Final answer:
The auditor's report on financial statements prepared on the entity's income tax basis should be titled to differentiate from GAAP, express an opinion on conformity with the tax basis used, and does not need to explain differences from cash basis accounting unless pertinent.
Option 'c' is the correct.
Step-by-step explanation:
When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should be titled so that the financial statements are not confused with statements prepared to conform to generally accepted accounting principles. This is because financial statements prepared on the income tax basis are designed to comply with the rules and regulations of the tax authorities, which can differ significantly from generally accepted accounting principles.
The report should not disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards; instead, the auditor should perform the audit in accordance with such standards and provide an opinion. Moreover, the auditor must express an opinion on whether the statements are presented in conformity with the basis of accounting used.
Financial statements are often prepared on different bases of accounting, and it is imperative that the auditor clarifies which basis applies to the statements in question to avoid any misunderstanding by the users of the financial statements.
Lastly, the auditor's report does not need to include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting unless such information is relevant to the understanding of the basis of accounting used or if there has been a change in the basis of accounting that affects comparability.
The auditor's primary responsibility is to ensure the financial statements are presented in accordance with the applied tax basis, not to provide comparisons with other accounting bases unless otherwise required.