[The following paragraphs of AS 3305, amended to read as follows, will be effective for audits of fiscal years ending on or after December 15, 2017. See PCAOB Release No. 2017-001.PDF The current standard can be found here.]

.01     This section applies to auditors' reports issued in connection with the following:

  1. Financial statements that are prepared in conformity with a comprehensive basis of accounting other than generally accepted accounting principles (paragraphs .02 through .10)
  2. Specified elements, accounts, or items of a financial statement (paragraphs .11 through .18)
  3. Compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements (paragraphs .19 through .21)
  4. Financial presentations to comply with contractual agreements or regulatory provisions (paragraphs .22 through .30)
  5. Financial information presented in prescribed forms or schedules that require a prescribed form of auditor's reports (paragraphs .32 and .33)

Note: In situations in which an auditor's report described in this section is filed with the U.S. Securities and Exchange Commission, the auditor is required to include in the auditor's report the basic elements and, for reports under subparagraph .01a, communication of critical audit matters, as would be required in an unqualified auditor's reporting under AS 3101, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. For qualified, adverse, and disclaimer of opinion reports, see requirements of AS 3105, Departures from Unqualified Opinions and Other Reporting Circumstances.

Reporting on Financial Statements Prepared in Conformity With an Other Comprehensive Basis of Accounting (OCBOA)

.05        When reporting on financial statements prepared in conformity with a comprehensive basis of accounting other than generally accepted accounting principles, as defined in paragraph .04, an independent auditor should include in the report—

  1. A title that includes the word independent.1
  2. A paragraph that—
    (1) States that the financial statements identified in the report were audited. 
    (2)  States that the financial statements are the responsibility of the Company's management2 and that the auditor is responsible for expressing an opinion on the financial statements based on the audit.
  3. A paragraph that—
    (1) States that the audit was conducted in accordance with the standards of the PCAOB and includes an identification of the United States of America as the country of origin of those standards (for example, the standards of the Public Company Accounting Oversight Board (United States)).
    (2) States that those standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
    (3) States that an audit includes—
    (a) Examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
    (b) Assessing the accounting principles used and significant estimates made by management, and
    (c) Evaluating the overall financial statement presentation (see paragraph .09).
    (4) States that the auditor believes that his or her audit provides a reasonable basis for the opinion.
  4. A paragraph that—
    (1) States the basis of presentation and refers to the note to the financial statements that describes the basis (see paragraphs .09 and .10).
    (2) States that the basis of presentation is a comprehensive basis of accounting other than generally accepted accounting principles.
  5. A paragraph that expresses the auditor's opinion (or disclaims an opinion) on whether the financial statements are presented fairly, in all material respects, in conformity with the basis of accounting described. If the auditor concludes that the financial statements are not presented fairly on the basis of accounting described or if there has been a limitation on the scope of the audit, he or she should disclose all the substantive reasons for the conclusion in an explanatory paragraph(s) (preceding the opinion paragraph) of the report and should include in the opinion paragraph the appropriate modifying language and a reference to such explanatory paragraph(s).3
  6. If the financial statements are prepared in conformity with the requirements or financial reporting provisions of a governmental regulatory agency (see paragraph .04a), a separate paragraph at the end of the report stating that the report is intended solely for the information and use of those within the entity and the regulatory agencies to whose jurisdiction the entity is subject, and is not intended to be and should not be used by anyone other than these specified parties. Such a paragraph is appropriate even though by law or regulation the auditor's report may be made a matter of public record.4 The auditor may use this form of report only if the financial statements and report are intended solely for use by those within the entity and one or more regulatory agencies to whose jurisdiction the entity is subject.5
  7. The manual or printed signature of the auditor's firm.
  8. The city and state (or city and country, in the case of non-U.S. auditors) from which the auditor's report has been issued.5A
  9. The date.6

1     This section does not require a title for an auditor's report if the auditor is not independent. See AS 3320, Association with Financial Statements, for guidance on reporting when the auditor is not independent.

2     In some instances, a document containing the auditor's report may include a statement by management regarding its responsibility for the presentation of the financial statements. Nevertheless, the auditor's report should state that the financial statements are management's responsibility. However, the statement about management's responsibility should not be further elaborated upon in the auditor's report or referenced to management's report.

3     Paragraph .31 discusses other circumstances that may require that the auditor add additional explanatory language to the special report.

4     Public record, for purposes of auditor's reports on financial statements of a regulated entity that are prepared in accordance with the financial reporting provisions of a government regulatory agency, includes circumstances in which specific requests must be made by the public to obtain access to or copies of the report. In contrast, the auditor would be precluded from using this form of report in circumstances in which the entity distributes the financial statements to parties other than the regulatory agency either voluntarily or upon specific request. 

5     If the financial statements and report are intended for use by parties other than those within the entity and one or more regulatory agencies to whose jurisdiction the entity is subject, the auditor should follow the guidance in AS 3310, Special Reports on Regulated Companies.

5A     See SEC Rule 2-02(a) of Regulation S-X, 17 C.F.R. § 210.2-02(a).

6     For guidance on dating the auditor's report, see AS 3105, Dating of the Independent Auditor's Report.

.06     Unless the financial statements meet the conditions for presentation in conformity with a "comprehensive basis of accounting other than generally accepted accounting principles" as defined in paragraph .04, the auditor should modify his or her report because of the departures from generally accepted accounting principles (see AS 3105).

.12     When expressing an opinion on one or more specified elements, accounts, or items of a financial statement, the auditor should plan and perform the audit and prepare his or her report with a view to the purpose of the engagement. The standards of the PCAOB are applicable to any engagement to express an opinion on one or more specified elements, accounts, or items of a financial statement. If the specified elements, accounts, or items of a financial statement are intended to be presented in conformity with generally accepted accounting principles, the requirements for the auditor's report, as described in AS 3101 and AS 3105, are applicable.

.14     The auditor should not express an opinion on specified elements, accounts, or items included in financial statements on which he or she has expressed an adverse opinion or disclaimed an opinion based on an audit, if such reporting would be tantamount to expressing a piecemeal opinion on the financial statements (see AS 3105.48). However, an auditor would be able to express an opinion on one or more specified elements, accounts, or items of a financial statement provided that the matters to be reported on and the related scope of the audit were not intended to and did not encompass so many elements, accounts, or items as to constitute a major portion of the financial statements. For example, it may be appropriate for an auditor to express an opinion on an entity's accounts receivable balance even if the auditor has disclaimed an opinion on the financial statements taken as a whole. However, the report on the specified element, account, or item should be presented separately from the report on the financial statements of the entity.

Reports on One or More Specified Elements, Accounts, or Items of a Financial Statement

.15        When an independent auditor is engaged to express an opinion on one or more specified elements, accounts, or items of a financial statement, the report should include—

  1. A title that includes the word independent.9
  2. A paragraph that—
    (1) States that the specified elements, accounts, or items identified in the report were audited. If the audit was made in conjunction with an audit of the company's financial statements, the paragraph should so state and indicate the date of the auditor's report on those financial statements. Furthermore, any departure from the auditor's unqualified report on those statements should also be disclosed if considered relevant to the presentation of the specified element, account or item.
    (2) States that the specified elements, accounts, or items are the responsibility of the Company's management and that the auditor is responsible for expressing an opinion on the specified elements, accounts or items based on the audit.
  3. A paragraph that—
    (1) States that the audit was conducted in accordance with the standards of the PCAOB and includes an identification of the United States of America as the country of origin of those standards (for example, the standards of the Public Company Accounting Oversight Board (United States)).
    (2) States that those standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the specified elements, accounts, or items are free of material misstatement.
    (3) States that an audit includes—
    (a) Examining, on a test basis, evidence supporting the amounts and disclosures in the presentation of the specified elements, accounts, or items,
    (b) Assessing the accounting principles used and significant estimates made by management, and
    (c) Evaluating the overall presentation of the specified elements, accounts, or items.
    (4) States that the auditor believes that his or her audit provides a reasonable basis for the auditor's opinion.
  4. A paragraph10 that—
    (1) Describes the basis on which the specified elements, accounts, or items are presented (see paragraphs .09 and .10) and, when applicable, any agreements specifying such basis if the presentation is not prepared in conformity with generally accepted accounting principles.11 If the presentation is prepared in conformity with generally accepted accounting principles, the paragraph should include an identification of the United States of America as the country of origin of those accounting principles (for example, accounting principles generally accepted in the United States of America or U.S. generally accepted accounting principles).
    (2) If considered necessary, includes a description and the source of significant interpretations, if any, made by the Company's management, relating to the provisions of a relevant agreement.
  5. A paragraph that expresses the auditor's opinion (or disclaims an opinion) on whether the specified elements, accounts, or items are fairly presented, in all material respects, in conformity with the basis of accounting described. If the auditor concludes that the specified elements, accounts, or items are not presented fairly on the basis of accounting described or if there has been a limitation on the scope of the audit, the auditor should disclose all the substantive reasons for that conclusion in an explanatory paragraph(s) (preceding the opinion paragraph) of the report and should include in the opinion paragraph appropriate modifying language and a reference to such explanatory paragraph(s).12
  6. If the specified element, account, or item is prepared to comply with the requirements or financial reporting provisions of a contract or agreement that results in a presentation that is not in conformity with either generally accepted accounting principles or an other comprehensive basis of accounting, a separate paragraph at the end of the report stating that the report is intended solely for the information and use of those within the entity and the parties to the contract or agreement,13 and is not intended to be and should not be used by anyone other than these specified parties. Such a restriction on the use of the report is necessary because the basis, assumptions, or purpose of the presentation (contained in the contract or agreement) is developed for and directed only to the parties to the contract or agreement.
  7. The manual or printed signature of the auditor's firm.
  8. The city and state (or city and country, in the case of non-U.S. auditors) from which the auditor's report has been issued.13A  
  9. The date.14

When expressing an opinion on one or more specified elements, accounts, or items of a financial statement, the auditor, to provide more information as to the scope of the audit, may wish to describe in a separate paragraph certain other auditing procedures applied. However, no modification in the content of paragraph .15c above should be made. 

9     See footnote 1.

10     Alternatively, this requirement can be met by incorporating the description in the introductory paragraph discussed in paragraph .15b above.

11     When the specified element, account, or item is presented in conformity with an other comprehensive basis of accounting, see paragraph .05d(2). 

12     Paragraph .31 discusses other circumstances that may require that the auditor add additional explanatory language to the special report.

13     If the presentation is prepared on a basis prescribed by a governmental regulatory agency (which is also OCBOA), the auditor should restrict the distribution of the report on such presentation. See paragraph .05f for further reporting guidance in this situation. 

13A     See footnote 5A.

14     See footnote 6.

.17     The auditor should consider the effect that any departure, including additional explanatory language because of the circumstances discussed in AS 3101.18, from the auditor's unqualified report on the audited financial statements might have on the report on a specified element, account, or item thereof.

.21     When an auditor's report on compliance with contractual agreements or regulatory provisions is included in the report that expresses the auditor's opinion on the financial statements, the auditor should include a paragraph, in the Opinion on the Financial Statements section, that provides negative assurance relative to compliance with the applicable covenants of the agreement, insofar as they relate to accounting matters, and that specifies the negative assurance is being given in connection with the audit of the financial statements. The auditor should also ordinarily state that the audit was not directed primarily toward obtaining knowledge regarding compliance. In addition, the report should include a paragraph that includes a description and source of any significant interpretations made by the entity's management as discussed in paragraph .20d as well as a paragraph that restricts the use of the report to the specified parties as discussed in paragraph .20e. Following are examples of reports that might be issued:

Report on Compliance With Contractual Provisions Given in a Separate Report22

Report of Independent Registered Public Accounting Firm

We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheet of XYZ Company as of December 31, 20X2, and the related statement of income, retained earnings, and cash flows for the year then ended, and have issued our report thereon dated February 16, 20X3.

In connection with our audit, nothing came to our attention that caused us to believe that the Company failed to comply with the terms, covenants, provisions, or conditions of sections XX to XX, inclusive, of the Indenture dated July 21, 20X0, with ABC Bank insofar as they relate to accounting matters. However, our audit was not directed primarily toward obtaining knowledge of such noncompliance.

This report is intended solely for the information and use of the boards of directors and management of XYZ Company and ABC Bank and is not intended to be and should not be used by anyone other than these specified parties.

Report on Compliance With Regulatory Requirements Given in a Separate Report When the Auditor's Report on the Financial Statements Included an Explanatory Paragraph Because of an Uncertainty

Report of Independent Registered Public Accounting Firm

We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheet of XYZ Company as of December 31, 20X2, and the related statement of income, retained earnings, and cash flows for the year then ended, and have issued our report thereon dated March 5, 20X3, which included an explanatory paragraph that described the litigation discussed in Note X of those statements.

In connection with our audit, nothing came to our attention that caused us to believe that the Company failed to comply with the accounting provisions in sections (1), (2) and (3) of the [name of state regulatory agency]. However, our audit was not directed primarily toward obtaining knowledge of such noncompliance.

This report is intended solely for the information and use of the board of directors and managements of XYZ Company and the [name of state regulatory agency] and is not intended to be and should not be used by anyone other than these specified parties.

22     When the auditor's report on compliance with contractual agreements or regulatory provisions is included in the report that expresses the auditor's opinion on the financial statements, the last two paragraphs of this report are examples of the paragraphs that should follow the opinion paragraph of the auditor's report on the financial statements. 

Circumstances Requiring Explanatory Language in an Auditor's Special Report

.31     Certain circumstances, while not affecting the auditor's unqualified opinion, may require that the auditor add additional explanatory language to the special report. These circumstances include the following:

  1. Lack of Consistency in Accounting Principles. If there has been a change in accounting principles or in the method of their application,35 the auditor should add an explanatory paragraph, including an appropriate title, to the report (immediately following the opinion paragraph) that describes the change and refers to the note to the financial presentation (or specified elements, accounts, or items thereof) that discusses the change and its effect thereon 36 if the accounting change is considered relevant to the presentation. Guidance on reporting in this situation is contained in AS 2820, Evaluating Consistency of Financial Statements.
  2. Going Concern Uncertainties. If the auditor has substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time not to exceed one year beyond the date of the financial statement, the auditor should add an explanatory paragraph, including an appropriate title, after the opinion paragraph of the report only if the auditor's substantial doubt is relevant to the presentation.39
  3. Other Auditors. When the auditor decides to make reference to the report of another auditor as a basis, in part, for his or her opinion, the auditor should disclose that fact in the introductory paragraph of the report and should refer to the report of the other auditors in expressing his or her opinion. Guidance on reporting in this situation is contained in AS 1205, Part of the Audit Performed by Other Independent Auditors.
  4. Comparative Financial Statements (or Specified Elements, Accounts, or Items Thereof). If the auditor expresses an opinion on prior-period financial statements (or specified elements, accounts, or items thereof) that is different from the opinion he or she previously expressed on that same information, the auditor should disclose all of the substantive reasons for the different opinion in a separate explanatory paragraph immediately following the opinion paragraph of the report. Guidance on reporting in this situation is contained in AS 3105.52 and .53. 

As in reports on financial statements prepared in conformity with generally accepted accounting principles, the auditor may add an explanatory paragraph to emphasize a matter regarding the financial statements (or specified elements, accounts, or items thereof). 

35     When financial statements (or specified elements, accounts, or items thereof) have been prepared in conformity with generally accepted accounting principles in prior years, and the entity changes its method of presentation in the current year by preparing its financial statements in conformity with an other comprehensive basis of accounting, the auditor need not follow the reporting guidance in this subparagraph. However, the auditor may wish to add an explanatory paragraph to the report to highlight (1) a difference in the basis of presentation from that used in prior years or (2) that another report has been issued on the entity's financial statements prepared in conformity with another basis of presentation (for example, when cash basis financial statements are issued in addition to GAAP financial statements). 

36     A change in the tax law is not considered to be a change in accounting principle for which the auditor would need to add an explanatory paragraph, although disclosure may be necessary. 

39     See AS 2415, Consideration of an Entity's Ability to Continue as a Going Concern,for a report example when the auditor has substantial doubt about the entity's ability to continue as a going concern.

[Effective pursuant to SEC Release No. 34-81916, File No. PCAOB-2017-01 (October 23, 2017)]