"the auditor should...determine whether the financial reporting framework to be applied in the preparation of the financial statements is acceptable"
An applicable financial reporting framework gives management a criteria to use when preparing its financial statements, and it gives the Auditor a criteria to use when auditing those financial statements. Without a financial reporting framework, there is no basis against which to compare the financial statements to.
An Auditor should understand the following areas in order to determine whether the financial reporting framework is appropriate:
- the nature of the entity (e.g., whether it is a for-profit, governmental, or non-profit entity)
- the purpose of the financial statements (e.g., how do the users prefer to see the financial information)
- the nature of the financial statements (e.g., whether they are a complete set or a single statement)
- whether law or regulation prescribes the appropriate framework
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