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The following bulletin is issued by staff of the Auditing and Assurance Standards Department at the CICA. The Auditing and Assurance Standards Board (AASB) has not adopted, endorsed, approved, disapproved or otherwise acted upon this material. In September 2003, the AASB issued amendments to Section 5100, Generally Accepted Auditing Standards, and issued new Section 5600, Auditor's Report on Financial Statements Prepared Using a Basis of Accounting Other Than Generally Accepted Accounting Principles. These changes are effective for audit reports issued on or after October 1, 2003. They will result in many audit reports being different in the future. This bulletin is intended to alert practitioners who might be affected by the changes.*
The AASB has also issued guidance for practitioners performing review engagements on non-GAAP financial statements that is consistent with Section 5600. Accordingly, the guidance in this bulletin is also applicable to review engagements.
Audit Reports Affected
If audit reports were issued prior to October 1, 2003 in any of the following circumstances, revisions will be required to reports issued after that date: - Non-consolidated financial statements.
- Pension fund financial statements filed with a regulator.
- Financial statements prepared in accordance with the terms of a purchase and sale agreement.
- Financial statements of a co-operative housing association filed with Canada Mortgage and Housing Corporation.
- Financial statements prepared in accordance with the terms of a written contract.
- Financial statements prepared in accordance with regulatory or legislative requirements to meet the specific needs of a regulator or legislator.
- General purpose financial statements prepared using a basis of accounting other than GAAP.
In addition, changes will have to be made to new audit reports being issued that previously included "soft qualifications" or wording such as: |
- "in accordance with the appropriate disclosed basis of accounting disclosed in Note X";
- "in accordance with generally accepted accounting principles for [industry]";
- "in accordance with accounting principles prescribed by [legislative authority]".
When engaged to report on general purpose financial statements, the auditor would refer to The Auditor's Standard Report, Section 5400. Financial statements may be prepared using a basis of accounting other than GAAP to meet the information needs of specific users. The auditor may report under Section 5600 when such statements meet the criteria in paragraph 5600.09 in that they are prepared: |
| (a) | in accordance with regulatory or legislative requirements to meet the specific needs of a regulator or legislator; or | | (b) | in accordance with written contractual requirements such as may be set out in trust indentures or buy/sell agreements. |
When one of these criteria is met, the auditor can report using Section 5600, regardless of the distribution of the financial statements. If neither of these criteria is met, the auditor reports in accordance with Section 5400, and determines whether the departures from GAAP require a reservation as per Reservations in the Auditor's Report, Section 5510.
Many entities are subject to legislation that requires financial statements to be prepared using accounting principles other than GAAP, such as school boards in certain jurisdictions. Paragraph 5600.07 permits the auditor to accept an engagement to report under Section 5600 on such financial statements, but only when it is confirmed by the entity that the financial statements reported on are not general purpose financial statements. Paragraph 5600.08 indicates that the auditor would confirm his or her understanding of the specified user(s) of the financial statements, the purpose(s) for which they will use them, and the basis of accounting used, in writing, preferably in an engagement letter. Paragraph 5600.15 also requires the auditor to:
… consider whether the presentation and disclosures in the financial statements are in accordance with the basis of accounting used and the notes to the financial statements appropriately describe the: | (a) | purpose(s) of such financial statements; | | (b) | basis of accounting used in preparing the financial statements including: |
| | (i) | the significant accounting policies; | | | (ii) | management's significant interpretations, if any, of regulatory, legislative or contractual requirements; and | | | (iii) | other informative disclosures; and |
| (c) | material differences between the basis of accounting and generally accepted accounting principles, which need not be quantified. |
Describing in the notes that the financial statements have been prepared "in accordance with GAAP except for…" is no longer acceptable and will not comply with the requirements of Section 5600 which, as stated above, requires a description of all significant accounting policies. Section 5600 provides examples of financial statement note disclosure that use the phrase: "The basis of accounting used in these financial statements materially differs from GAAP because…"
Paragraph 5600.17 prescribes the form and content of the auditor's report, which includes an additional paragraph after the opinion paragraph as follows:
| (d) | in a paragraph following the opinion paragraph, state that these financial statements, which have not been, and were not intended to be, prepared in accordance with Canadian generally accepted accounting principles, are solely for the information and use of (the addressee) and: |
| | (i) | (the regulator or legislator), and/or | | | (ii) | (the parties to the contract), |
| | for (the purpose(s)), and are not intended to be and should not be used by anyone other than the specified users, or for any other purpose |
Given the significant changes in audit reporting standards for engagements meeting the circumstances described in this bulletin, practitioners are advised to alert their clients at an early stage of the implications on the form of the auditor's report.
Prepared by Eric Turner, (416) 204-3240 |
