REPORTING ON FINANCIAL

STATEMENTS
Learning Objectives
1. Describe the basic elements of the auditor’s report.
2. Cite the enhancements introduced in the 2016 (new) auditor’s report.
3. Explain the requirements relative to forming an opinion on the financial
statements.
4. Identify the circumstances that would require modifications of auditor’s report
and the effect on the auditor’s opinion.

AUDPRIN 2
Forming an Opinion on Financial Statements
• Auditor shall conclude as to whether reasonable assurance has been obtained about
whether the financial statements, as a whole, are free from material misstatement,
whether due to fraud or error, taking into account
• Auditor’s conclusion re sufficiency and appropriateness of audit evidence obtained
• Auditor’s conclusion on materiality of uncorrected misstatements, individually or
aggregated
• Evaluation of whether the financial statements
• are prepared in all material respects, in accordance with requirements of
applicable financial reporting framework (FRF)
• achieve fair presentation
• adequately refer to or describe applicable FRF

AUDPRIN 3
Forming an Opinion on Financial Statements
• Requirements of applicable FRF
• Adequate disclosure of significant policies selected and applied,
• Consistency of such accounting policies with FRF and their appropriateness
• Reasonableness of accounting estimates
• Relevance, reliability, comparability, and understandability of information
presented in financial statements
• Adequacy of financial statement disclosures to enable users to understand
effect of material transactions on information conveyed in the financial
statements
• Appropriateness of terminologies used in financial statements

AUDPRIN 4
Forms of Opinion
• Unmodified opinion
• auditor concludes that financial statements are prepared, in all material
respects, in accordance with applicable FRF
• Modified opinion
• Auditor concludes that, based on audit evidence obtained, the financial
statements as a whole are not free from material misstatement; or
• Auditor is unable to obtain sufficient appropriate audit evidence to conclude
that the financial statements as whole are free from material misstatement
• Types – qualified, adverse, disclaimer

AUDPRIN 5
New and Revised Auditor Reporting Standards
effective for audits of financial statements for periods ending on or
after December 15, 2016, with early application permitted

widely recognized as the most significant development in auditing in

recent history

intended to enhance the communicative value and relevance of the

auditor’s report

AUDPRIN 6
New and Revised Auditor Reporting Standards
• PSA 700 (Revised), Forming an Opinion and Reporting on Financial Statements
• Includes required elements of auditor’s report and specifies contents of the sections
for the opinion, basis for opinion, management responsibilities and auditor
responsibilities
• PSA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report
• Amendments to clarify how new required reporting elements of PSA 700 (Revised)
are affected when auditor expresses a modified opinion
• PSA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor’s Report
• Amendments to clarify relationship between “emphasis of matter “ paragraphs,
“other matter” paragraphs and key audit matters section of auditor’s report
AUDPRIN 7
New and Revised Auditor Reporting Standards
• PSA 720 (Revised), The Auditor’s Responsibilities Relating to Other Information
• Clarifies auditor’s responsibilities re other information
• Introduces requirement for auditor to include statement in auditor’s report regarding
work performed over other information
• New PSA 701, Communicating Key Audit Matters in the Independent Auditor’s Report
• Establishes requirements and guidance for auditor’s determination and
communication of key audit matters (KAM)
• KAM are selected from matters communicated to those charged with governance
and are required to be communicated in auditor’s reports for audits of financial
statements of listed entities

AUDPRIN 8
New and Revised Auditor Reporting Standards
• PSA 260 (Revised), Communication with Those Charged with Governance
• Amendments to required auditor communications with those charged with governance to
include
• Significant risks identified by auditor, in light of PSA 701
• Circumstances that affect form and content of auditor’s report
• PSA 570 (Revised), Going Concern
• Establishes auditor reporting requirements relating to going concern and illustrates reporting
within auditor’s report in different circumstances
• New requirement to evaluate adequacy of disclosure with respect to requirements of
applicable FRF if events or conditions have been identified that may cast significant doubt on
entity’s ability to continue as going concern but auditor concludes that no material
uncertainty exists

AUDPRIN 9
New Auditor’s Report
• Mandatory for audits of financial statements of listed companies, voluntary application allowed for entities other than listed
entities
o New section to communicate those matters that in auditor’s judgment, were of most significance in the audit of current
period financial statements
o Disclosure of name of engagement partner
• Opinion section to be presented first, followed by Basis for Opinion section, unless law or regulation prescribe otherwise
o Incorporates matters previously contained in introductory paragraph and opinion on the financial statements as previously
contained in the opinion paragraph of the extant PSA 700
o “Basis for Opinion” has to be included regardless of whether a modified opinion is expressed on the financial statements
• Enhanced auditor reporting on going concern
• Affirmative statement about auditor’s independence and fulfillment of relevant ethical responsibilities
• Enhanced description of auditor’s responsibilities and key features of an audit

AUDPRIN 10
 Content Comparison
PSA 700 (Redrafted) • PSA 700 (Revised)
• Title • Title
• Addressee • Addressee
• Introductory paragraph • Opinion
• Management’s Responsibility for the • Basis for Opinion
Financial Statements
• Responsibilities of Management and Those Charged
• Auditor’s Responsibility with Governance for the Financial Statements
• Opinion • Auditor’s Responsibilities for the Audit of the
Financial Statements
• Report on Other Legal and Regulatory
Requirements • Report on Other Legal and Regulatory Requirements
• Auditor’s signature • Auditor’s signature
• Date of the report • Date of the report
• Auditor’s address • Auditor’s address
AUDPRIN 11
PSA 700 (Revised)
• Applies to audit of complete set of general purpose financial statements (those prepared in accordance
with general purpose framework)
• General purpose framework – FRF designed to meet common financial information needs of wide
range of users; may be
• Compliance framework – FRF that requires compliance with the requirements of the framework;
or
• Fair presentation framework – requires compliance with framework and acknowledges
• Explicitly or implicitly that, to achieve fair presentation of FS, it may be necessary for
management to provide disclosures beyond those specifically required by the framework; or
• Explicitly that it may be necessary for management to depart from requirement of framework
to achieve fair presentation of FS; departure expected only in extremely rare circumstances

AUDPRIN 12
Contents of Auditor’s Report
• Title
• Appropriate title such as “Report of Independent Auditor’ affirms that the
auditor has met all relevant ethical requirements regarding independence.
• Addressee
• As required by circumstances of engagement; ordinarily addressed to the
client entity itself, to its stockholders or Board of Directors – auditor’s
ultimate responsibility is to the shareholders rather to its management

AUDPRIN 13
Contents of Auditor’s Report
• First section
• Include auditor’s opinion, and shall have the heading “Opinion”
• Identify the entity whose financial statements have been audited
• State that the financial statements have been audited
• Identify the title of each of the financial statements that comprise the
complete set of financial statements
• Specify the date of , or period covered by the financial statements
• Refer to the notes, including summary of significant accounting policies

AUDPRIN 14
Contents of Auditor’s Report
• Second section
• Directly follow the “Opinion” section, with the heading “Basis for Opinion”
• State that the audit was conducted in accordance with PSAs
• Refer to section of the auditor’s report that describes auditor’s
responsibilities under the PSAs
• Include a statement that the auditor is independent of the entity in
accordance with relevant ethical requirements relating to audit, and has
fulfilled auditor’s other ethical responsibilities
• State whether the auditor believes that the audit evidence obtained is
sufficient and appropriate to provide basis for opinion

AUDPRIN 15
Contents of Auditor’s Report
• Going Concern
• Where applicable, the auditor shall report in accordance with PSA 570
• Key Audit Matters
• Communicate key audit matters in the auditor’s report, for audit of complete
sets of general purpose financial statements of listed entities

AUDPRIN 16
Contents of Auditor’s Report
• Responsibilities of Management and Those Charged with Governance for the
Financial Statements
• Describe management’s responsibility for
• Preparing FS in accordance with applicable FRF and for such internal
control as management determines necessary to enable preparation of FS
that are free from material misstatement, whether due to fraud or error
• Assessing entity’s ability to continue as a going concern and whether use
of going concern basis of accounting is appropriate, and disclosing, if
applicable, matters relating to going concern
• Identify those responsible for oversight of financial reporting process

AUDPRIN 17
Contents of Auditor’s Report
• Auditor’s Responsibilities for the Audit of Financial Statements
• State the objectives of the auditor
• Statement on reasonable assurance
• State that misstatements can arise from fraud or error
• Describe auditor’s responsibilities tailored to reflect specific nature of entity
• Other Reporting Responsibilities
• Addresses situations where the auditor has additional auditing
responsibilities to report on other matters that are supplementary to the
auditor’s responsibility to express an opinion on the financial statements

AUDPRIN 18
Contents of Auditor’s Report
• Auditor’s Signature
• Report should be in writing signed in the name of the audit firm, the personal name of the auditor, or both, as
appropriate.
• Name of Engagement Partner
• Required for audit of listed entities
• Date of Auditor’s Report
• Informs readers that the auditor has considered the effects and events and transactions of which the auditor
became aware and that occurred up to that date
• Date should be no earlier than the date on which the auditor has obtained sufficient appropriate audit
evidence on which to base the opinion on the financial statements.
• Auditor’s Address
• Should name the location in the country where the auditor practices

AUDPRIN 19
PSA 705 (Revised)
• Deals with auditor’s responsibility to issue appropriate report in circumstances when auditor
concludes that modification to auditor’s opinion is necessary
• Modification of opinion required when
• Auditor concludes that, based on audit evidence obtained, financial statements as a whole
are not free from material misstatement, or
• Auditor is unable to obtain sufficient appropriate audit evidence to conclude that financial
statements as a whole are free from material misstatement
• Types of modified opinion
• Qualified opinion
• Adverse opinion
• Disclaimer of opinion

AUDPRIN 20
PSA 705 (Revised)
• Decision on appropriate type depends upon
• nature of matter giving rise to modification
• Financial statements are materially misstated, or
• In case of inability to obtain sufficient appropriate evidence, financial statements may be materially
misstated
• auditor’s judgment about pervasiveness of effects or possible effects of matter on financial statements
• Qualified Opinion
• misstatements, individually or in aggregate, are material, but not pervasive, to financial statements, or
• possible effects on financial statements of undetected misstatements, if any, could be material but not
pervasive

AUDPRIN 21
PSA 705 (Revised)
• Adverse Opinion
• misstatements, individually or in aggregate, are both material and pervasive, to
financial statements
• Disclaimer of opinion
• possible effects on financial statements of undetected misstatements, if any, could
be both material and pervasive
• when in extremely rare circumstances involving multiple uncertainties,
notwithstanding having sufficient appropriate evidence regarding each individual
uncertainty, it is not possible to form an opinion on financial statements due to
possible interaction of uncertainties and their possible cumulative effect on financial
statements

AUDPRIN 22
PSA 705 (Revised)
• Form and Content of Report
• Use appropriate heading for Opinion section
• Qualified Opinion
• Material misstatement: “In our opinion, except for the effects of the matter(s) described in
the Basis for Qualified Opinion section of our report, the accompanying financial statements
present fairly, in all material respects… in accordance with Philippine Financial Reporting
Standards (PFRSs). ”
• Inability to obtain evidence: “In our opinion, except for the possible effects of the matter(s)…:
• Adverse Opinion
• “In our opinion, because of the significance of the matter(s) described in the Basis for Adverse
Opinion section of our report, the accompanying financial statements do not present fairly…
in accordance …”

AUDPRIN 23
PSA 705 (Revised)
• Form and Content of Report
• Disclaimer of Opinion
• “We were engaged to audit the financial statements of ABC Company (the Company),
which comprise the statement of financial position as at December 31, 2019, and the
statement of comprehensive income, statement of changes in equity and statement of
cash flows for the year then ended, and notes to the financial statements, including a
summary of significant accounting policies.

We do not express an opinion on the accompanying financial statements of the

Company. Because of the significance of the matter described in the Basis for Disclaimer
of Opinion section of our report, we have not been able to obtain sufficient appropriate
audit evidence to provide a basis for an audit opinion on these financial statements.”

AUDPRIN 24
PSA 705 (Revised)
• Form and Content of Report
• Amend Basis for Opinion, as appropriate, and within the section, include a
description of matter giving rise to modification
• When auditor disclaims an opinion, following elements are not included in
the auditor’s report
• KAM section, unless required by law or regulation
• Reference to section where auditor’s responsibilities are described
• Statement about whether the audit evidence obtained is sufficient and
appropriate to provide a basis for the auditor’s opinion

AUDPRIN 25
Circumstances Requiring Modification
• Material Misstatements
• Appropriateness of selected accounting policies
• Application of selected accounting policies (method/consistency of application)
• Appropriateness or adequacy of disclosures in financial statements
• Inability to obtain sufficient appropriate audit evidence (scope limitations)
• Client-imposed
• Client did not allow auditor to perform an audit procedure, and auditor was unable to
perform alternative procedures
• Circumstance-imposed
• Beyond control of entity
• Relating to nature or timing of auditor’s work

AUDPRIN 26
Types of Modified Opinion

Auditor’s Judgment About Pervasiveness

of Effects/Possible Effects on Financial
Statements
Nature of Matter Giving Rise
Material but not pervasive Material and pervasive
to Modification
Financial statements are materially
Qualified Adverse
misstated

Inability to obtain sufficient

Qualified Disclaimer
appropriate audit evidence

AUDPRIN 27
KEY POINTS: UNMODIFIED AUDITOR’S
REPORT
• Standard unmodified audit report is issued when:
• Auditor has performed his examination in accordance with generally accepted
auditing standards in the Philippines
• The financial statements are presented in conformity with accounting
principles generally accepted in the Philippines
• There are no circumstances requiring modification

AUDPRIN 28
KEY POINTS: MODIFIED AUDITOR’S REPORT
• Modification occurs when the basic elements of the auditor’s report are not kept intact
• Modifications may or may not affect the auditor’s opinion depending on the matters,
including the levels of materiality, that had come to the attention of the auditor in the
course of his audit examination
• Reasons for departure from wording of standard audit report
• Auditing related – auditor is unable to conduct the audit in accordance with PAS
resulting to scope limitation which may be imposed by the client or prevailing
conditions (qualified or disclaimer)
• Accounting-related – auditor discovers that financial statements contain a departure
from acceptable financial reporting framework (qualified or adverse)
• Auditor not independent – auditor should refrain from expressing an opinion
AUDPRIN 29
KEY POINTS: MODIFIED AUDITOR’S REPORT
• Not affecting the auditor’s opinion
• When auditor considers it necessary to draw users’ attention to
• A matter or matters presented or disclosed in financial statements that
are of such importance that they are fundamental to users’ understanding
of financial statements (Emphasis of matter), or
• Any matter or matters other than those presented or disclosed in the
financial statements that are relevant to users’ understanding of the audit,
the auditor’s responsibilities or the auditor’s report (Other matter)

AUDPRIN 30
KEY POINTS: MODIFIED AUDITOR’S REPORT
• Emphasis of matter paragraph
• Considered necessary by auditor
• Uncertainty relating to future outcome of exceptional litigation or regulatory action
• Significant subsequent event that occurs between date of financial statements and date of auditor’s
report
• Early application (where permitted) of a new accounting standard that has a material effect on the
financial statements
• A major catastrophe that has had, or continues to have, a significant effect on entity’s financial position
• A widespread use of EM paragraph may diminish effectiveness of auditor’s communication about such
matters.
• Other matter paragraph
• Reporting on more than one set of financial statements
• Restriction on distribution or use of auditor’s report

AUDPRIN 31
KEY POINTS: MODIFIED AUDITOR’S REPORT
• Affecting the auditor’s opinion
• Limitation on the scope of the auditor’s work
• Disagreement with management regarding the acceptability of the accounting policies selected, the method
of their application or the adequacy of financial statement disclosures
• Matter is material to the financial statements
• Qualified opinion: There is scope limitation or disagreement with management but not that material or
pervasive as to require a disclaimer of opinion or adverse opinion; “except for” the effects of the matter
to which the qualification relates.
• Disclaimer of opinion: Possible effect of scope limitation is so material and pervasive that auditor has not
been able to obtain sufficient appropriate audit evidence and accordingly is unable to express an opinion
on the financial statements.
• Adverse opinion: Effect of a disagreement is so material and pervasive to the financial statements that
the auditor concludes that a qualification of the report is not adequate to disclose the misleading or
incomplete nature of the financial statements.

AUDPRIN 32
KEY POINTS: MODIFIED AUDITOR’S REPORT
• Scope limitations
• Conditions
• Refusal of client to allow the auditor to perform a procedure that the auditor considers
necessary for the audit
• Circumstances that make gathering of necessary evidence impossible
• Existence of insufficient evidence
• Auditor’s report (qualified vs disclaimer) will depend on
• Degree or extent of limitation
• Ability of the auditor to use alternative methods to obtain sufficient audit evidence
• Management’s role in the limitation

AUDPRIN 33
FURTHER READINGS
1. https://www.ais-cpa.com/4-factors-that-impact-
the-audit-opinion/

2. https://www.pwc.com/im/en/services/Assurance/
pwc-understanding-financial-statement-audit.pdf

3. https://www.pwc.com/mt/en/careers/career-deal-
material/The%20Audit%20Report%20and%20ISA%
20260.pdf

4. https://www2.deloitte.com/content/dam/Deloitte/
ch/Documents/audit/ch-en-audit-new-auditors-
report.pdf

AUDPRIN 34
SELF-TEST QUESTIONS
1. What should the auditor consider and evaluate in determining whether the financial
statements are prepared in all material respects in accordance with the applicable financial
reporting framework?
2. What are the basic elements of the auditor’s report?
3. How is the audit report dated?
4. Give the four basic audit reports which may be issued in an audit engagement. Identify the
situations which warrant the issuance of each type of report.
5. When is an emphasis of matter paragraph used in an audit report?
6. If there is substantial doubt about the entity’s ability to continue as a going concern, what type
of report should be issued? Why?
7. Discuss the changes introduced in the new (2016) auditor’s report.
AUDPRIN 35
LEARNING ACTIVITY
For each of the following independent situations, assume that you are reporting on a client’s
financial statements. Reply as to the type or types of opinion possible in the circumstance:
S Standard unmodified
U Unmodified with explanatory language
Q Qualified
D Disclaimer
A Adverse
Do not read more into the circumstance than what is presented, and do not consider the possibility
of an “emphasis of a matter paragraph” being added to the audit report. Unless stated otherwise,
assume that the information presented is material to the financial statements.

AUDPRIN 36
.

LEARNING ACTIVITY
Situation
1. A company in its first year of existence is valuing inventory at current replacement cost. While you believe that the
inventory costs do not approximate replacement costs, these costs do not approximate any PAS inventory valuation
method.
2. An entity changes its depreciation method for production equipment from the straight-line to the units-of-production
method based on hours of utilization. You concur with the change.
3. A client has changed from the method it uses to calculate post-employment benefits from one acceptable method to
another one. The effect of the change is immaterial this year, but expected to be material in the future.
4. You have discovered that a client has made illegal pay offs to a candidate for president of the Philippines. You are unable
to determine the amounts associated with the payoffs because of the client’s inadequate record retention policies. The
client has added a note to the financial statements to describe this all, and has stated that the amounts of the payments
are not determinable.
5. In auditing the long-term investments account of a new client, you find that a large contingent liability exists that is
material to the consolidated company. It is probable that this contingent liability will be resolved with a material loss in
the future, and this amount is reasonably estimable at P2 million. Although no adjusting entry has been made, the client
has provided a note to the financial statements that describes the matter in detail and includes the P2 million estimate in
that note. AUDPRIN 37
AUDPRIN 38