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

In an auditor's special report on financial statements prepared on a cash basis, it is important to include a reference to the note describing the basis of accounting immediately after the opinion paragraph. This reference is essential as it clarifies to users of the financial statements that the cash basis of accounting has been used, which is a departure from Generally Accepted Accounting Principles (GAAP).

The inclusion of this reference helps ensure transparency about how the financial statements were prepared. It provides context for the opinion given by the auditor and assists users in understanding the limitations and specific circumstances surrounding the financial statements. This is particularly significant because cash basis accounting can yield different results compared to accrual accounting, which is what GAAP typically prescribes. This acknowledgment helps users interpret the financial information accurately and effectively.

The other options involve elements that are not standard requirements in a special report on cash basis statements. For instance, while justifying a departure from GAAP is important, it would typically be a general statement rather than detailed in this context. An emphasis-of-matter paragraph about fairness generally does not apply to cash basis reporting, nor is it standard practice to reference specific authoritative pronouncements in the same way, as the primary focus is the basis of accounting used. Therefore, including a reference to