AU-C 800 governs audits of financial statements prepared under a special purpose framework, meaning any reporting framework other than GAAP or IFRS that falls into one of five recognized categories: cash basis, tax basis, regulatory basis, contractual basis, or other basis.1O’Reilly Media. AU-C 800 Special Considerations — Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks Three things change compared with a standard GAAP audit: the auditor has to evaluate the framework itself for acceptability during engagement acceptance, the audit procedures have to be built around the framework’s rules rather than GAAP’s, and the audit report carries modifications that keep users from mistaking the statements for a GAAP presentation.
The Five Frameworks You Can Audit Under
Tax basis. The entity prepares its statements using the same methods it uses on its federal income tax return. Depreciation follows IRC rules rather than GAAP schedules, revenue tracks the return rather than ASC 606, and items like meals or entertainment reflect tax code treatment. This is the most common SPF in practice, especially for closely held businesses and partnerships.
Cash basis. Revenue is recorded when cash comes in and expenses when cash goes out. No receivables, no payables, no accrual adjustments. AU-C 800 also recognizes a modified cash basis that adds limited accrual-type adjustments, such as depreciation on fixed assets, provided the modifications have substantial support.1O’Reilly Media. AU-C 800 Special Considerations — Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks
Regulatory basis. An oversight body prescribes how the entity must prepare its statements. The clearest example is insurance: most insurers authorized in the United States prepare statutory financial statements under Statutory Accounting Principles, detailed in the NAIC Accounting Practices and Procedures Manual, which emphasizes solvency and liquidity rather than earnings measurement.2National Association of Insurance Commissioners. Statutory Accounting Principles
Contractual basis. A specific agreement between the entity and a third party dictates how financial information is reported. A loan covenant might define debt-to-equity using particular definitions; a joint venture agreement might call for a negotiated modified cash basis. The reporting rules come from the contract, not from a standard-setter or regulator.
Other basis. A catch-all for any framework using a definite set of logical, reasonable criteria applied to all material items.3Surgent CPE. Guide and Update to Compilations, Reviews, and Preparations This category comes up less often and requires more auditor judgment about whether the criteria actually qualify.
Deciding Whether the Framework Is Acceptable
The acceptability question belongs at engagement acceptance under AU-C 210, not after fieldwork has begun. The test isn’t personal preference; it’s whether the framework produces statements that make sense for the intended users.
Regulatory and contractual frameworks are usually straightforward: an external authority or agreement requires the framework, and its existence establishes acceptability. Tax basis and cash basis frameworks are generally accepted as appropriate for the entities that use them. The “other basis” category demands the most scrutiny, because the auditor has to independently judge whether the criteria are logical, reasonable, and applied consistently.
Management has to acknowledge responsibility for preparing the statements under the chosen SPF, including maintaining the internal controls relevant to that preparation. The engagement letter should identify the specific framework, so there is no ambiguity about what the opinion covers.4Journal of Accountancy. AU-C 800 Series Amended to Conform With Auditor Reporting Standard
How Audit Procedures Shift by Framework
A GAAP audit with a different cover page is the wrong model. The framework decides what can go wrong, and risk assessment, materiality, and testing all flow from that.
On a cash basis engagement, focus on completeness of cash receipts and proper cutoff of cash transactions. Unrecorded receipts are the primary concern. Complex estimates like allowances for doubtful accounts or fair value measurements are not on the field — they don’t exist in the presentation.
On a tax basis engagement, the IRC is the measuring stick. If the entity depreciates an asset over five years for tax purposes, the audit question is whether five years is correct under the IRC, not under GAAP’s useful-life analysis. The auditor needs working familiarity with the tax provisions the entity relies on.
On a regulatory basis audit, obtain a thorough understanding of the specific regulations. For an insurance company under SAP, that means knowing which NAIC prescribed practices apply and whether the state has adopted permitted practices that deviate from the standard NAIC guidance.2National Association of Insurance Commissioners. Statutory Accounting Principles Procedures must confirm compliance with the regulatory framework and with general auditing standards.
When the Framework Doesn’t Address Something
No framework covers everything, and SPFs are especially prone to gaps because they were built for narrower purposes than GAAP. When the framework is silent on an element that shows up in the entity’s operations, management applies a reasonable interpretation consistent with the framework’s overall objectives, and the auditor evaluates whether that interpretation makes sense and has been applied consistently.
A cash basis framework doesn’t contemplate related-party disclosures, for example, but the entity might have significant transactions with its owner. The auditor has to think about whether the statements, taken as a whole, are misleading without some acknowledgment of those transactions, even where the framework technically doesn’t require it.
What the Financial Statements Themselves Must Show
The notes have to include an adequate description of the SPF being used. That means explaining the basis of accounting and how it differs from GAAP in material respects. A tax basis set of statements should tell the reader that depreciation follows IRC rules, that revenue recognition tracks the tax return, and that certain items GAAP would require, such as lease liabilities under ASC 842, are not reflected.
Titles matter too. The statements should not carry the same titles as GAAP statements (“Balance Sheet,” “Income Statement”) if doing so would be misleading. Common alternatives are “Statement of Assets, Liabilities, and Equity — Tax Basis” or “Statement of Cash Receipts and Disbursements.” A reader glancing at the top of the page should immediately understand this is not a GAAP presentation.
How the Audit Report Changes
The report on SPF statements carries several required modifications.
Framework-Specific Opinion Language
The opinion paragraph references the specific framework. Instead of stating that the statements are presented fairly in accordance with GAAP, the auditor states they are presented fairly in accordance with the identified framework — for example, “the cash basis of accounting described in Note 1.” That single change signals immediately that the reader is looking at something other than GAAP.
Emphasis-of-Matter Paragraph
The report includes an emphasis-of-matter paragraph directing the reader to the note describing the SPF. It explains that the statements are prepared under a framework other than GAAP and points to the specific note where the basis is described. Even a reader who skips the notes encounters a clear statement that the financial statements follow non-standard rules.4Journal of Accountancy. AU-C 800 Series Amended to Conform With Auditor Reporting Standard
Restricted Use Versus General Use
Not every SPF report is restricted, and this is where practitioners most often trip. Cash basis and tax basis reports do not require an alert restricting use; those frameworks are considered appropriate for a general audience. Regulatory basis and contractual basis reports do require an other-matter paragraph containing an alert that restricts the report’s use to the specified parties, meaning the regulatory agency, the parties to the contract, or those within the entity. Reports under the “other basis” category follow AU-C 905’s guidance on restricted use, which depends on the specific circumstances.5AICPA. Marked Drafts of Proposed AU-C Sections 800, 805, and 810
The restricted-use paragraph identifies the specified parties and states that the report is not intended for anyone else.
Regulatory Basis Intended for General Use
There is an important exception. When regulatory basis statements are distributed beyond the regulatory agency and the entity, the auditor must express a dual opinion: one on compliance with the regulatory framework, and a separate opinion on whether the statements comply with GAAP. In that scenario the emphasis-of-matter and restricted-use paragraphs are not required, because the dual opinion itself tells the reader where the statements stand relative to GAAP.5AICPA. Marked Drafts of Proposed AU-C Sections 800, 805, and 810
Mistakes That Show Up Most Often
The frequent one is treating an SPF engagement as a GAAP audit with cosmetic report changes. An auditor who sets materiality using GAAP benchmarks on a cash basis engagement is solving the wrong problem. Risk assessment and testing should come from the framework.
Thin framework descriptions in the notes are another persistent issue. “The financial statements are prepared on the tax basis of accounting” is not enough on its own. The notes need to explain how tax basis treatment differs from GAAP for material items. When management’s disclosure is thin, pushing for more before issuing the report is worth the effort.
Mislabeling is subtler. A cash basis balance sheet titled simply “Balance Sheet” invites readers to assume GAAP. If management resists retitling, the auditor has to weigh whether the labeling rises to a misleading presentation that affects the opinion.
The SAS 139 Update
SAS 139, issued in March 2020, amended AU-C Sections 800, 805, and 810 to conform with the revised auditor reporting model introduced by SAS 134. The report on SPF statements now mirrors the updated format used for GAAP audits, with separate sections for the auditor’s opinion, the basis for the opinion, and the responsibilities of management and the auditor. Framework-specific opinion language, the emphasis-of-matter paragraph, and the restricted-use alert where applicable all remain, but they sit within the reorganized structure.4Journal of Accountancy. AU-C 800 Series Amended to Conform With Auditor Reporting Standard