Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

When an auditor reports on financial statements using the same basis of accounting as the income tax return, what should the auditor's report include?

1. A statement justifying the use of the income tax basis

2. A note regarding the intended use of those financial statements

3. A statement about the income tax basis as a non-GAAP basis

4. An explanation of the results compared to GAAP statements

The correct answer is: A statement about the income tax basis as a non-GAAP basis

When an auditor reports on financial statements prepared using the income tax basis of accounting, it is essential for the auditor to clarify that this basis does not conform to Generally Accepted Accounting Principles (GAAP). This is why stating that the income tax basis is a non-GAAP basis in the auditor's report is critical. This information helps users of the financial statements understand the context in which the financial information has been presented, and it informs them that they may not be comparing these statements directly to others prepared in accordance with GAAP. Clarifying that the income tax basis is a non-GAAP basis provides transparency and ensures that stakeholders, including management and investors, are aware of the limitations and differences that may exist compared to GAAP-compliant financial statements. The inclusion of this statement serves to prevent misunderstanding and misinterpretation of the financial data presented under a method that may prioritize tax rules over standard accounting practices. This approach aligns with the auditor's responsibility to present information clearly and accurately to those relying on the financial statements for decision-making purposes.