 Hello and welcome to this session. This is Professor Farhad. Today we would look at CPA exam questions that deals with reporting on the special purpose framework. It's a topic that's covered on the auditing section of the exam. Oftentimes it's not covered in an auditing course, which it should be covered in an auditing course, but oftentimes professors, they don't cover this topic because it's not part of the major gap and gas auditing. As always, I would like to remind you to connect with me on LinkedIn. If you haven't done so, YouTube is where you would need to subscribe. I have 1,700 plus accounting, auditing, tax, finance, as well as Excel tutorial. If you like my lectures, please like them, share them. If they benefit you, it means they might benefit other people, share the wealth, and connect with me on Instagram. On my website, farhadlectures.com, you will find additional resources such as lectures, practice questions, 2000 CPA questions. For example, this topic today is covered in depth in my auditing course. Once you go to my auditing course, not only you find this topic, you find other topics plus practice exercises. Also, I have CPA sections where you have 500 questions to practice for the CPA exam. The CPA exam is an adaptive test. It means if the AI CPA software notices that you have a weakness in the special purpose framework topic, they will keep asking you the same questions about this topic and they might fail you. Simply put, you want to be familiar with all topics before you sit for the exam. So let's take a look at this question. Reports on special purpose framework are issued in conjunction with what? So basically, what basis can we use to issue those special purpose framework? Reports based on what? Can we use cash basis? And the answer is yes. When you work with a small or a medium sized CPA firm, which is this is what I worked when I was in practice, we did a lot of cash basis. Why? Because small businesses, they prepare their financial statements on cash basis. So if one is correct, I can take out C because one is in A, one is in B, and one is in D. Income tax basis, can you prepare special purpose framework? Can you issue them based on income tax basis? Same thing, and the answer is yes. Also small businesses. So now I can take out A because A does not have two. I can keep B and keep D. All what I need to know now, can I issue those special purpose framework based on regulatory basis of accounting? And the answer is yes. Sometimes you have to issue them based on regulatory basis. Now there are special rules for regulatory basis, but you need to know that you have to issue them based on that. Therefore the answer is D as in Davis. D as in David. You could also issue those special purpose framework based on contractual basis. Anything that you agreed with the client, but you have to spell it out clearly and you have to include it in the report. Let's take a look at this question. When the CPA reports on a financial statements, prepare on cash basis. What is cash basis? Cash basis is a special purpose framework. So cash basis. The report will contain an emphasis of of a matter paragraph. Let me ask you this, just not knowing anything. Do you think you should tell the users that look, this is a cash basis report. Should you tell them this? What do you think? I would say yes. You should tell them this and you should tell them in the report this is a non gap because cash basis is non gap and you have to explicitly tell them it's non gap. So one, it should be just obviously you have to tell them, look, this is not gap. Okay. So I keep one, I take out D, I keep C, take out B and D. Okay. Now all what I have to find out now if number two is correct, if number two is correct, C is the answer. If not one is the answer. One only, which is A. The opinion paragraph would evaluate the usefulness of the basic accounting and compare it to gap. Do you think we have to do that? Do you think we have to evaluate how useful is cash basis? We don't have to. I mean, if we are reporting based on cash basis, it's acceptable and there's no reason to compare it to gap. If somebody is interested in converting the financial statements to gap, by all means, you know their cash basis, you can do your own evaluation and compare it to gap. But we don't, we don't do this work. Otherwise, if we do this work, it means we are doing gap and cash basis. Therefore, two is not correct. C is not correct. One A is the answer. And hopefully you can, you can learn this based on common sense. Yes, I have to emphasize the accounting method I'm using cash basis, but I don't have to compare it to gap. So why don't I compare it also to income tax? Or why don't I compare it to regulatory requirement? I don't. I don't have to compare it to anything. I just have to let you know which basis am I using. Which of the following reports would contain restricted use language? So what is your restricted use language? It means in the report, you clearly state this report is for a specific party, for a specific group. So if somebody else gets their hands on it, and if they use it, I'm sorry, we told you you can't use it because it's only, it's only targeted, targeting this particular group. So when do we, when do we do so? When do we do so? When do we do so? A report, a report on the client's compliance with regulatory requirement, assuming the report is prepared based on a financial statement audit of the complete financial statement. Do we do, do we have to use this restrictive language? And the answer is yes. If we are preparing a client's compliance with some type of regulatory requirement, but it's based on the audited financial statements, we have to use this language. We have to restrict the report to let them know this is, this, this regulatory report should be restricted to your use specifically. So under those circumstances, one is a correct answer. So we keep one, we take out B, we keep C, take out D. A report on financial statement prepare on the cash basis. Do we have to restrict the report on the cash basis? And the answer is no. If it's a cash basis, you know what you need to do. Just make sure you contain an emphasis of a matter of paragraph, letting them know it's a cash basis. So you don't have to restrict it. You know, restricted means it's only to a particular group. A lot of companies use the cash basis. A lot of small businesses use the cash basis. There is no reason to restrict the report. Therefore, A is the answer, something that you have to memorize. Just know, just know the rule for this. An auditor's report on special purpose framework statement would contain a restricted use paragraph. When the financial statements are presented using the cash basis, I just told you, you don't have to restrict under the cash basis. Therefore, one is not a correct answer. If you're using the cash basis, a lot of people use the cash basis. It's kind of, it's kind of an acceptable thing that, you know, if somebody see the cash basis, they should be able to understand it. Therefore, we'll take out one. We'll take out C. Income tax basis. Do you have to restrict the report if it's on the income tax basis? And the answer is no. Every company practically use the, not practically, every company that they have to report, they have to prepare their tax return. They have to have some sort of an income basis financial statement. So it's an acceptable method. Do you have to restrict the report if you prepare it based on income tax? And the answer is no. So these two, you don't have to restrict anything. Therefore, the answer is D. Let's take a look at this question. Which of the following will be included in an auditor's report on a special purpose financial statement not intended for general use? So what do you have to do when it's not intended for general use? Emphasis of a matter paragraph, alerting the reader about the preparation and according with a special purpose framework. Do you have to do that? And the answer is yes. If it's not for general use, if it's for regulatory use, or if it's specifically between you and that particular party, you have to emphasize this matter and a paragraph. So if somebody get their hands on the report, they would say, hold on a second, we can't use it because it's not intended for general use. And that will be shown in the emphasis of a matter paragraph. Other matter paragraph restrict in the use of the report. Do you have to do that? Yes, you have to do that. You have to put other matter paragraph letting everybody know, look, it's between the company and the regulatory agency. It's between the company and the party that contracted the company. Therefore, both one and two is the answer. If you need additional information about this topic, please check out my website, farhatlectures.com, specifically my auditing course, and you will find additional information about this topic. As always, I would like to remind you to also, like my lecture, share them, put them in playlists. If they benefit you, it means they might benefit other people. The CPA exam is a lifetime investment. Don't shortchange yourself. It's a 10, it's a 20 to 30 year investment in your career. Study hard, take it seriously, and stay safe if you are still living through this coronavirus. Good luck.