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

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In a CPA's report on audited financial statements prepared on the cash receipts and disbursements basis, what should be declared regarding the basis of presentation?

Explain why this basis is more useful than GAAP.
Refer to the note in the financial statements describing management's responsibility for those statements.
State that the basis is a comprehensive basis of accounting (OCBOA) other than GAAP.
Include an emphasis-of-matter paragraph discussing the CPA's concurrence with a departure from GAAP.

The correct answer is: State that the basis is a comprehensive basis of accounting (OCBOA) other than GAAP.

When a CPA issues a report on audited financial statements prepared on the cash receipts and disbursements basis, it's essential to clearly state the accounting basis used. This basis, often referred to as a comprehensive basis of accounting other than generally accepted accounting principles (GAAP), is recognized because it provides an alternative methodology for financial statement preparation that may be appropriate for certain entities, such as small businesses or specific non-profit organizations. Identifying the cash receipts and disbursements basis as an OCBOA reinforces that it diverges from the standard GAAP framework. This declaration is crucial for users of the financial statements as it informs them that the statements may not provide all the information typically expected under the GAAP framework. This is especially significant because there are varying levels of detail and presentation required under GAAP which may not be present in OCBOA statements. The mention of the basis as OCBOA is not merely a formality; it is intended to guide the reader regarding the suitability and limitations of the financial statements presented. By setting the right expectations, users can better understand how to interpret the financial information in context. Such clarity helps ensure transparency and avoids potential misinterpretations of the financial condition of the entity being audited.