The presentation of financial statements must be applied within an identifiable framework (AU-C 800.A15–.A18). Normally, the framework is provided by generally accepted accounting principles (GAAP). However, in some circumstances, a different framework may be used. Which of the following would not be indicative of an acceptable framework for the presentation of financial statements?
A.
Reporting on cash basis but capitalizing fixed assets and recording depreciation
B.
Ignoring accrued income and expenses
C.
Measuring inflation and reporting it on the financial statements
D.
Modifying items on the cash flow statement based on definite criteria
Explanation:
Financial statements may be prepared using a comprehensive basis of accounting other than generally accepted accounting principles (often referred to as a special purpose framework). Examples given by AU-C 800.07 are as follows:
Quote
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).
Tax basis. A basis of accounting that the entity uses to file its income tax return for the period covered by the financial statements.
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).
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.
Modifications to the cash flow statement without including all material items on the financial statements (and modifications that do not have substantial support) would not qualify as a special purpose framework.
FAR - August 2016
AUD - September 2016
REG - October 2016
BEC - November 2016
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