AS 3305: Engagements for Special Reports

Auditing Standard (AS) 3305 is a professional standard from the Public Company Accounting Oversight Board (PCAOB) that provides a framework for auditors issuing a “special report.” These engagements differ from a typical audit, which involves expressing an opinion on a company’s complete set of financial statements. Special reports are necessary when an opinion is required on specific financial information that is less than a full financial statement presentation. AS 3305 guides the auditor in planning and performing these engagements, ensuring their conclusions are based on sufficient evidence and are clearly communicated.

Scope and Applicability of the Standard

The guidance in AS 3305 applies to several distinct types of engagements. One of the most common is reporting on financial statements prepared on a comprehensive basis of accounting other than Generally Accepted Accounting Principles (GAAP). This alternative framework is often called an “other comprehensive basis of accounting” (OCBOA) and includes methods like the cash basis or tax basis. For instance, if a small business that uses cash-basis accounting needs audited financial statements for a lender, the auditor would follow AS 3305.

Another application is for engagements to report on specified elements, accounts, or items of a financial statement. This involves isolating a single component of the financial statements for audit. An example is a company that must pay royalties based on sales revenue from a particular book, and the royalty agreement might require an auditor’s report verifying the sales figure.

The standard also covers engagements related to compliance with aspects of contractual agreements or regulatory requirements. In these situations, an auditor provides assurance that a company has adhered to specific financial covenants. For example, a loan agreement may require a company to maintain a certain debt-to-equity ratio, and the lender might require an auditor’s report to verify compliance with this clause.

A related area involves reporting on financial presentations designed to comply with contractual or regulatory provisions. This pertains to a specific financial presentation, which may not be a full set of financial statements, created to meet an agreement’s terms. For example, a company might have to provide a schedule of assets pledged as collateral under a debt agreement, and an auditor could be engaged to report on whether this schedule is fairly stated according to the criteria in the agreement.

Core Auditor Responsibilities

When undertaking an engagement under AS 3305, an auditor’s responsibilities are grounded in the same principles that govern a full audit. The PCAOB’s general principles, including maintaining independence, exercising due professional care, and applying professional skepticism, remain fully applicable. These duties ensure the quality and integrity of the audit are not diminished simply because the scope of the engagement is narrower.

A primary responsibility for the auditor is to develop a clear understanding of the engagement’s purpose and the intended users of the special report. This understanding directly influences the nature, timing, and extent of the audit procedures. The auditor must know why the report is being prepared and who will rely on it to design an effective audit approach.

The concept of materiality must also be adapted to the specific context of the engagement. In a full financial statement audit, materiality is determined for the financial statements as a whole. For a special report on a single account, such as inventory, the materiality level will be significantly lower, as a smaller error could be meaningful to users.

The auditor is required to obtain a written representation letter from the client’s management. This letter serves as a formal acknowledgment from management of its responsibilities concerning the subject matter. For example, if the engagement is to report on accounts receivable, the letter would include management’s confirmation that it is responsible for the existence, completeness, and valuation of those receivables.

Required Engagement Procedures

The execution of an AS 3305 engagement involves a systematic process tailored to the subject matter. The initial step is to develop a detailed audit plan based on the auditor’s understanding of the engagement’s purpose. This plan includes assessing the risks of material misstatement for the specific subject matter, which allows the auditor to design appropriate procedures.

A significant portion of the fieldwork involves gathering sufficient and appropriate audit evidence, the nature of which varies by engagement. For a report on a company’s compliance with royalty payment terms, the auditor would inspect licensing agreements and examine sales invoices. If the engagement concerns a schedule of specific assets, procedures might include physical observation and examination of title documents.

With the evidence gathered, the auditor performs specific tests and analyses to validate the information. For an engagement focused on accounts receivable, this would involve sending confirmation requests to customers to verify outstanding balances. The auditor would also test subsequent cash collections to confirm that the recorded receivables were eventually paid.

In the final stage, the auditor evaluates the findings. This involves aggregating the evidence and assessing any discovered misstatements against the engagement’s materiality level. The auditor then determines if there is a sufficient basis to form an opinion for the special report.

Reporting Under the Standard

The final step is issuing the special report, which has a specific structure. The report’s title must include the word “independent” to emphasize the auditor’s objectivity and is addressed to the company or parties specified in an agreement. The introductory paragraph clearly identifies the specific financial information that was audited, such as the schedule of accounts receivable as of a certain date.

The report contains an opinion paragraph stating the auditor’s conclusion on the subject matter, followed by a basis for opinion paragraph. The basis for opinion explains that the audit was conducted in accordance with PCAOB standards. For instance, a report on financial statements prepared on a cash basis will include a paragraph emphasizing that the presentation is not intended to be in conformity with GAAP.

Many special reports include a paragraph that restricts their use and distribution. This is required when the report is based on criteria suitable only for a limited number of users who are knowledgeable about the context. A report on compliance with a contractual agreement, for example, is intended only for the company and the other party to the contract, such as a bank.

The opinion in a special report can be modified, similar to a standard audit report. If the auditor cannot obtain sufficient evidence or finds a material misstatement, a qualified or adverse opinion may be issued. A disclaimer of opinion is issued if the auditor cannot form an opinion.