| A2. | Law or regulation may establish the responsibilities of management and, where appropriate, those charged with governance in relation to financial reporting. However, the extent of these responsibilities, or the way in which they are described, may differ across jurisdictions. Despite these differences, an audit in accordance with ISAs (UK and Ireland) is conducted on the premise that management and, where appropriate, those charged with governance have acknowledged and understand that they have responsibility: |
| (a) | For the preparation of the financial statements in accordance with the applicable financial reporting framework, including where relevant their fair presentation; |
| (b) | For such internal control as management and, where appropriate, those charged with governance determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; and |
| (c) | To provide the auditor with: |
| (i) | Access to all information of which management and, where appropriate, those charged with governance are aware that is relevant to the preparation of the financial statements such as records, documentation and other matters; |
| (ii) | Additional information that the auditor may request from management and, where appropriate, those charged with governance for the purpose of the audit; and |
| (iii) | Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence. |
| A3. | The preparation of the financial statements by management and, where appropriate, those charged with governance requires: |
| The identification of the applicable financial reporting framework, in the context of any relevant laws or regulations. |
| The preparation of the financial statements in accordance with that framework. |
| The inclusion of an adequate description of that framework in the financial statements. |
| The preparation of the financial statements requires management to exercise judgment in making accounting estimates that are reasonable in the circumstances, as well as to select and apply appropriate accounting policies. These judgments are made in the context of the applicable financial reporting framework. |
| A4. | The financial statements may be prepared in accordance with a financial reporting framework designed to meet: |
| The common financial information needs of a wide range of users (that is, "general purpose financial statements"); or |
| The financial information needs of specific users (that is, "special purpose financial statements"). |
| A5. | The applicable financial reporting framework often encompasses financial reporting standards established by an authorized or recognized standards setting organization, or legislative or regulatory requirements. In some cases, the financial reporting framework may encompass both financial reporting standards established by an authorized or recognized standards setting organization and legislative or regulatory requirements. Other sources may provide direction on the application of the applicable financial reporting framework. In some cases, the applicable financial reporting framework may encompass such other sources, or may even consist only of such sources. Such other sources may include: |
| The legal and ethical environment, including statutes, regulations, court decisions, and professional ethical obligations in relation to accounting matters; |
| Published accounting interpretations of varying authority issued by standards setting, professional or regulatory organizations; |
| Published views of varying authority on emerging accounting issues issued by standards setting, professional or regulatory organizations; |
| General and industry practices widely recognized and prevalent; and |
| Accounting literature. |
| Where conflicts exist between the financial reporting framework and the sources from which direction on its application may be obtained, or among the sources that encompass the financial reporting framework, the source with the highest authority prevails. |
| A6. | The requirements of the applicable financial reporting framework determine the form and content of the financial statements. Although the framework may not specify how to account for or disclose all transactions or events, it ordinarily embodies sufficient broad principles that can serve as a basis for developing and applying accounting policies that are consistent with the concepts underlying the requirements of the framework. |
| A7. | Some financial reporting frameworks are fair presentation frameworks, while others are compliance frameworks. Financial reporting frameworks that encompass primarily the financial reporting standards established by an organization that is authorized or recognized to promulgate standards to be used by entities for preparing general purpose financial statements are often designed to achieve fair presentation, for example, International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB). |
| A8. | The requirements of the applicable financial reporting framework also determine what constitutes a complete set of financial statements. In the case of many frameworks, financial statements are intended to provide information about the financial position, financial performance and cash flows of an entity. For such frameworks, a complete set of financial statements would include a balance sheet; an income statement; a statement of changes in equity; a cash flow statement; and related notes. For some other financial reporting frameworks, a single financial statement and the related notes might constitute a complete set of financial statements: |
| For example, the International Public Sector Accounting Standard (IPSAS), "Financial Reporting Under the Cash Basis of Accounting" issued by the International Public Sector Accounting Standards Board states that the primary financial statement is a statement of cash receipts and payments when a public sector entity prepares its financial statements in accordance with that IPSAS. |
| Other examples of a single financial statement, each of which would include related notes, are: |
 | Balance sheet. |
| Statement of income or statement of operations. |
| Statement of retained earnings. |
| Statement of cash flows. |
| Statement of assets and liabilities that does not include owner's equity. |
| Statement of changes in owners' equity. |
| Statement of revenue and expenses. |
| Statement of operations by product lines. |
| A9. | ISA (UK and Ireland) 210 establishes requirements and provides guidance on determining the acceptability of the applicable financial reporting framework.5 ISA 800 deals with special considerations when financial statements are prepared in accordance with a special purpose framework.6 |
| A10. | Because of the significance of the premise to the conduct of an audit, the auditor is required to obtain the agreement of management and, where appropriate, those charged with governance that they acknowledge and understand that they have the responsibilities set out in paragraph A2 as a precondition for accepting the audit engagement.7 |
| 5 ISA (UK and Ireland) 210, "Agreeing the Terms of Audit Engagements," paragraph 6(a). |
| 6 ISA 800, "Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks," paragraph 8. |
| ISA 800 has not been promulgated by the APB for application in the UK and Ireland. |
| 7 ISA (UK and Ireland) 210, paragraph 6(b). |
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