Chapter 25

Procedures and Reports on Special Purpose Audit Engagement

What is a special purpose financial statement?

- FS that comply with a financial reporting framework designed to meet the needs of specific
users. (PSA 800)

Examples of special purpose frameworks are:

1. A tax basis of accounting for a set of financial statements that accompany an entity’s tax return.

2. The cash receipts and disbursements basis of accounting for cash flow information.

3. The financial reporting provisions established by a regulator to meet the requirements of that
regulator.

4. The financial reporting of a contract, such as a bond indenture, a loan agreement, or a project grant.

A. Audit of FS Prepared in Accordance with Special Purpose Frameworks

Requirements:

 The auditor should determine the acceptability of the framework. In an audit of special purpose
financial statements, the auditor shall obtain understanding of:

a) Purpose of FS

b) Intended users

c) Steps taken by the management to determine that the applicable framework is

acceptable in the circumstances.

 In planning and performing an audit of SPFS, the auditor shall determine whether application of
PSAs requires special consideration in the circumstances of the engagement.

 An auditor is required to obtain an understanding of the entity’s selection and application of

accounting policies.

 When forming an opinion and reporting on SPFS, the auditor shall apply the requirements in PSA
700.

 PSA 790 requires the auditor to evaluate whether the financial reporting statements adequately
refer to or describe the applicable financial reporting framework.

 The auditor’s report on special purpose financial statement should:

a) Describe the purpose of which the financial statements are prepared and, if necessary,
the intended users.
 b) Explanation of management’s responsibility for financial statements.
c) (c) Include an Emphasis of Matter paragraph, alerting users that the FS are prepared in
accordance with special purpose framework, thus, it is not suitable for another purpose.

Illustration 1 — An Auditor’s Report on a Complete Set of Financial Statements Prepared in Accordance

with the Cash Basis of Accounting

Circumstances include the following:

• The financial statements have been prepared by management of the entity in accordance with
the cash basis of accounting (that is, a special purpose framework).
Management has a choice of financial reporting frameworks.1

Independent Auditor's Report

[Appropriate Addressee]

Report on the Audit of Financial Statement

Opinion

We have audited the financial statements of ABC Partnership, which comprise the statement of assets
and liabilities arising from cash transactions as of December 31, 20X1, and the related statement of
revenue collected and expenses paid for the year then ended, and the related notes to the financial
statements.

In our opinion, the accompanying financial statements present fairly, in all material respects, the assets
and liabilities arising from cash transactions of ABC Partnership as of December 31, 20X1, and its
revenue collected and expenses paid during the year then ended in accordance with the cash basis of
accounting described in Note X.

Basis for Opinion

We conducted our audit in accordance with auditing standards generally accepted in the Philippines
(GAAP). Our responsibilities under those standards are further described in the Auditor's Responsibilities
for the Audit of the Financial Statements section of our report. We are required to be independent of
ABC Partnership, and to meet our other ethical responsibilities, in accordance with the relevant ethical
requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit opinion.

Emphasis of Matter — Basis of Accounting

We draw attention to Note X of the financial statements, which describes the basis of accounting. The
financial statements are prepared on the cash basis of accounting, which is a basis of accounting other
than accounting principles generally accepted in the Philippines. Our opinion is not modified with
respect to this matter.
Responsibilities of Management for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in
accordance with the cash basis of accounting described in Note X, and for determining that the cash
basis of accounting is an acceptable basis for the preparation of the financial statements in the
circumstances.

Management is also responsible for the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of financial statements that are free from material
misstatement, whether due to fraud or error.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error, and to issue an auditor's report
that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute
assurance and therefore is not a guarantee that an audit conducted in accordance with GAAP will always
detect a material misstatement when it exists. The risk of not detecting a material misstatement
resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal control. Misstatements are
considered material if there is a substantial likelihood that, individually or in the aggregate, they would
influence the judgment made by a reasonable user based on the financial statements.

In performing an audit in accordance with GAAP, we:

•Exercise professional judgment and maintain professional skepticism throughout the audit.

•Identify and assess the risks of material misstatement of the financial statements, whether due to
fraud or error, and design and perform audit procedures responsive to those risks. Such procedures
include examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of ABC Partnership’s internal control. Accordingly, no such opinion is expressed.

 Evaluate the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluate the overall presentation of the
financial statements.

• Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that
raise substantial doubt about ABC Partnership's ability to continue as a going concern for a reasonable
period of time.

We are required to communicate with those charged with governance regarding, among other matters,
the planned scope and timing of the audit, significant audit findings, and certain internal control-related
matters that we identified during the audit.

Report on Other Legal and Regulatory Requirements

[Form and content of this section of the auditor's report will vary depending on the nature of the
auditor's other reporting responsibilities.]

[Signature of the auditor's firm]

[City and state where the auditor's report is issued]

[Date of the auditor's report]

B. Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial
Statement

Examples of specific elements, accounts or items of a Financial Statement:

• Accounts receivable, allowance for doubtful accounts, inventory, liability for accrued benefits of
a private pension plan, the recorded value of identified intangible asset, or the liability for
“incurred but not reported” claims in an insurance portfolio, including related notes.

• A schedule of externally managed assets and income of a private pension plan, including related
notes.

• A schedule of net intangible assets, including related notes.

• A schedule of disbursements in relation to lease property, including explanatory notes.

• A schedule of profit participation or employee bonuses, including explanatory notes.

Requirements:

 The auditor is required to comply with all PSAs relevant to the audit.

 The auditor is required to determine the acceptability of the financial reporting framework
applied in the preparation of the financial statements.

 The auditor should consider whether the expected form of opinion is appropriate in the
circumstances.

 The auditor shall adapt all PSAs relevant to the audit as necessary in the circumstances of the
engagement.

 The auditor shall apply the requirements in PSA 700.

 The auditor shall express a separate opinion if he/she have audited the entity’s complete set or
single financial statements.

 If the opinion of the auditor is modified, or it contains an Emphasis of Matter or an Other Matter
paragraph, the auditor shall determine the effect that this may have on the auditor’s report on a
single financial statement.
  PSA 705 does not permit the auditor to include in the auditor’s report an unmodified opinion on
a single or specific financial statement that forms part of the complete set of financial statement
which was concluded as adverse or disclaimer of opinion.

 The above statement is only applicable or appropriate if and only if:

(a) The auditor is not prohibited by law or regulation

(b) That unmodified opinion for a single financial statement is not published together with the
report containing an adverse opinion.

(c) That specific element does not constitute a major portion of the entity’s complete set of
financial statement.

Illustration 2 — An Auditor’s Report on a Single Financial Statement Prepared in Accordance with a

Special Purpose Framework

Circumstances include the following:

•Audit of a statement of cash receipts and disbursements (that is, a single financial statement).

•The financial statement has been prepared by management of the entity in accordance with
the cash basis of accounting (a special purpose framework) to respond to a request for cash flow
information received from a creditor.

• Management has a choice of financial reporting frameworks.

Independent Auditor's Report

[Appropriate Addressee]

Report on the Audit of the Financial Statement

Opinion

We have audited the statement of cash receipts and disbursements of ABC Company for the year ended
December 31, 20X1, and the related notes (the financial statement).

In our opinion, the accompanying financial statement presents fairly, in all material respects, the cash
receipts and disbursements of ABC Company for the year ended December 31, 20X1, in accordance with
the cash basis of accounting described in Note X.

Basis for Opinion

We conducted our audit in accordance with auditing standards generally accepted in the Philippines
(GAAP). Our responsibilities under those standards are further described in the Auditor's Responsibilities
for the Audit of the Financial Statement section of our report. We are required to be independent of
ABC Company and to meet our other ethical responsibilities, in accordance with the relevant ethical
requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit opinion.

Emphasis of Matter — Basis of Accounting

We draw attention to Note X to the financial statement, which describes the basis of accounting. The
financial statement is prepared on the cash basis of accounting, which is a basis of accounting other than
accounting principles generally accepted in the Philippines. Our opinion is not modified with respect to
this matter.

Responsibilities of Management for the Financial Statement

Management is responsible for the preparation and fair presentation of the financial statement in
accordance with the cash basis of accounting described in Note X, and for determining that the cash
basis of accounting is an acceptable basis for the preparation of the financial statement in the
circumstances.

Management is also responsible for the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of the financial statement that is free from material
misstatement, whether due to fraud or error.

Auditor’s Responsibilities for the Audit of the Financial Statement

Our objectives are to obtain reasonable assurance about whether the financial statement as a whole is
free from material misstatement, whether due to fraud or error, and to issue an auditor's report that
includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance
and therefore is not a guarantee that an audit conducted in accordance with GAAP will always detect a
material misstatement when it exists. The risk of not detecting a material misstatement resulting from
fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of certain internal control. Misstatements are considered
material if there is a substantial likelihood that, individually or in the aggregate, they would influence
the judgment made by a reasonable user based on the financial statement.

In performing an audit in accordance with GAAP, we:

•Exercise professional judgment and maintain professional skepticism throughout the audit.

•Identify and assess the risks of material misstatement of the financial statement, whether due to fraud
or error, and design and perform audit procedures responsive to those risks. Such procedures include
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statement.

•Obtain an understanding of internal control relevant to the audit in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of ABC Company’s internal control. Accordingly, no such opinion is expressed.

 Evaluate the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluate the overall presentation of the
financial statement.
•Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that
raise substantial doubt about ABC Company's ability to continue as a going concern for a reasonable
period of time.

We are required to communicate with those charged with governance regarding, among other matters,
the planned scope and timing of the audit, significant audit findings, and certain internal control–related
matters that we identified during the audit.

Report on Other Legal and Regulatory Requirements

[The form and content of this section of the auditor's report would vary depending on the nature of the
auditor's other reporting responsibilities.]

[Signature of the auditor's firm]

[City and state where the auditor's report is issued]

[Date of the auditor's report]