AU 544: Lack of Conformity with Generally Accepted Accounting Principles

AU-C 800: Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks

AU EFFECTIVE DATE AND APPLICABILITY

Original Pronouncements Statement on Auditing Procedure (SAP) 33 (codified in Statement on Auditing Standards [SAS] 1); SAS 2, 62, and 77.
Effective Date These statements currently are effective.
Applicability Audits of financial statements of regulated companies in accordance with generally accepted auditing standards (GAAS) when the financial statements are presented for purposes other than regulatory filings.

AU-C EFFECTIVE DATE AND SUMMARY OF CHANGES

SAS No. 122, Codification of Auditing Standards and Procedures, is effective for audits of financial statements with periods ending on or after December 15, 2012.

AU Section 334 is focused on auditing the amounts and disclosures pursuant to accounting principles generally accepted in the United States (US GAAP), and it is centered on the provisions of Financial Accounting Standards Board (FASB) Statement No. 57. AU-C 800 is framework neutral, encompassing financial reporting frameworks in addition to US GAAP, such as International Financial Reporting Standards as promulgated by the International Accounting Standards Board.

The objectives, requirements, and definitions in AU-C 800 are applicable irrespective of whether the applicable financial reporting framework establishes requirements for related-party disclosures.

AU DEFINITION OF TERM

Regulated companies. Companies, such as public utilities and insurance companies, whose accounting practices are prescribed by governmental regulatory authorities or commissions.

AU-C DEFINITIONS OF TERMS

Source: AU-C 800.07

Special purpose financial statements. Financial statements prepared in accordance with a special purpose framework.

Special purpose framework. A financial reporting framework other than GAAP that is one of the following bases of accounting:

1. Cash basis. A basis of accounting that the entity uses to record cash receipts and disbursements and modifications of the cash basis having substantial support (for example, recording depreciation on fixed assets).
2. Tax basis. A basis of accounting that the entity uses to file its income tax return for the period covered by the financial statements.
3. Regulatory basis. A basis of accounting that the entity uses to comply with the requirements or financial reporting provisions of a regulatory agency to whose jurisdiction the entity is subject (for example, a basis of accounting that insurance companies use pursuant to the accounting practices prescribed or permitted by a state insurance commission).
4. Contractual basis. A basis of accounting that the entity uses to comply with an agreement between the entity and one or more third parties other than the auditor.

The cash, tax, and regulatory bases of accounting are commonly referred to as other comprehensive bases of accounting (OCBOA).

OBJECTIVES OF AU SECTION 544

Governmental regulatory authorities or commissions may prescribe accounting practices for regulated companies. Examples of these companies include public utilities, common carriers, insurance companies, and financial institutions. Sometimes the prescribed accounting practices are not in conformity with GAAP. This section tells the auditor the kind of report he or she should issue when a regulated company presents financial statements for purposes other than regulatory filings that follow accounting practices prescribed by regulatory authorities or commissions that are not in conformity with GAAP.

Differences between prescribed accounting practices and accounting practices applicable to nonregulated businesses that are caused by the rate-making process can be in conformity with GAAP. Guidance on accounting for regulated enterprises is contained in several FASB Statements of Financial Accounting Standards, particularly SFAS 71, Accounting for the Effects of Certain Types of Regulation, SFAS 90, Regulated Enterprises—Accounting for Abandonments and Disallowances of Plant Costs, SFAS 92, Regulated Enterprises—Accounting for Phase-in Plans, and SFAS 101, Regulated Enterprises—Accounting for the Discontinuation of Application of FASB Statement 71.

OBJECTIVES OF AU-C SECTION 800

AU-C section 800 states that:

. . . the objective of the auditor, when applying generally accepted auditing standards (GAAS) in an audit of financial statements prepared in accordance with a special-purpose framework, is to address appropriately the special considerations that are relevant to

a. the acceptance of the engagement,
b. the planning and performance of that engagement, and
c. forming an opinion and reporting on the financial statements.

FUNDAMENTAL REQUIREMENTS

Departures from GAAP

The auditor should express a qualified opinion or an adverse opinion when a regulated company issues financial statements to anyone other than its regulatory agency that are prepared in conformity with accounting practices prescribed by regulatory authorities or commissions that do not conform with GAAP.

Financial Statements Solely for Filing with Regulatory Agency

The auditor may report on a regulated company’s financial statements as being prepared in accordance with a comprehensive basis of accounting other than generally accepted accounting principles (see Section 623, Special Reports) only if the statements are solely for filing with the regulatory agency.

Financial Statements for other than Filing with Regulatory Agency

The auditor may be asked to report on the fair presentation of financial statements in conformity with a regulatory prescribed basis of accounting in presentations other than filings with the regulatory agency. In these circumstances, the auditor’s standard report should be modified because of the departure from GAAP, and, in an additional paragraph, an opinion may be expressed on the conformity of the financial statements with the prescribed method.

NOTE: The additional paragraph is added at the auditor’s discretion; it is never required.

INTERPRETATIONS

There are no interpretations for this section.

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