Special purpose framework

Accounting and Auditing Update - October 2022

CHAPTER 1

Special purpose

framework

This article aims to:

Summarise the key considerations for nancial

statements prepared for a specic set of users.

Introduction

An entity usually prepares general purpose

nancial statements as per the general-purpose

framework. A general-purpose framework

is designed to meet the common nancial

information needs of a wide range of users, e.g.:

a. Financials prepared as per applicable Generally

Accepted Accounting Principles (GAAP) for tax

ling purposes

b. Financials of a foreign subsidiary prepared

as per Indian Accounting Standards (Ind AS)/

Accounting Standards (AS) for inclusion in the

annual report.

The general-purpose framework i.e. Ind AS and

AS are used for preparation and presentation

of the nancial statements. The Standards on

Auditing (SA) issued by the Institute of Chartered

Accountants of India (ICAI) apply to an audit of

general-purpose nancial statements.

However, under certain circumstances, an entity

would be required to submit nancial statements

as per a special purpose framework or an audited

single nancial statement, specic elements,

accounts, or items of a nancial statement to

a specic category of stakeholders. A special-

purpose nancial statement is a nancial report

that is intended for presentation to specic users,

and it may accompany a complete set of nancial

statements that is intended for general use, or it

may be presented separately. The audits of such

statements are conducted in accordance with

all the SAs. The ICAI has also formulated special

consideration standards which are also required to

be followed by an auditor when undertaking such

engagements.

Therefore, in addition to the application of all the

SAs (in the 100-700 series), an auditor is also

required to comply with:

• SA 800, Special Considerations—Audits of

Financial Statements Prepared in Accordance

with Special Purpose Frameworks which

deals with the audit of nancial statements

prepared in accordance with a special purpose

framework, and

• SA 805, Special Considerations—Audits of

Single Financial Statements and Specic

Elements, Accounts or Items of a Financial

Statement which deals with an audit of a

single nancial statement, a specic element,

account or item of a nancial statement to

be prepared in accordance with a general or

special purpose framework.

However, SA 805 does not apply to the report

of a component auditor which is issued as a

result of the work performed on the nancial

information of a component at the request of a

group engagement team for purposes of an audit

of group nancial statements.

As per SA 800, a special purpose framework is

designed to meet the nancial information needs

of specic users, example:

i. Financial statements prepared on cash receipts

and disbursements basis of accounting for cash

ow information that may be requested by the

key supplier

ii. Financial statements prepared as per the

nancial reporting provisions established by

a regulator to meet the requirements of that

regulator

iii. Financial statements prepared as per the

nancial reporting provisions of a contract,

such as a bond indenture, a loan agreement, or

a project grant.

It is pertinent to note that, when nancial

statements are prepared based on the needs of

a regulator, it should not be construed that such

nancial statements are special purpose nancial

statements. Special purpose nancial statements

are nancial statements with a special purpose

framework i.e. a nancial reporting framework

designed to meet the nancial information needs

of specic users. Special purpose nancial

statements are not intended to meet the common

information needs of a wide range of users.

Examples of single nancial statement or the

specic element, account or item of a nancial

statement are:

i. An audited cashow statement to be

submitted to potential investors.

ii. Accounts receivable, allowance for doubtful

accounts receivable, inventory, the liability for

accrued benets of a private pension plan, the

recorded value of identied intangible assets,

or the liability for ‘incurred but not reported’

claims in an insurance portfolio, including

related notes.

iii. A schedule of externally managed assets and

income of a private pension plan, including

related notes.

iv. A schedule of net tangible assets, including

related notes.

v. A schedule of disbursements in relation to a

lease property, including explanatory notes.

vi. A schedule of prot participation or employee

bonuses, including explanatory notes.

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Accounting and Auditing Update - October 2022

Key considerations for the management while preparing financial statements under special circumstances

The nancial statements (both general purpose

nancial statements and special purpose nancial

statements) can either be prepared as per the fair

presentation framework or as per the compliance

framework.

A fair presentation framework is a nancial

reporting framework that requires compliance with

the requirements of the framework and:

a. Acknowledges explicitly or implicitly that,

to achieve fair presentation of the nancial

statements, it may be necessary for

management to provide disclosures beyond

those specically required by the framework, or

b. Acknowledges explicitly that it may be

necessary for management to depart from a

requirement of the framework to achieve fair

presentation of the nancial statements. Such

departures are expected to be necessary only in

extremely rare circumstances.

A compliance framework is a nancial reporting

framework that requires compliance with the

requirements of the framework but does not

contain the acknowledgements in (a) or (b) above.

It is the primary responsibility of the management

to prepare nancial statements. In order to do so

following aspects need to be considered:

Purpose

The management should understand the purpose

for which such nancial statements are being

prepared and its intended users.

Accounting framework

While preparing nancial statements under a

special purpose framework, it is essential to

understand the nancial information needs of

the intended users in order to determine the

acceptability of the appropriate nancial reporting

framework to be applied in the preparation of

the nancial statements. If the special purpose

nancial statements are prepared in accordance

with the applicable accounting standards, then

a proper explanation should be provided for

any material departures from those accounting

standards. The management should ensure that

the appropriate accounting policies are applied

consistently,judgements and estimates are

reasonable and prudent so as to give a true and fair

view of the state of affairs of the entity.

In case the nancial statements are prepared as

per the nancial reporting provisions laid down

by the regulator or as per the terms of a contract,

the same should be specied in the said nancial

statements.

Where the management intends to publish an

audited single nancial statement or an audited

specic element of a nancial statement together

with the entity’s audited complete set of nancial

statements, then the management should ensure

that the presentation of such a single nancial

statement or of the specic element of a nancial

statement is sufciently differentiated from the

complete set of nancial statements.

In certain situations, the laws or regulations may

prescribe the nancial reporting framework to

be used by the management in the preparation

of special purpose nancial statements. In

certain cases the nancial reporting provisions

are prescribed in a contract, then that reporting

framework would be considered acceptable if

the framework exhibits attributes of a normally

acceptable nancial reporting framework.

Adequate disclosures

Ensure that the special purpose nancial

statements contain adequate disclosures to enable

the intended users to understand the information

contained in the nancial statements.

Accounting and Auditing Update - October 2022

Key considerations for the auditor

Acceptance and planning

When accepting a special purpose audit, an auditor

should consider the following:

a. Understand the purpose for which the nancial

statements are prepared

b. Understand the intended users

c. Obtain an understanding of the steps taken

by the management to determine that the

applicable nancial reporting framework is

acceptable in the circumstances and the entity’s

selection and application of accounting policies

d. Planning and performing the audit engagement

to obtain sufcient and appropriate audit

evidence

e. Should ensure compliance with the applicable

laws and regulations

f. Communication with Those Charged with

Governance (TCWG) regarding signicant

matters.

Compliance with SAs

SA 800 and SA 805 also draw reference to SA 200,

Overall Objectives of the Independent Auditor and

the Conduct of an Audit in Accordance with

Standards on Auditing thereby requiring an auditor

to comply with:

a. The relevant ethical requirements, including

those pertaining to independence, relating to

nancial statement audit engagements, and

b. All SAs relevant to the audit unless in certain

circumstances of the audit, the auditor is of

the view that the entire SA is not relevant, or

the requirement is not relevant because it is

conditional, and the condition does not exist.

Forming an opinion and reporting

When forming an opinion and reporting on special

purpose nancial statements or single nancial

statement or on a specic element of a nancial

statement, an auditor should comply with the

requirements in SA 700 (Revised), Forming an

Opinion and Reporting on Financial Statements

The report should also contain an explanation of

the management’s responsibility regarding the

selection of the nancial reporting framework and

preparation of such nancial statements. While

auditing and reporting on special purpose nancial

statements or single nancial statements or on

a specic element of a nancial statement, an

auditor must take into consideration the impact

of the following aspects included in the auditor’s

report on the complete nancial statements:

i. Material uncertainty related to going concern

as per SA 570 (Revised), Going Concern,

ii. Key audit matters in accordance with SA 701,

Communicating Key Audit Matters in the

Independent Auditor’s Report

iii. Other information as per SA 720, The Auditor’s

Responsibilities Relating to Other Information.

When reporting on special purpose nancial

statements under SA 800, the auditor’s report

should describe the purpose for which the nancial

statements are prepared and the intended users.

or refer to the note in the special purpose nancial

statements that contains information which

states that the nancial statements are prepared

in accordance with a special purpose framework

and may not be suitable for another purpose.

The auditor is required to do so by including an

Emphasis of Matter (EOM) paragraph in the audit

report.

Accounting and Auditing Update - October 2022

1. SA 700 (Revised) deals with the form and content of the auditor’s report.

It provides guidance with respect to the auditor’s responsibility to form

an opinion on the nancial statements. SA 700 (Revised) requires an

auditor to evaluate whether the nancial statements are prepared, in all

material respects, in accordance with the requirements of the applicable

nancial reporting framework. This evaluation should also be based on

qualitative aspects of the entity’s accounting practices, including indicators

of possible bias in management’s judgements. In order to form an opinion

about whether the nancial statements as a whole are free from material

misstatement, whether due to fraud or error, the auditor must obtain

reasonable assurance

If an auditor undertakes an engagement under

SA 805 to report on a single nancial statement

or on a specic element of a nancial statement,

then the auditor should not express an opinion on

the effectiveness of the entity’s internal control.

Further, where an auditor has undertaken an

engagement to report on the single nancial

statement or on a specic element of a nancial

statement in conjunction with an engagement

to audit the entity’s complete set of nancial

statements, the auditor should express a separate

opinion for each engagement and must ensure that

the presentation of a single nancial statement or

of the specic element of a nancial statement

sufciently differentiates from a complete set of

nancial statements. If not, the auditor shall not

issue the auditor’s report containing the opinion

on the single nancial statement or on the specic

element of a nancial statement until the auditor is

satised with the differentiation.

An auditor should not express an unmodied

opinion on a single nancial statement of a

complete set of nancial statements if the auditor

has expressed an adverse opinion or disclaimed

an opinion on the complete set of nancial

statements as a whole, unless the following

conditions are satised:

• The auditor is not prohibited by law or

regulation from doing so

• The opinion is expressed in an auditor’s report

that is not published together with the auditor’s

report containing the adverse opinion or

disclaimer of opinion, and

• The specic element does not constitute a

major portion of the entity’s complete set of

nancial statements.

Bottom line

Financial statements prepared under a special

purpose framework or special circumstance

are unique engagements that provide specic

and relevant information to a specic group of

users. Therefore, due consideration should be

given by the management and the auditor to the

requirements of such specic users. As the audit

reports of general-purpose nancial statements

and special purpose nancial statements are

governed by two different auditing standards

(SA 700 and SA 800), an auditor is expected

to obtain clarity about the difference between

the two frameworks. Further, auditors should

exercise professional skepticism and should have

professional experience for issuing such audit

reports as it helps maintain stakeholder condence

in the assurance process.

Accounting and Auditing Update - October 2022