AU-C Section 800 governs audits of financial statements prepared under a special purpose framework, meaning any basis of accounting other than GAAP or IFRS that falls into one of five recognized categories. On these engagements the auditor has to confirm the framework is acceptable, redesign procedures around the framework’s rules rather than GAAP’s, and issue a report with modified opinion language, an emphasis-of-matter paragraph pointing to the basis of accounting, and, for some frameworks, an alert that restricts who may use the report.
The Five Frameworks AU-C 800 Recognizes
AU-C 800 applies when the financial statements follow one of five bases: cash, tax, regulatory, contractual, or other.1O’Reilly Media. AU-C 800 Special Considerations — Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks Which one is in play shapes everything that follows, so identifying it correctly is step one.
Tax basis. The entity prepares its statements using the methods it uses on its federal income tax return. Depreciation follows IRC rules, revenue recognition tracks the return, and items like meals or entertainment reflect the tax code’s treatment. Closely held businesses and partnerships often use this basis because it avoids maintaining two sets of books.
Cash basis. Revenue is recorded when cash is received, expenses when cash is paid. No receivables, no payables, no accrual adjustments. AU-C 800 also recognizes a modified cash basis, which allows limited accrual-type adjustments such as recording 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 statements must be prepared. The clearest example is insurance: most insurers authorized to do business in the United States prepare statutory financial statements under Statutory Accounting Principles set out in the NAIC Accounting Practices and Procedures Manual, a framework designed to help state insurance departments assess solvency and liquidity rather than earnings.2National Association of Insurance Commissioners. Statutory Accounting Principles
Contractual basis. A specific agreement between the entity and a third party dictates the reporting. A loan covenant might define debt and equity in a particular way for ratio calculations; a joint venture agreement might call for a negotiated modified cash basis. The rules come from the contract itself.
Other basis. A catch-all for any framework that applies a definite set of logical, reasonable criteria to all material items in the financial statements.3Surgent CPE. Guide and Update to Compilations, Reviews, and Preparations This category requires the most judgment about whether the criteria actually qualify.
Accepting the Engagement and Evaluating the Framework
Acceptability of the framework is settled during engagement acceptance under AU-C 210, before fieldwork begins. The question is not whether the auditor prefers the framework but whether it produces statements that make sense for the intended users.
For regulatory and contractual frameworks, acceptability is usually clear-cut because an external authority or agreement mandates the framework. Tax basis and cash basis are generally accepted as appropriate for the entities that use them. The other-basis category demands the most work, because the auditor has to independently evaluate whether the criteria are logical, reasonable, and applied consistently to all material items.
Management must acknowledge its responsibility for preparing the statements under the chosen framework and for the related internal controls. The engagement letter has to identify the specific framework so there is no ambiguity about what the audit opinion covers.4Journal of Accountancy. AU-C 800 Series Amended to Conform With Auditor Reporting Standard
How Audit Procedures Shift by Framework
The framework determines what can go wrong, and that shapes testing. A GAAP audit template with cosmetic label changes is the wrong approach.
On a cash basis engagement, the risk focus narrows to completeness of cash receipts and cutoff of cash transactions. Complex estimates like allowances for doubtful accounts or fair value measurements simply do not exist in the presentation, so testing them makes no sense.
On a tax basis engagement, the auditor needs a working knowledge of the relevant IRC provisions, because those are the measuring stick. If the entity depreciates an asset over five years for tax purposes, the question is whether five years is correct under the IRC, not whether it reflects a GAAP useful-life analysis.
For a regulatory basis audit, the auditor has to understand the specific regulations. An insurance company audit under SAP requires knowing which NAIC prescribed practices apply and whether the state has adopted permitted practices that deviate from standard NAIC guidance.2National Association of Insurance Commissioners. Statutory Accounting Principles Procedures must confirm compliance with both the framework and generally accepted auditing standards.
When the Framework Is Silent
Special purpose frameworks were built for narrower purposes than GAAP and are prone to gaps. When the framework does not address an element that appears in the entity’s operations, management applies a reasonable interpretation consistent with the framework’s overall objectives, and the auditor evaluates whether that interpretation is sound and consistently applied.
Related-party transactions are a common example. A cash basis framework does not contemplate related-party disclosures, but the entity may have significant transactions with its owner. The auditor has to consider whether the statements taken as a whole are misleading without some acknowledgment of those transactions, even where the framework does not technically require it.
Financial Statement Titling and Disclosure
The auditor evaluates whether the statements adequately describe the framework in the notes. A description that says only “prepared on the tax basis of accounting” is not enough. The notes must explain how the basis differs from GAAP for material items, so the reader understands what is reflected and what is not (for example, that lease liabilities under ASC 842 do not appear).
Titles matter too. Statements should not carry GAAP titles like “Balance Sheet” or “Income Statement” if doing so would mislead. Common alternatives include “Statement of Assets, Liabilities, and Equity — Tax Basis” or “Statement of Cash Receipts and Disbursements.” A reader skimming the statements should immediately see that they are not GAAP presentations.
What the Audit Report Must Contain
The report on special purpose framework statements carries several required modifications relative to a standard GAAP report.
Framework-Specific Opinion
The opinion paragraph names the framework. Rather than referring to GAAP, the auditor states that the statements are presented fairly in accordance with the identified framework, for example “the cash basis of accounting described in Note 1.” That reference 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 that describes the framework. It states that the statements are prepared under a framework other than GAAP and points to the specific note where the basis is explained. 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 special purpose framework report restricts its audience. Cash basis and tax basis reports do not require a use alert; those statements are considered understandable enough for a broad audience, so the report is treated as general use. Regulatory basis and contractual basis reports do require an other-matter paragraph containing an alert that restricts the report to the specified parties: the regulatory agency, the parties to the contract, or those within the entity. Other-basis engagements follow AU-C 905, which turns on the specific circumstances.5AICPA. Marked Drafts of Proposed AU-C Sections 800, 805, and 810
The alert identifies the specified parties and states the report is not intended for anyone else. The reasoning is straightforward: a loan covenant’s reporting rules were negotiated between two parties, and someone outside the agreement has no basis for evaluating whether the presentation is reasonable.
Regulatory Basis Intended for General Distribution
One exception matters. When regulatory basis statements are distributed beyond the regulator (that is, intended for general use), the auditor expresses a dual opinion: one on compliance with the regulatory framework and a separate opinion on compliance 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 to Avoid
The most common error is treating a special purpose framework audit as a GAAP audit with cosmetic report changes. Risk assessment, materiality, and procedures should flow from the framework itself. Setting materiality using GAAP benchmarks on a cash basis engagement solves the wrong problem.
Thin framework descriptions in the notes are another persistent issue. When the disclosure does not explain how the basis differs from GAAP for material items, pushing management to expand it before issuing the report is worth the effort. Mislabeling statements is subtler. A cash basis balance sheet titled simply “Balance Sheet” invites readers to assume GAAP. If management resists a modified title, the auditor has to evaluate whether the presentation crosses into misleading and affects the opinion.
What Changed Under SAS 139
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. Reports on special purpose framework engagements now use the same reorganized structure as GAAP reports, with separate sections for the opinion, the basis for the opinion, and the responsibilities of management and the auditor. The core requirements did not change: framework-specific opinion language, an emphasis-of-matter paragraph, and a restricted-use alert where applicable still apply, now within the updated report format.4Journal of Accountancy. AU-C 800 Series Amended to Conform With Auditor Reporting Standard