Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

What is required to be disclosed by a reporting accountant for financial statements presented on a tax basis?

1. How prior periods were reported

2. The risks of the specific transaction being reported

3. The differences from GAAP compliance

4. The income tax accounting principles followed

The correct answer is: The income tax accounting principles followed

In the context of financial statements presented on a tax basis, the requirement for disclosure centers around the income tax accounting principles that have been followed in the preparation of those financial statements. This is crucial because tax basis reporting can differ significantly from Generally Accepted Accounting Principles (GAAP). By disclosing the income tax accounting principles, the reporting accountant helps users of the financial statements understand how these principles affect the reported figures and the overall financial position of the entity. This transparency is essential for stakeholders, including investors, creditors, and tax authorities, as it provides insight into the entities’ tax obligations and the basis of their financial performance from a tax perspective. The focus on tax basis accounting inherently means that the reporting accountant does not need to delve into how prior periods were reported, the risks of specific transactions, or the differences from GAAP compliance in the same way. Instead, the clarity surrounding the principles guiding the tax basis presentation is of utmost priority, enhancing the reliability and integrity of the financial statements in the context they are intended for.