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When the rules and the law no longer agree: proceed with care when regulator-prescribed forms do not comply with GAAS.


* Many regulators require that independent auditors provide an opinion on financial information that is submitted to a regulator, often by means of an auditor's report on forms prescribed by the regulator.

* Auditors engaged to submit reports on prescribed forms need to consider what the regulator is requesting of the auditor. Many regulators use language that is not consistent with the language used in GAAS.

* If the minimum required reporting elements and wording are not contained in the prescribed form, GAAS requires the auditor to reword the prescribed form of the report or attach an appropriately worded separate report.

* Similar considerations apply when practitioners are requested to report on prescribed forms in review or compilation engagements.


In 2012, a form required by the New York City Tax Commission left auditors in a quandary. Recent changes to GAAS that revised the wording of the auditor's report had not been reflected in the form. As a result, the form required auditors to submit a report to the Tax Commission that did not contain the elements and wording that GAAS requires auditors to use.

The Real Estate Committee of the New York State Society of CPAs and the AICPA Audit and Attest Standards Team stepped in to craft a solution, allowing auditors to meet the AICPA Auditing Standards Board's new standards without requiring the city of New York to issue a new form.

But the problem persists in other places. Auditors are finding themselves in the awkward position of having to submit forms that are required by regulators but are not in compliance with state accountancy laws that require auditors to follow GAAS % for engagements that require a review or compilation, Statements on Standards for Accounting and Review Services (SSARSs).

Auditors who determine that a regulator-prescribed report form is not in accordance with the requirements of GAAS may wish to contact the regulator to determine if a reworded form or separate report will be accepted. Auditors may wish to contact their state societies to work with them and the regulator to resolve the issue. The AICPA developed a webpage (available at tinyurl.comlmrq2fso) with resources to assist practitioners, including a sample letter for contacting a regulator about prescribed report forms that do not comply with GAAS.

But the situation may take time to resolve. In the meantime, here is how auditors should proceed when confronted with such a problem.


When a regulator prescribes the form of an auditor's report, the auditor is permitted to refer to GAAS only when the auditor's report includes the elements required by GAAS (see Exhibit 1). Statement on Auditing Standards (SAS) No. 122, Clarification and Recodification, revised the wording of the auditor's report. The description of management's responsibilities and description of an audit particularly changed in the revision. As a result, many regulator-prescribed forms may no longer be in accordance with GAAS.

If the prescribed form does not contain the minimum required reporting elements and wording, GAAS requires the auditor to reword the prescribed form of the report or attach an appropriately worded separate report. Some regulator-prescribed report forms can be made acceptable by inserting additional wording to include the elements that GAAS requires. Other regulator-pre scribed report forms need complete re vision to be acceptable because the prescribed language of the report calls for statements that are inconsistent with the auditor's function or responsibility. An example of this would be a regulator-prescribed report form that requests the auditor to certify the financial statements. The NYC Tax Commission agreed to allow auditors either to insert footnotes in the form that contained the appropriate wording or to attach a separate report.


In determining the appropriate form and content of the auditor's report, auditors need to consider various factors, including financial statement preparation and presentation.

GAAS requires the auditor to consider whether the financial reporting framework to be applied in preparing the financial statement(s) is acceptable. The financial statement(s) may be prepared in accordance with a general-purpose framework, such as GAAP, or a special-purpose framework (commonly referred to as an other comprehensive basis of accounting, or OCBOA), such as a regulatory framework.

In the absence of indications to the contrary, a financial reporting framework prescribed by a regulator is presumed acceptable. In some instances, a regulator requires financial statements to be prepared in accordance with a financial reporting framework that is based on GAAP but does not comply with all of its requirements. Such frameworks are regulatory bases of accounting. It is inappropriate for the description of the applicable financial reporting framework in such financial statements to imply full compliance with GAAP. An appropriate description would state that the financial statements are prepared in accordance with the regulator's requirements.


GAAS requires the auditor to evaluate whether the financial statements achieve fair presentation in accordance with the applicable financial reporting framework. One basic step in this consideration is determining that the financial statements include all informative disclosures that are appropriate for the applicable financial reporting framework, including matters that affect their use, understanding, and interpretation.

When the financial statements prepared in accordance with a regulatory basis of accounting contain items that are the same as, or similar to, those in financial statements prepared in accordance with GAAP, informative disclosures similar to those required by GAAP are necessary to achieve fair presentation. If just a single financial statement is presented, only the disclosures related to that financial statement are necessary For example, financial statements prepared on a regulatory basis of accounting usually reflect depreciation, long-term debt, and owners' equity, so the informative disclosures for those items would be comparable to those in financial statements prepared in accordance with GAAP.

Such disclosures are necessary for fair presentation and need to be provided regardless of whether the regulator specifically requires them. If the form prescribed by the regulator does not provide for disclosures, the necessary disclosures should be attached to the prescribed form. If the disclosures necessary for fair presentation are not provided, the financial statements are materially misstated, and a modification to the auditor's opinion on the financial statements is required.


A regulator may request that an independent accountant perform a review engagement, with the financial statement and accountant's report submitted on regulator-prescribed forms. Just as in an audit engagement, an accountant who encounters regulator-prescribed forms in a review engagement is required to consider the fair preparation and presentation of the financial statements--and the wording and elements of the accountant's report. If a regulator's prescribed report does not include the specific elements and wording required by SSARSs for a review report, the accountant should reword the form or attach a separately worded report.

More commonly, a regulator will request that financial statements be compiled. In a compilation engagement, there is a presumption that the information required by a prescribed form meets the needs of the body that designed or adopted the form and that there is no need for that body to be advised of departures from the applicable financial reporting framework required by the prescribed form or related instructions. When the financial statements have been prepared in accordance with GAAP, but the prescribed form fails to include the disclosures or presentation required by GAAP, the accountant's compilation report should include:

* A description of management's responsibility for the preparation and fair presentation of the financial statements in accordance with GAAP

* A paragraph stating that "The financial statements included in the accompanying prescribed form are presented in accordance with the requirements of [name of regulatory body], and are not intended to be a complete presentation in accordance with accounting principles generally accepted in the United States of America."

However, in such engagements, if the accountant becomes aware of a departure from GAAP other than lack of disclosures or presentation, then the accountant should consider whether modification of the standard report is adequate to disclose the departure.

An accountant may have reviewed financial statements, including disclosures required by GAAP,, and be asked to compile financial statements included in a prescribed form that does not request such disclosures. When the difference between the previously reviewed financial statements and the financial statements included in the prescribed form is limited to the omission of disclosures not requested by the form, the accountant may refer to the accountant's report on the reviewed financial statements in the accountant's report on the compiled financial statements included in the prescribed form. This might be accomplished by adding a sentence to the introductory paragraph of the report or a separate paragraph, such as the following: "These financial statements were compiled by me (us) from financial statements for the same period which I (we) previously reviewed, as indicated in my (our) report dated --." The reference to a previous review report should include a description or a quotation of any modifications of the standard review report previously issued and of any paragraphs emphasizing a matter regarding the financial statements.


Practitioners who are asked to provide an opinion on financial information that is submitted to a regulator, by means of an auditor's or accountant's report on forms prescribed by the regulator, need to be aware of the possibility that the form may not meet the requirements of GAAS or the SSARSs. In these situations, following proper procedures is essential, and contacting the regulator can help correct the problem for the future.


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* "Auditing Transition," May 2012, page 22

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* AICPA Professional Standards, AU-C Sections 700, 725, 800, and 825, and AR Sections 80, 90, and 300 (#APS13P, paperback; and #WPS-XX, one-year online access)

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* Top Audit Issues: Current Issues Facing CPAs (#?45203)


* Current SEC and PCAOB Developments, Dec. 9-11, Chicago; New York City; San Francisco; and Washington

For more information or to make a purchase or register, go to or call the Institute at 888-777-7077.


* AICPA webpage devoted to addressing changes that may be needed when an auditor is required to submit an auditor's report on forms prescribed by the regulator,

by Ahava Goldman, CPA, and Thomas A. Ratcliffe, CPA, CGMA, Ph.D.

Ahava Goldman ( is a senior technical manager with the AICPA Audit and Attest Standards Team. Thomas A. Ratcliffe ( is senior accounting and auditing technical director for Warren Averett LLC and director emeritus at the school of accountancy at Troy University.

To comment on this article or to suggest an idea for another article, contact Ken Tysiac, senior editor, at or 919-402-2112.

Exhibit 1 Auditor's Report Required Elements

This table describes the elements required by GARS to be included
in an auditor's reports and describes the changes as a result of
the issuance of SAS No. 122, Clarification and Recodification.

Required Element                     Comment

a. A title                           No change.

b. An addressee                      Form usually includes addressee.

c. An introductory paragraph that    Includes reference to the related
identifies the financial             notes to the financial
statements audited                   statements, because the
                                     definition of "financial
                                     statements" includes the related

d. A description of management's     Revised wording:

                                     "Management is responsible for
                                     the preparation and fair
                                     presentation of these financial
                                     statements in accordance with the
                                     f state basis of accounting].
                                     Management is also responsible
                                     for the design, implementation,
                                     and maintenance of internal
                                     control relevant to the
                                     preparation and fair presentation
                                     of financial statements that are
                                     free from material misstatement,
                                     whether due to fraud or error."

e. A reference to management's       Note that often regulators
responsibility for determining       prescribe the financial reporting
that the applicable financial        framework to be used, in which
reporting framework is acceptable    case this is not applicable.
when management has a choice of
financial reporting frameworks to

f. A description of the purpose      New requirement that now pertains
for which the financial              to all financial statements
statements are prepared or           prepared in accordance with a
reference to a note in the           regulatory or contractual basis
financial statements that            of accounting.
contains that information in
certain circumstances

g. A description of the auditor's    See below.
responsibility to express an
opinion on the financial
statements (or special-purpose
financial statements) and the
scope of the audit, that includes

i. A reference to GARS and, if       No change.
applicable, the law or regulation

ii. A description of an audit in     Revised wording:
accordance with those standards
                                     "Our responsibility is to express
                                     an opinion on the financial
                                     statement based on our audit. We
                                     conducted our audit in accordance
                                     with auditing standards 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
                                     financial statement is free from
                                     material misstatement.

                                     "An audit involves performing
                                     procedures to obtain audit
                                     evidence about the amounts and
                                     disclosures in the financial
                                     statements. The procedures
                                     selected depend on the auditor's
                                     judgment, including the
                                     assessment of the risks of
                                     material misstatement of the
                                     financial statements, whether due
                                     to fraud or error. In making
                                     those risk assessments, the
                                     auditor considers internal
                                     control relevant to the entity's
                                     preparation and fair presentation
                                     of the financial statements in
                                     order to design audit procedures
                                     that are appropriate in the
                                     circumstances, but not for the
                                     purpose of expressing an opinion
                                     on the effectiveness of the
                                     entity's internal control.
                                     Accordingly, we express no such
                                     opinion. An audit also includes
                                     evaluating the appropriateness of
                                     accounting policies used and the
                                     reasonableness of significant
                                     accounting estimates made by
                                     management, as well as evaluating
                                     the overall presentation of the
                                     financial statements.

                                     "We believe that the audit
                                     evidence we have obtained is
                                     sufficient and appropriate to
                                     provide a basis for our audit

h. An opinion paragraph              No change.
containing an expression of
opinion on the financial
statements (or special-purpose
financial statements) and a
reference to the general-purpose
framework (or special-purpose
framework) used to prepare the
financial statements (or special-
purpose framework), including
identifying the origin of the

i. An emphasis-of-matter             The placement of the paragraph
paragraph that indicates that the    within the auditor's report has
financial statements are prepared    changed; however, the placement
in accordance with a special-        may vary in a prescribed form.
purpose framework (when

j. An other-matter paragraph that    No change.
restricts the use of the
auditor's report when the
financial statements are not
intended for general use

k. The auditor's signature           No change.

l. The auditor's city and state      New requirement, however, many
                                     prescribed forms request this.

m. The date of the auditor's         No change.

Source: AU-C Section 800, Special Considerations--Audits of
Financial Statements Prepared in Accordance With Special Purpose
Frameworks (AICPA, Professional Standards), Ahava Goldman, and
Thomas A. Ratcliffe.
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Title Annotation:generally accepted auditing standards
Author:Goldman, Ahava; Ratcliffe, Thomas A.
Publication:Journal of Accountancy
Date:Nov 1, 2013
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