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

What should an auditor state when reporting on an entity's income tax basis financial statements?

1. The statements are in conformity with GAAP.

2. There is no opinion on the statements’ conformity.

3. They differ from cash receipts and disbursements accounting.

4. The basis of presentation is non-GAAP.

The correct answer is: The basis of presentation is non-GAAP.

When an auditor reports on an entity's income tax basis financial statements, it's essential to clarify that these statements are prepared using a basis of accounting that does not conform to Generally Accepted Accounting Principles (GAAP). The mention of a non-GAAP basis of presentation indicates that the financial statements are tailored to the specific reporting needs or tax requirements of the entity, which often means that they won't fully align with standard GAAP criteria. Recognizing that the financial statements differ from GAAP helps to inform users of the financial statements about the nature and structure of the information presented. It sets appropriate expectations regarding the format of the financial information and its intended use. Thus, indicating that the basis of presentation is non-GAAP provides users with necessary context, particularly regarding how the figures reported might differ from traditional financial statements prepared under GAAP, which is vital for accurate interpretation and decision-making. Additionally, other options would mislead users regarding the nature of the financial presentation and its alignment with standardized accounting principles.