auditing
standards) and the date of the auditor's report on those financial state-
ments. Furthermore, any departure from the standard report on those
statements should also be disclosed.
c. A paragraph that includes a reference to the specific covenants or para-
graphs of the agreement, provides negative assurance relative to com-
pliance with the applicable covenants of the agreement insofar as they
relate to accounting matters, and specifies that the negative assurance
is being given in connection with the audit of the financial statements.
The auditor should ordinarily state that the audit was not directed
primarily toward obtaining knowledge regarding compliance.
d. A paragraph that includes a description and the source of significant
interpretations, if any, made by the Company's management relating
to the provisions of a relevant agreement.
e. A separate paragraph at the end of the report stating that the report
is intended solely for the information and use of those within the en-
tity and the parties to the contract or agreement or the regulatory
agency with which the report is being filed, and is not intended to be
and should not be used by anyone other than these specified parties.
Such a restriction on the use of the report is necessary because the ba-
sis, assumptions, or purpose of such presentations (contained in such
contracts, agreements, or regulatory provisions) are developed for and
directed only to the parties to the contract or agreement, or regulatory
agency responsible for the provisions.
f. The manual or printed signature of the auditor's firm.
g. The date.
21
[Revised, October 2000, to reflect conforming changes necessary due to the
issuance of Statement on Auditing Standards No. 93.]
.21 When an auditor's report on compliance with contractual agreements
or regulatory provisions is included in the report that expresses the audi-
tor's opinion on the financial statements, the auditor should include a para-
graph, after the opinion paragraph, that provides negative assurance relative to
(footnote continued)
Standards No. 77, November 1995. Footnote revised, February 1997, to reflect conforming changes
necessary due to the issuance of Statement on Standards for Attestation Engagements No. 3. Footnote
revised, January 2001, to reflect conforming changes necessary due to the issuance of Statement on
Standards for Attestation Engagements No. 10.]
20
See footnote 1. [Footnote renumbered by the issuance of Statement on Auditing Standards No.
77, November 1995.]
21
See footnote 6. [Footnote renumbered by the issuance of Statement on Auditing Standards No.
77, November 1995.]
AU §623.21
2306 Other Types of Reports
compliance with the applicable covenants of the agreement, insofar as they re-
late to accounting matters, and that specifies the negative assurance is being
given in connection with the audit of the financial statements. The auditor
should also ordinarily state that the audit was not directed primarily toward
obtaining knowledge regarding compliance. In addition, the report should in-
clude a paragraph that includes a description and source of any significant
interpretations made by the entity's management as discussed in paragraph
.20d as well as a paragraph that restricts the use of the report to the specified
parties as discussed in paragraph .20e. Following are examples of reports that
might be issued:
Report on Compliance With Contractual Provisions Given in a
Separate Report
22
Independent Auditor's Report
We have audited, in accordance with auditing standards generally accepted in
the United States of America, the balance sheet of XYZ Company as of December
31, 20X2, and the related statement of income, retained earnings, and cash flows
for the year then ended, and have issued our report thereon dated February 16,
20X3.
In connection with our audit, nothing came to our attention that caused us to
believe that the Company failed to comply with the terms, covenants, provi-
sions, or conditions of sections XX to XX, inclusive, of the Indenture dated July
21, 20X0, with ABC Bank insofar as they relate to accounting matters. How-
ever, our audit was not directed primarily toward obtaining knowledge of such
noncompliance.
This report is intended solely for the information and use of the boards of di-
rectors and management of XYZ Company and ABC Bank and is not intended
to be and should not be used by anyone other than these specified parties.
Report on Compliance With Regulatory Requirements Given in
a Separate Report When the Auditor’s Report on the Financial
Statements Included an Explanatory Paragraph Because of an
Uncertainty
Independent Auditor's Report
We have audited, in accordance with auditing standards generally accepted in
the United States of America, the balance sheet of XYZ Company as of December
31, 20X2, and the related statement of income, retained earnings, and cash
flows for the year then ended, and have issued our report thereon dated March
5, 20X3, which included an explanatory paragraph that described the litigation
discussed in Note X of those statements.
In connection with our audit, nothing came to our attention that caused us to
believe that the Company failed to comply with the accounting provisions in
sections (1), (2) and (3) of the [name of state regulatory agency]. However, our
audit was not directed primarily toward obtaining knowledge of such noncom-
pliance.
22
When the auditor's report on compliance with contractual agreements or regulatory provisions
is included in the report that expresses the auditor's opinion on the financial statements, the last two
paragraphs of this report are examples of the paragraphs that should follow the opinion paragraph of
the auditor's report on the financial statements. [Footnote renumbered by the issuance of Statement
on Auditing Standards No. 77, November 1995.]
AU §623.21
Special Reports 2307
This report is intended solely for the information and use of the board of di-
rectors and managements of XYZ Company and the [name of state regulatory
agency] and is not intended to be and should not be used by anyone other than
these specified parties.
[Revised, October 2000, to reflect conforming changes necessary due to the
issuance of Statement on Auditing Standards No. 93.]
Special-Purpose Financial Presentations to Comply With
Contractual Agreements or Regulatory Provisions
.22 An auditor is sometimes asked to report on special-purpose financial
statements prepared to comply with a contractual agreement
23
or regulatory
provisions. In most circumstances, these types of presentations are intended
solely for the use of the parties to the agreement, regulatory bodies, or other
specified parties. This section discusses reporting on these types of presenta-
tions, which include the following:
a. A special-purpose financial presentation prepared in compliance with
a contractual agreement or regulatory provision that does not consti-
tute a complete presentation of the entity's assets, liabilities, revenues
and expenses, but is otherwise prepared in conformity with generally
accepted accounting principles or an other comprehensive basis of ac-
counting (paragraphs .23 through .26).
b. A special-purpose financial presentation (may be a complete set of fi-
nancial statements or a single financial statement) prepared on a ba-
sis of accounting prescribed in an agreement that does not result in
a presentation in conformity with generally accepted accounting prin-
ciples or an other comprehensive basis of accounting (paragraphs .27
through .30).
Financial Statements Prepared on a Basis of Accounting
Prescribed in a Contractual Agreement or Regulatory Provision
That Results in an Incomplete Presentation But One That is
Otherwise in Conformity With Generally Accepted Accounting
Principles or an Other Comprehensive Basis of Accounting
.23 A governmental agency may require a schedule of gross income and cer-
tain expenses of an entity's real estate operation in which income and expenses
are measured in conformity with generally accepted accounting principles, but
expenses are defined to exclude certain items such as interest, depreciation,
and income taxes. Such a schedule may also present the excess of gross income
over defined expenses. Also, a buy-sell agreement may specify a schedule of
gross assets and liabilities of the entity measured in conformity with generally
accepted accounting principles, but limited to the assets to be sold and liabilities
to be transferred pursuant to the agreement.
.24 Paragraph .02 of this section defines the term financial statement and
includes a list of financial presentations that an auditor should consider to be
financial statements for reporting purposes. The concept of specified elements,
23
A contractual agreement as discussed in this section is an agreement between the client and
one or more third parties other than the auditor. [Footnote renumbered by the issuance of Statement
on Auditing Standards No. 77, November 1995.]
AU §623.24
2308 Other Types of Reports
accounts, or items of a financial statement discussed in paragraphs .11 through
.18, on the other hand, refers to accounting information that is part of, but
significantly less than, a financial statement. The financial presentations de-
scribed above and similar presentations should generally be regarded as finan-
cial statements, even though, as indicated above, certain items may be excluded.
Thus, when the auditor is asked to report on these types of presentations, the
measurement of materiality for purposes of expressing an opinion should be
related to the presentations taken as a whole (see section 312, Audit Risk and
Materiality in Conducting an Audit). Further, the presentations should differ
from complete financial statements only to the extent necessary to meet spe-
cial purposes for which they were prepared. In addition, when these financial
presentations contain items that are the same as, or similar to, those contained
in a full set of financial statements prepared in conformity with generally ac-
cepted accounting principles, similar informative disclosures are appropriate
(see paragraphs .09 and .10). The auditor should also be satisfied that the fi-
nancial statements presented are suitably titled to avoid any implication that
the special-purpose financial statements on which he or she is reporting are
intended to present financial position, results of operations, or cash flows.
.25 When the auditor is asked to report on financial statements prepared
on a basis of accounting prescribed in a contractual agreement or regulatory
provision that results in an incomplete presentation but one that is otherwise
in conformity with generally accepted accounting principles or an other com-
prehensive basis of accounting, the auditor's report should include—
a. A title that includes the word independent.
24
b. A paragraph that—
(1) States that the financial statements identified in the report were
audited.
(2) States that the financial statements are the responsibility of the
Company's management
25
and that the auditor is responsible for
expressing an opinion on the financial statements based on the
audit.
26
c. A paragraph that—
(1) States that the audit was conducted in accordance with gener-
ally accepted auditing standards and includes an identification
of the United States of America as the country of origin of those
standards (for example, auditing standards generally accepted in
the United States of America or U.S. generally accepted auditing
standards).
(2) States that those standards require that the auditor plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
24
See footnote 1. [Footnote renumbered by the issuance of Statement on Auditing Standards No.
77, November 1995.]
25
Sometimes the auditor's client may not be the person responsible for the financial statements
on which the auditor is reporting. For example, when the auditor is engaged by the buyer to report
on the seller's financial statements prepared in conformity with a buy-sell agreement, the person
responsible for the financial statements may be the seller's management. In this case, the wording
of this statement should be changed to clearly identify the party that is responsible for the financial
statements reported on. [Footnote renumbered by the issuance of Statement on Auditing Standards
No. 77, November 1995.]
26
See footnote 2. [Footnote renumbered by the issuance of Statement on Auditing Standards No.
77, November 1995.]
AU §623.25
Special Reports 2309
(3) States that an audit includes—
(a) Examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements,
(b) Assessing the accounting principles used and significant es-
timates made by management, and
(c) Evaluating the overall financial statement presentation.
(4) States that the auditor believes that the audit provides a reason-
able basis for his or her opinion.
d. A paragraph that—
(1) Explains what the presentation is intended to present and refers
to the note to the special-purpose financial statements that de-
scribes the basis of presentation (see paragraphs .09 and .10).
(2) If the basis of presentation is in conformity with generally ac-
cepted accounting principles, states that the presentation is not
intended to be a complete presentation of the entity's assets, lia-
bilities, revenues and expenses.
27
e. A paragraph that expresses the auditor's opinion (or disclaims an
opinion) related to the fair presentation, in all material respects, of
the information the presentation is intended to present in conformity
with generally accepted accounting principles or an other comprehen-
sive basis of accounting. If the presentation is prepared in conformity
with generally accepted accounting principles, the paragraph should
include an identification of the United States of America as the coun-
try of origin of those accounting principles (for example, accounting
principles generally accepted in the United States of America or U.S.
generally accepted accounting principles). If the auditor concludes that
the information the presentation is intended to present is not pre-
sented fairly on the basis of accounting described or if there has been
a limitation on the scope of the audit, the auditor should disclose all
the substantive reasons for that conclusion in an explanatory para-
graph(s) (preceding the opinion paragraph) of the report and should
include in the opinion paragraph appropriate modifying language and
a reference to such explanatory paragraph(s).
28
f. A separate paragraph at the end of the report stating that the report is
intended solely for the information and use of those within the entity,
the parties to the contract or agreement, the regulatory agency with
which the report is being filed, or those with whom the entity is nego-
tiating directly, and is not intended to be and should not be used by
anyone other than these specified parties. However, such a paragraph
is not appropriate if the report and related financial presentation are
to be filed with a regulatory agency, such as the Securities and Ex-
change Commission, and are to be included in a document (such as a
prospectus) that is distributed to the general public.
27
If the basis of presentation is an other comprehensive basis of accounting, the paragraph should
state that the basis of presentation is a comprehensive basis of accounting other than generally
accepted accounting principles and that it is not intended to be a complete presentation of the entity's
assets, liabilities, revenues and expenses on the basis described. [Footnote renumbered by the issuance
of Statement on Auditing Standards No. 77, November 1995.]
28
Paragraph .31 discusses other circumstances that may require that the auditor add additional
explanatory language to the special report. [Footnote renumbered by the issuance of Statement on
Auditing Standards No. 77, November 1995.]
AU §623.25
2310 Other Types of Reports
g. The manual or printed signature of the auditor's firm.
h. The date.
29
[Revised, October 2000, to reflect conforming changes necessary due to the
issuance of Statement on Auditing Standards No. 93.]
.26 The following examples illustrate reports expressing an opinion on
such special-purpose financial statements:
Report on a Schedule of Gross Income and Certain Expenses to
Meet a Regulatory Requirement and to Be Included in a
Document Distributed to the General Public
Independent Auditor's Report
We have audited the accompanying Historical Summaries of Gross Income and
Direct Operating Expenses of ABC Apartments, City, State (Historical Sum-
maries), for each of the three years in the period ended December 31, 20XX.
These Historical Summaries are the responsibility of the Apartments' manage-
ment. Our responsibility is to express an opinion on the Historical Summaries
based on our audits.
We conducted our audits in accordance with auditing standards generally ac-
cepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the His-
torical Summaries are free of material misstatement. An audit includes exam-
ining, on a test basis, evidence supporting the amounts and disclosures in the
Historical Summaries. An audit also includes assessing the accounting princi-
ples used and significant estimates made by management, as well as evaluating
the overall presentation of the Historical Summaries. We believe that our audits
provide a reasonable basis for our opinion.
The accompanying Historical Summaries were prepared for the purpose of com-
plying with the rules and regulations of the Securities and Exchange Commis-
sion (for inclusion in the registration statement on Form S-11 of DEF Corpora-
tion) as described in Note X and are not intended to be a complete presentation
of the Apartments' revenues and expenses.
In our opinion, the Historical Summaries referred to above present fairly, in all
material respects, the gross income and direct operating expenses described in
Note X of ABC Apartments for each of the three years in the period ended De-
cember 31, 20XX, in conformity with accounting principles generally accepted
in the United States of America.
Report on a Statement of Assets Sold and Liabilities Transferred
to Comply With a Contractual Agreement
Independent Auditor's Report
We have audited the accompanying statement of net assets sold of ABC Com-
pany as of June 8, 20XX. This statement of net assets sold is the responsibility
of ABC Company's management. Our responsibility is to express an opinion on
the statement of net assets sold based on our audit.
29
See footnote 6. [Footnote renumbered by the issuance of Statement on Auditing Standards No.
77, November 1995.]
AU §623.26
Special Reports 2311
We conducted our audit in accordance with auditing standards generally ac-
cepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the state-
ment of net assets sold is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the statement. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall presentation of the statement of net assets sold. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying statement was prepared to present the net assets of ABC
Company sold to XYZ Corporation pursuant to the purchase agreement de-
scribed in Note X, and is not intended to be a complete presentation of ABC
Company's assets and liabilities.
In our opinion, the accompanying statement of net assets sold presents fairly,
in all material respects, the net assets of ABC Company as of June 8, 20XX sold
pursuant to the purchase agreement referred to in Note X, in conformity with
accounting principles generally accepted in the United States of America.
This report is intended solely for the information and use of the boards of di-
rectors and managements of ABC Company and XYZ Corporation and is not
intended to be and should not be used by anyone other than these specified
parties.
[Revised, October 2000, to reflect conforming changes necessary due to the
issuance of Statement on Auditing Standards No. 93.]
Financial Statements Prepared on a Basis of Accounting
Prescribed in an Agreement That Results in a Presentation That
is not in Conformity With Generally Accepted Accounting
Principles or an Other Comprehensive Basis of Accounting
.27 The auditor may be asked to report on special-purpose financial state-
ments prepared in conformity with a basis of accounting that departs from
generally accepted accounting principles or an other comprehensive basis of
accounting. A loan agreement, for example, may require the borrower to pre-
pare consolidated financial statements in which assets, such as inventory, are
presented on a basis that is not in conformity with generally accepted account-
ing principles or an other comprehensive basis of accounting. An acquisition
agreement may require the financial statements of the entity being acquired
(or a segment of it) to be prepared in conformity with generally accepted ac-
counting principles except for certain assets, such as receivables, inventories,
and properties for which a valuation basis is specified in the agreement.
.28 Financial statements prepared under a basis of accounting as discussed
above are not considered to be prepared in conformity with a "comprehensive
basis of accounting" as contemplated by paragraph .04 of this section because
the criteria used to prepare such financial statements do not meet the require-
ment of being "criteria having substantial support," even though the criteria
are definite.
.29 When an auditor is asked to report on these types of financial presen-
tations, the report should include—
a. A title that includes the word independent.
30
30
See footnote 1. [Footnote renumbered by the issuance of Statement on Auditing Standards No.
77, November 1995.]
AU §623.29
2312 Other Types of Reports
b. A paragraph that—
(1) States that the special-purpose financial statements identified in
the report were audited.
(2) States that the financial statements are the responsibility of the
Company's management
31
and that the auditor is responsible for
expressing an opinion on the financial statements based on the
audit.
32
c. A paragraph that—
(1) States that the audit was conducted in accordance with gener-
ally accepted auditing standards and includes an identification
of the United States of America as the country of origin of those
standards (for example, auditing standards generally accepted in
the United States of America or U.S. generally accepted auditing
standards).
(2) States that those standards require that the auditor plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
(3) States that an audit includes—
(a) Examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements,
(b) Assessing the accounting principles used and significant es-
timates made by management, and
(c) Evaluating the overall financial statement presentation.
(4) States that the auditor believes that the audit provides a reason-
able basis for the auditor's opinion.
d. A paragraph that—
(1) Explains what the presentation is intended to present and refers
to the note to the special-purpose financial statements that de-
scribes the basis of presentation (see paragraphs .09 and .10).
(2) States that the presentation is not intended to be a presentation
in conformity with generally accepted accounting principles.
e. A paragraph that includes a description and the source of significant
interpretations, if any, made by the Company's management relating
to the provisions of a relevant agreement.
f. A paragraph that expresses the auditor's opinion (or disclaims an opin-
ion) related to the fair presentation, in all material respects, of the
information the presentation is intended to present on the basis of ac-
counting specified. If the auditor concludes that the information the
presentation is intended to present is not presented fairly on the ba-
sis of accounting described or if there has been a limitation on the
scope of the audit, the auditor should disclose all the substantive rea-
sons for that conclusion in an explanatory paragraph(s) (preceding
31
See footnote 25. [Footnote renumbered by the issuance of Statement on Auditing Standards
No. 77, November 1995.]
32
See footnote 2. [Footnote renumbered by the issuance of Statement on Auditing Standards No.
77, November 1995.]
AU §623.29
Special Reports 2313
the opinion paragraph) of the report and should include in the opinion
paragraph appropriate modifying language and a reference to such
explanatory paragraph(s).
33
g. A separate paragraph at the end of the report stating that the report is
intended solely for the information and use of those within the entity,
the parties to the contract or agreement, the regulatory agency with
which the report is being filed, or those with whom the entity is nego-
tiating directly, and is not intended to be and should not be used by
anyone other than these specified parties. For example, if the financial
statements have been prepared for the specified purpose of obtaining
bank financing, the report's use should be restricted to the various
banks with whom the entity is negotiating the proposed financing.
h. The manual or printed signature of the auditor's firm.
i. The date.
34
[Revised, October 2000, to reflect conforming changes necessary due to the
issuance of Statement on Auditing Standards No. 93.]
.30 The following example illustrates reporting on special-purpose finan-
cial statements that have been prepared pursuant to a loan agreement:
Report on Financial Statements Prepared Pursuant to a Loan
Agreement That Results in a Presentation not in Conformity
With Generally Accepted Accounting Principles or an Other
Comprehensive Basis of Accounting
Independent Auditor's Report
We have audited the special-purpose statement of assets and liabilities of ABC
Company as of December 31, 20X2 and 20X1, and the related special-purpose
statements of revenues and expenses and of cash flows for the years then ended.
These financial statements are the responsibility of the Company's manage-
ment. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally ac-
cepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the fi-
nancial statements are free of material misstatement. An audit includes exam-
ining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying special-purpose financial statements were prepared for the
purpose of complying with Section 4 of a loan agreement between DEF Bank and
the Company as discussed in Note X, and are not intended to be a presentation
in conformity with generally accepted accounting principles.
33
Paragraph .31 discusses other circumstances that may require that the auditor add additional
explanatory language to the special report. [Footnote renumbered by the issuance of Statement on
Auditing Standards No. 77, November 1995.]
34
See footnote 6. [Footnote renumbered by the issuance of Statement on Auditing Standards No.
77, November 1995.]
AU §623.30
2314 Other Types of Reports
In our opinion, the special-purpose financial statements referred to above
present fairly, in all material respects, the assets and liabilities of ABC Com-
pany at December 31, 20X2 and 20X1, and the revenues, expenses and cash
flows for the years then ended, on the basis of accounting described in Note X.
This report is intended solely for the information and use of the boards of di-
rectors and management of ABC Company and DEF Bank and is not intended
to be and should not be used by anyone other than these specified parties.
[Revised, October 2000, to reflect conforming changes necessary due to the
issuance of Statement on Auditing Standards No. 93.]
Circumstances Requiring Explanatory Language in an
Auditor’s Special Report
.31 Certain circumstances, while not affecting the auditor's unqualified
opinion, may require that the auditor add additional explanatory language to
the special report. These circumstances include the following:
a. Lack of Consistency in Accounting Principles. If there has been a
change in accounting principles or in the method of their application,
35
the auditor should add an explanatory paragraph to the report (follow-
ing the opinion paragraph) that describes the change and refers to the
note to the financial presentation (or specified elements, accounts, or
items thereof) that discusses the change and its effect thereon
36
if the
accounting change is considered relevant to the presentation. Guid-
ance on reporting in this situation is contained in section 508, Reports
on Audited Financial Statements, paragraphs .16 through .18.
[37–38]
b. Going Concern Uncertainties. If the auditor has substantial doubt
about the entity's ability to continue as a going concern for a reasonable
period of time not to exceed one year beyond the date of the financial
statement, the auditor should add an explanatory paragraph after the
opinion paragraph of the report only if the auditor's substantial doubt
is relevant to the presentation.
39
c. Other Auditors. When the auditor decides to make reference to the
report of another auditor as a basis, in part, for his or her opinion,
the auditor should disclose that fact in the introductory paragraph
35
When financial statements (or specified elements, accounts, or items thereof) have been pre-
pared in conformity with generally accepted accounting principles in prior years, and the entity
changes its method of presentation in the current year by preparing its financial statements in con-
formity with an other comprehensive basis of accounting, the auditor need not follow the reporting
guidance in this subparagraph. However, the auditor may wish to add an explanatory paragraph to
the report to highlight (1) a difference in the basis of presentation from that used in prior years or (2)
that another report has been issued on the entity's financial statements prepared in conformity with
another basis of presentation (for example, when cash basis financial statements are issued in addi-
tion to GAAP financial statements). [Footnote renumbered by the issuance of Statement on Auditing
Standards No. 77, November 1995.]
36
A change in the tax law is not considered to be a change in accounting principle for which the
auditor would need to add an explanatory paragraph, although disclosure may be necessary. [Footnote
renumbered by the issuance of Statement on Auditing Standards No. 77, November 1995.]
[37–38]
[Footnotes deleted to reflect conforming changes necessary due to the issuance of Statement
on Auditing Standards No. 79.]
39
See section 341A, The Auditor's Consideration of an Entity's Ability to Continue as a Going Con-
cern, for a report example when the auditor has substantial doubt about the entity's ability to continue
as a going concern. [Footnote renumbered by the issuance of Statement on Auditing Standards No.
77, November 1995.]
AU §623.31
Special Reports 2315
of the report and should refer to the report of the other auditors in
expressing his or her opinion. Guidance on reporting in this situation
is contained in section 508, Reports on Audited Financial Statements,
paragraphs .12 and .13.
d. Comparative Financial Statements (or Specified Elements, Accounts,
or Items Thereof). If the auditor expresses an opinion on prior-period
financial statements (or specified elements, accounts, or items thereof)
that is different from the opinion he or she previously expressed on that
same information, the auditor should disclose all of the substantive
reasons for the different opinion in a separate explanatory paragraph
preceding the opinion paragraph of the report. Guidance on report-
ing in this situation is contained in section 508, Reports on Audited
Financial Statements, paragraphs .68 and .69.
As in reports on financial statements prepared in conformity with generally
accepted accounting principles, the auditor may add an explanatory paragraph
to emphasize a matter regarding the financial statements (or specified ele-
ments, accounts, or items thereof). [Revised, February 1997, to reflect conform-
ing changes necessary due to the issuance of Statement on Auditing Standards
No. 79.]
Financial Information Presented in Prescribed Forms
or Schedules
.32 Printed forms or schedules designed or adopted by the bodies with
which they are to be filed often prescribe the wording of an auditor's report.
Many of these forms are not acceptable to independent auditors because the
prescribed form of auditor's report does not conform to the applicable profes-
sional reporting standards. For example, the prescribed language of the report
may call for statements by the auditor that are not consistent with the auditor's
function or responsibility.
.33 Some report forms can be made acceptable by inserting additional
wording; others can be made acceptable only by complete revision. When a
printed report form calls upon an independent auditor to make a statement
that he or she is not justified in making, the auditor should reword the form
or attach a separate report. In those situations, the reporting provisions of
paragraph .05 may be appropriate.
Effective Date
.34 This section is effective for reports issued on or after July 1, 1989. Early
application of the provisions of this section is permissible.
AU §623.34
