ISA 800 (Revised)

Special Considerations: Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks

1Objective and scope

ISA 800 (Revised) deals with special considerations in the application of the ISAs in the 200 to 700 series to an audit of financial statements prepared in accordance with a special purpose framework. It applies to a complete set of financial statements (ISA 805 covers a single statement or a specific element). The ISAs apply in full; ISA 800 sets out how the auditor accepts the engagement, plans and performs it, and reports, when the statements are designed for the needs of specific users rather than a wide range of users. Typical Kenyan examples: financial statements prepared on the tax basis for the Kenya Revenue Authority, on a cash receipts and disbursements basis for a donor-funded project, on the basis of the financial reporting provisions of a loan agreement or a regulator's return, or in accordance with a contract for a joint venture partner.

The objective, when applying ISAs to an audit of financial statements prepared under a special purpose framework, is to address appropriately the special considerations relevant to the acceptance of the engagement, the planning and performance of that engagement, and forming an opinion and reporting on the financial statements.

2Key definitions

3Requirements

Acceptance

• ISA 210 requires the auditor to determine the acceptability of the financial reporting framework. In an audit of special purpose financial statements, the auditor obtains an understanding of the purpose for which the financial statements are prepared, the intended users, and the steps taken by management to determine that the framework is acceptable in the circumstances.
• A framework established by a regulator or by contract is generally acceptable for those users; a framework devised by management for a specific purpose is evaluated for whether it exhibits the attributes of an acceptable framework (relevance, completeness, reliability, neutrality, understandability), and whether the contract's financial reporting provisions are sufficiently clear.
• The engagement letter records the special purpose framework, the intended users and the expected restriction on distribution or use of the report.

Planning and performing

• ISA 200 requires compliance with all ISAs relevant to the audit; in a special purpose audit the auditor applies each ISA with judgement about how its requirements are met in the circumstances (materiality under ISA 320 is judged with reference to the specific users; ISA 260 communications with those charged with governance may need adapting where the entity has none in the usual sense).
• ISA 315 requires an understanding of the entity's selection and application of accounting policies. Where the statements are prepared in accordance with the provisions of a contract, the auditor obtains an understanding of any significant interpretations of the contract that management made in preparing the statements: an interpretation is significant if adoption of another reasonable interpretation would have produced a material difference.

Forming an opinion and reporting

• Apply ISA 700 (Revised) to form the opinion and prepare the report, adapted as necessary. The report describes the purpose for which the statements are prepared and, if necessary, the intended users, or refers to a note in the special purpose financial statements that contains that information.
• In evaluating whether the financial statements adequately refer to or describe the framework, the auditor evaluates whether the statements adequately describe any significant interpretations of the contract on which they are based.
• Where management has a choice of frameworks, the explanation of management's responsibility in the report refers to its responsibility for determining that the framework is acceptable in the circumstances.
• The report includes an Emphasis of Matter paragraph alerting users that the financial statements are prepared in accordance with a special purpose framework and that, as a result, they may not be suitable for another purpose. The paragraph is headed appropriately and may also state that the report is intended solely for the specific users and should not be distributed to or used by other parties (a restriction on distribution or use), where the auditor considers that appropriate.
• ISA 701 on key audit matters applies only where law, regulation or the terms of engagement require it or the auditor decides to communicate them; it is not triggered by listed status for special purpose statements. ISA 570 on going concern applies where the framework rests on the going concern basis; the cash basis or a liquidation basis may make it irrelevant.

4Documentation and reporting

The report carries the same elements as an ISA 700 report (title, addressee, opinion, basis for opinion, responsibilities, signature, date), with the opinion referring to the special purpose framework by name and, for a compliance framework, using the 'prepared, in all material respects, in accordance with' wording, and with the required Emphasis of Matter alert placed after the Basis for Opinion section. The auditor's file records the understanding of the purpose, users and framework, the acceptability evaluation, the significant contractual interpretations and their evaluation, and the reporting decisions including any restriction on distribution. Where a special purpose set of statements is published alongside general purpose ones (a regulatory return within the annual report), the auditor evaluates whether the layout adequately differentiates them so users are not misled.

5Examinable focus