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

When is an auditor's report designated as a report on compliance?

1. Application of accounting principles to specified transactions.

2. Compliance with aspects of regulatory requirements related to audited financial statements.

3. Interim financial information of a publicly held company that is subject to a limited review.

4. Limited use prospective financial statements such as a financial projection.

The correct answer is: Compliance with aspects of regulatory requirements related to audited financial statements.

An auditor's report is designated as a report on compliance when it addresses the entity's adherence to specific regulatory requirements that pertain to the audited financial statements. This type of report typically evaluates whether the subject entity has complied with applicable laws, regulations, or specific provisions related to its financial reporting. In this context, compliance is crucial as it assures stakeholders, such as investors and regulators, that the financial statements are not only prepared following generally accepted accounting principles (GAAP) but also that the entity has followed relevant legal and regulatory guidelines that govern its operations and reporting practices. The other options, while relevant to auditing and financial reporting, do not specifically pertain to compliance in the same manner. For instance, the application of accounting principles to specified transactions deals more with the technical accounting treatment rather than addressing compliance. Similarly, interim financial information subject to limited review focuses on the auditor's procedures for assessing financial interim statements rather than compliance with regulatory requirements. Finally, limited use prospective financial statements are typically directed towards projections and forecasts, which are not inherently linked to compliance with regulatory requirements.