Final answer:
Auditors must include a paragraph clarifying the basis of accounting used when reporting on financial statements prepared for income tax purposes, stressing that they differ from GAAP and highlighting the potential for misinterpretation by users not familiar with this basis.
Step-by-step explanation:
When an auditor is reporting on financial statements that are prepared using a basis of accounting for income tax purposes, they should include a specific paragraph. This paragraph is necessary to explain that the financial statements are prepared on a basis of accounting that is different from generally accepted accounting principles (GAAP). The auditor's report should include a paragraph that indicates the basis of accounting used and that the financial statements may not be suitable for those who are unaware of this basis. It is important as users of these financial statements might misinterpret the financial position and results if they assume the statements are prepared under GAAP when, in fact, they follow tax basis accounting.