"The financial statements subject to audit are those of the entity, prepared and presented by management of the entity with oversight from those charged with governance.GAAS do not impose responsibilities on management or those charged with governance and do not override laws and regulations that govern their responsibilities. However, an audit in accordance with GAAS is conducted on the premise that management and, when appropriate, those charged with governance have acknowledged certain responsibilities that are fundamental to the conduct of the audit. The audit of the financial statements does not relieve management or those charged with governance of their responsibilities."
So what does this mean?
When initiating the audit engagement, management has acknowledged their responsibility for the fair presentation of the financial statements, the design/implementation/maintenance of internal control, and to provide unrestricted access to its personnel and information. In fact, the auditor is required to obtain an agreement of management and, when appropriate, those charged with governance, that they acknowledge and understand that they have these responsibilities (often included in the engagement letter).
So what is an applicable financial reporting framework?
The applicable financial reporting framework often includes rules/laws promulgated by financial accounting standards-setting organizations and/or legislative or regulatory requirements. Other sources might be common general and industry practices, or accounting literature.
The framework typically sets broad principles rather than how to account for every possible transaction. The framework also determines what constitutes a complete set of financial statements; for example, for one framework, a complete set of financial statements might include a balance sheet, an income statement, a statement of changes in equity, a cash flow statement, and related notes. For some other financial reporting frameworks, a single financial statement and the related notes might constitute a complete set of financial statements.
The financial accounting standards authorized/recognized to be used for preparing financial statements in accordance with general purpose frameworks include Accounting Standards Codification, issued by FASB; IFRSs, issued by the IASB; Statements of Federal Financial Accounting Standards, issued by the Federal Accounting Standards Advisory Board for U.S. federal government entities; and Statements of the Governmental Accounting Standards Board, issued by the Governmental Accounting Standards Board for U.S. state and local governmental entities.
So how does management go about selecting and following it?
The preparation and fair presentation of the financial statements require management to exercise judgment and identify the applicable financial reporting framework, the fair presentation of the financial statements in accordance with that framework, and an inclusion of the description of that framework in the financial statements.
The financial statements may be prepared under a general purpose framework (i.e., one that meets the needs of a wide range of users, for example GAAP) or a special purpose framework (i.e., one such as cash, tax, regulatory, or another other comprehensive basis of accounting).
The auditor can make suggestions about the form or content of the financial statements, or assist in preparing them based on information provided by management; but the auditor's responsibility for the financial statements is limited to the opinion placed upon them.
Section 210,Terms of Engagement, establishes requirements and provides guidance on determining the acceptability of the applicable financial reporting framework. Section 800, Special Considerations—Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks, addresses engagements in which the auditor issues a report in connection with financial statements prepared in accordance with a special purpose framework.
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