ISA 805 (Revised) DEALS with Special Considerations in the APPLICATION of ISAs 100-700 to an audit of a ‘Single Financial Statement’ or of a ‘Specific Element’, ‘Account’ or ‘Item’ of a Financial Statement.
International Standards on Auditing
1. Overview & Background
ISA 805, titled “Special Considerations – Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement,” is an International Standard on Auditing issued by the International Auditing and Assurance Standards Board (IAASB). It deals with the unique considerations auditors face when the engagement covers less than a complete set of general purpose financial statements.
The standard was revised as part of the IAASB’s Clarity Project and became effective for audits of financial statements for periods ending on or after December 15, 2009. Its purpose is to complement the general principles in ISA 200 and the audit reporting guidance in ISA 700, while addressing the specialized circumstances that arise when a narrower scope of financial information is audited.
ISA 805 recognizes that while the general principles and requirements of auditing still apply, additional and specific guidance is needed when an auditor is engaged to report on a single financial statement or specific element, rather than a complete set of financial statements.
Issuing Body
International Auditing and Assurance Standards Board (IAASB), an independent standard-setting body under the International Federation of Accountants (IFAC).
Effective Date
Applies to audits of financial statements for periods ending on or after December 15, 2009.
Sister Standard
ISA 805 is closely linked to ISA 800 (special purpose frameworks) and ISA 810 (engagements to report on summary financial statements).
Global Reach
Adopted in over 100 jurisdictions worldwide, either directly or as the basis for national auditing standards.
2. Scope and Application
ISA 805 applies when an auditor is engaged to audit and report on one of two types of financial information:
Type A – A Single Financial Statement
This covers engagements to audit a standalone financial statement prepared in accordance with a financial reporting framework. Examples include:
- A single balance sheet (statement of financial position)
- A single income statement (statement of profit or loss)
- A single cash flow statement
- A statement of changes in equity prepared as a standalone document
Type B – Specific Elements, Accounts, or Items
This covers engagements where the subject matter is narrower than a full financial statement. Examples include:
- The accounts receivable balance and related disclosures
- A schedule of royalty revenues for a specific licensing agreement
- The provision for income taxes
- A schedule of committed expenditures under a grant or contract
- A summary of property, plant & equipment for regulatory purposes
ISA 805 does not apply when the auditor is reporting on summary financial statements derived from audited financial statements, that scenario is governed by ISA 810. Nor does it apply to engagements to report on general purpose financial statements, which fall under ISA 700.
3. Objectives of ISA 805
The standard sets out two primary objectives for the auditor in an ISA 805 engagement:
| Objective | Description |
|---|---|
| Address Special Considerations | To address the special considerations in applying ISAs when the audit covers a single financial statement or specific elements, accounts, or items including when undertaking such an audit simultaneously with an audit of the entity’s complete financial statements. |
| Appropriate Reporting | To form an opinion on whether the single financial statement or specific element is prepared, in all material respects, in accordance with an applicable financial reporting framework; and to report in accordance with the auditor’s findings. |
4. Key Requirements
ISA 805 sets out several specific requirements that overlay the general ISA framework. These requirements address the unique features of narrower-scope audit engagements:
4.1 Applicability of All ISAs
The auditor must comply with all ISAs relevant to the audit. The entire suite of International Standards on Auditing applies, not just ISA 805 itself. The auditor identifies and applies those ISAs that are relevant given the nature of the engagement.
4.2 Acceptance of the Engagement
Before accepting or continuing an ISA 805 engagement, the auditor must give special consideration to whether the applicable financial reporting framework is acceptable and whether engagement acceptance is appropriate given the circumstances. This is particularly important when:
- The financial reporting framework is determined by law or regulation
- The single statement or specific element is intended for use in particular circumstances by identified users
- The auditor is also engaged to audit the complete financial statements
4.3 Forming the Opinion
When expressing an opinion on a single financial statement or specific element, the auditor determines the applicable financial reporting framework and evaluates whether the subject matter is prepared in all material respects in accordance with it.
When auditing a specific element, materiality is determined separately for that element. The materiality level is likely to be significantly lower than the materiality used for the entity’s complete financial statements, since users of the element-specific report will focus on the amounts and disclosures in that narrower scope.
4.4 Simultaneous Engagements
When the auditor is engaged to audit both the complete financial statements and a single financial statement or specific element of those same financial statements, the auditor may express separate opinions in separate reports. Key considerations include:
- A modified opinion on the complete financial statements may affect the opinion on the single statement or element
- An adverse or disclaimer opinion on complete financial statements should ordinarily preclude expressing an unmodified opinion on a single financial statement derived from those statements
- The auditor considers the effect of any modifications on the related element or statement
4.5 Auditor’s Report
The auditor’s report on an ISA 805 engagement must include all elements required by ISA 700 (Forming an Opinion and Reporting on Financial Statements), adapted as appropriate for the specific nature of the engagement. Key adaptations include identifying the specific financial statement or element being reported upon and describing the applicable financial reporting framework.
| Requirement Area | Nature | Standard Reference |
|---|---|---|
| Apply all relevant ISAs | Required | ISA 805.6 |
| Evaluate acceptability of financial reporting framework | Required | ISA 805.8 |
| Determine separate materiality for the element | Required | ISA 805.9 |
| Consider impact of modified opinion on complete FS | Required | ISA 805.13–14 |
| Issue separate report for single FS / specific element | Required | ISA 805.15 |
| Reference to complete financial statements report | Recommended | ISA 805 App 1 |
5. Applicable Financial Reporting Frameworks
A critical step in any ISA 805 engagement is identifying the Applicable Financial Reporting framework – the rules and principles against which the single statement or specific element is to be evaluated. This may be:
General Purpose Frameworks
IFRS, national GAAP, or other frameworks that are designed to meet the common financial information needs of a wide range of users.
Special Purpose Frameworks
Cash basis, tax basis, regulatory basis, or contractual basis frameworks used when the audience is limited and defined.
Contractually Defined
Basis of preparation defined by contract or agreement, such as loan covenants, grant agreements, or concession contracts.
The auditor evaluates whether the framework is acceptable — considering factors such as whether it is established by an authorized or recognized body, its relevance to the information being presented, and whether it will result in information that is reliable and relevant to users.
6. The Auditor’s Report Under ISA 805
The auditor’s report is the primary output of an ISA 805 engagement. It must be clearly drafted to distinguish it from a report on complete financial statements. The report under ISA 805 typically includes the following elements:
- Title: Clearly indicating it is an independent auditor’s report
- Addressee: The appropriate party as required by the engagement terms
- Introductory paragraph: Identifying the specific financial statement or element audited and the applicable financial reporting framework
- Management’s responsibility paragraph: Describing management’s responsibility for preparing the statement or element
- Auditor’s responsibility paragraph: Stating that the audit was conducted in accordance with ISAs and the applicable ISA 805 requirements
- Opinion paragraph: The auditor’s conclusion expressed clearly and without ambiguity
- Emphasis of Matter or Other Matter paragraphs: Where applicable (ISA 706)
- Restriction on use: Where necessary, alerting readers that the report is intended only for specific users
- Signature, date, and location
When the auditor also audits the entity’s complete financial statements, the report under ISA 805 should clearly distinguish itself. Including an Other Matter paragraph referencing the separate report on the complete financial statements helps users understand the relationship between the two engagements and avoids misunderstanding the scope of each report.
7. Relationship with Other ISAs
ISA 805 does not stand alone, it operates within the broader ISA framework and must be applied alongside the following standards, among others:
| Standard | Topic | Relevance to ISA 805 |
|---|---|---|
| ISA 200 | Overall Objectives of the Auditor | Provides overarching principles that apply to all audit engagements |
| ISA 210 | Agreeing the Terms of Audit Engagements | Engagement letter considerations for ISA 805 engagements |
| ISA 320 | Materiality in Planning and Performing | Separate materiality thresholds apply to the single element |
| ISA 700 | Forming an Opinion and Reporting | Reporting requirements adapted for ISA 805 engagements |
| ISA 705 | Modifications to the Opinion | Modified opinions and their cascading effect across reports |
| ISA 706 | Emphasis of Matter / Other Matter Paragraphs | Communication of matters relevant to users of the ISA 805 report |
| ISA 800 | Special Purpose Financial Statements | Often applies alongside ISA 805 when the framework is special purpose |
8. Practical Challenges & Considerations
Determining Appropriate Materiality
One of the most significant practical challenges under ISA 805 is the determination of materiality for the specific element or single statement. Because the focus is narrow, a misstatement that would be immaterial to the complete financial statements could be highly material from the perspective of the element-specific report. Auditors must exercise professional judgment to set a threshold that is meaningful to users of that specific report.
Risk of Unintentional Omission
When applying the full suite of ISAs to a narrower engagement, auditors must carefully consider which standards are relevant and ensure none are inadvertently overlooked. The risk of omission is higher in ISA 805 engagements than in standard audits simply because the bespoke nature of the engagement may make it less routine for the audit team.
Interaction with Modified Opinions
When an auditor expresses an adverse opinion or a disclaimer of opinion on the entity’s complete financial statements, expressing an unmodified opinion on a single financial statement that is part of those statements would create a misleading impression. ISA 805 requires the auditor to carefully evaluate this scenario and, ordinarily, to not issue a clean opinion on the element if a pervasive adverse or disclaimer opinion has been issued on the complete set.
Adequacy of Disclosures
A single financial statement or specific element may require disclosures that would ordinarily appear in other parts of the complete financial statements. Auditors must ensure that the presented financial information includes sufficient disclosures to avoid being misleading particularly when the applicable framework requires notes and disclosures to accompany the information.
When the financial reporting framework for an ISA 805 engagement is a special purpose or contractual basis, the auditor’s report should include an Other Matter paragraph restricting its use to the intended users. Failing to include this restriction can expose the auditor to claims from third parties who relied on the report without understanding its limited purpose.
9. Frequently Asked Questions
(Qualified) Chartered Accountant – ICAP
Master of Commerce – HEC, Pakistan
Bachelor of Accounting (Honours) – AeU, Malaysia