THE AUDITOR’S REPORT 0N

FINANCIAL STATEMENTS
Bonalos, Renz Ryan
Esco, Vienge A.
Fullido, Jhaymart
 Auditor’s Report on Financial Statement

Modification Key Audit Special

Emphasis of
Unmodified Matters and Report on
to the Matter & Other Purpose
Report Other Group FS
Opinion Matter Paragraphs
Information FS
Objective of an audit of Financial
Statement
THE OBJECTIVE OF AN AUDIT OF FINANCIAL STATEMENTS IS TO ENABLE THE AUDITOR
TO EXPRESS AN OPINION ABOUT WHETHER THE FINANCIAL STATEMENTS ARE
PREPARED, IN ALL MATERIAL RESPECTS, IN ACCORDANCE WITH THE APPLICABLE
FINANCIAL REPORTING FRAMEWORK.

THE FINANCIAL REPORTING FRAMEWORK PROVIDES A CONTEXT FOR THE AUDITOR’S

EVALUATION OF THE FAIR PRESENTATION OF THE FINANCIAL STATEMENTS.
 General purpose financial statements may be:
 Prepared using either “compliance framework” or
 “fair presentation framework”.
is used to refer to a financial reporting framework that requires compliance with the requirements of
the framework and:
(i) Acknowledge explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be necessary
for management to provide disclosures beyond those specifically required by the framework; or
(ii) Acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework
to achieve fair presentation of the financial statements.

 In contrast, “compliance framework”

 is used to refer to a financial reporting framework that requires compliance with the requirements of the framework,
but does not contain the acknowledgements in (i) or (ii) mentioned above.
PSA 700 requires the auditor’s report to contain a clear expression of the auditor’s opinion on
the financial statements. In forming this opinion, the auditor’s should evaluate whether the
financial statements taken as a whole are free from material misstatement. The auditor must
form judgement as to whether:

 The accounting policies selected and applied are consistent with the financial reporting
framework and are appropriate in the circumstances;
 The accounting estimates made by management are reasonable in the circumstances;
 The information presented in the financial statements; including accounting policies, is
relevant, reliable, comparable and understandable; and
 The financial statement provide sufficient disclosures to enable user to understand the
effect of material transactions and events conveyed in the financial statement.
THE UNMODIFIED REPORT
 The most common type of auditor’s report contains a clear opinion or unmodified
opinion. This types of opinion is issued when the auditor concludes, based on audit
evidence obtained, that the financial statements are presented fairly, in all
material respects in accordance with the applicable financial reporting framework.

 When the audit is conducted in accordance with PSAs, uniformity in the wording
of the auditor’s report is required. The accountancy profession has been deemed
essential to standardize the format and content of the auditor’s report in order to
enhance the credibility of the report and promote the reader’s understanding of
the report. In addition, uniformity in reporting also alerts the readers in
circumstances where the auditor expresses an audit report that contains modified
opinions.
BASIC ELEMENT OF THE
UNMODIFIED REPORT
PSA 700 sets out the following requirements relating to the elements of the unmodified report:
 Title
 Addressee
 Auditor’s Opinion
 Basis for Opinion
 Responsibilities for the Financial Statements
 Auditor’s Responsibilities for the Audit of the Financial Statements
 Other Reporting Responsibilities
 Auditor’s signature
 Auditor’s address
 Date of the report
 1. Title
The auditor’s report must have a title that clearly indicates that it is
report of an independent auditor. This is done in order to :

 to distinguish the auditor’s report from the reports that might be

issued by others; and
 to emphasize the independence of the auditor with respect to the
client being audited.
 2. Addressee
 The report should be addressed to those parties whom the report is
prepared. Ordinarily the audit report is addressed to the shareholders or the
board of directors of the entity whose financial statements are being audited.

 It would not be appropriate for the auditor to address the report to the
members of management.

 As a regulatory requirement, if the audit report accompanying the FS is to be

filed with regulatory agencies, the Philippine Securities and Exchange
Commission (SEC) requires the auditor’s report to indicate the complete
mailing address of the client.
 3. Auditor’s Opinion
 To give more prominence on the auditor’s opinion, the opinion of the auditor is placed in
the first section of the auditor’s report. This section shall have the heading “ Opinion”
and shall:
a. identify the name of the entity whose financial statements have been audited;
b. state that the financial statements have been audited;
c. identify the title of each of the financial statements audited including the date and
period covered by the financial statements; and
d. refer to the summary of significant accounting policies and explanatory notes.
e. Express an opinion on the financial statements stating that:
“In our opinion, the accompanying financial statements present fairly, in all material
respects, […] in accordance with [the applicable financial reporting framework].
 4. Basis for Opinion
 This part of the report describes the framework for an audit that enables the
auditor to express an opinion on the financial statements. This shall be
presented immediately after the Opinion section and shall:
a. State that the audit was concluded in accordance with the Philippine
Standards on Auditing;
b. Refer to the section of the auditor’s report that describes the auditor’s
responsibilities under the PSAs;
c. Include a statement that the auditor is independent of the entity and has
fulfilled the auditor’s ethical responsibilities; and
d. State whether the auditor believes that the audit evidence the auditor has
obtained is sufficient and appropriate to provide a basis for the auditor’s
opinion.
EXAMPLE:
 5. Responsibilities for the Financial
Statements
 The auditor’s report shall have a section with a heading “Responsibilities of Management and Those
Charged with Governance for the Financial Statements”. This section shall describe:

a. management’s responsibility for the preparation and fair presentation of the financial
statements in accordance with the applicable financial reporting framework, and for such internal control
necessary to enable the preparation of financial statements that are free from material misstatements;
b. responsibility of the management is assessing the entity’s ability to continue as a going concern and
whether the use of the going concern basis of accounting is appropriate as well as disclosing, if applicable,
matters relating to going concern; and
c. the responsibility of those charged with governance for overseeing the financial reporting process.
EXAMPLE:
 6. Auditor’s Responsibilities for the
Audit of the Financial Statement
 The auditor’s report shall include a section with a heading “Auditor’s
Responsibilities for the Audit of the Financial Statements” and this shall:
a. State that the objective of the auditor are to:
 Obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatements whether due to fraud or error; and
 Issue a report that includes the auditor’s opinion.

b. State that reasonable assurance in a high level assurance but is not a

guarantee that an audit conducted in accordance with PSAs will always detect a
material misstatement when it exists; and
6. Auditor’s Responsibilities for the Audit of
the Financial Statement
c. State that misstatement can arise from fraud and error, and either:
 Describe that they are considered material if, individually or in aggregate, they
could reasonably expected to influence the economic decisions of users taken
on the basis of the financial statements; or
 Provide a definition or description of materiality in accordance with the
applicable financial reporting framework.

d. State that, as part of the audit in accordance with PSAs, the auditor exercises
professional judgment and maintains professional skepticism throughout the audit;
and
 6. Auditor’s Responsibilities for the
Audit of the Financial Statement
e. Describe an audit by stating that the auditor’s responsibilities are:
 To identify and assess the risks of material misstatement of financial
statements.
 To obtain an understanding of internal control relevant to the audit in order to
design appropriate audit procedures.
 To evaluate the appropriateness of the accounting policies used and the
reasonableness of the accounting estimates and related disclosures.
 To conclude on the appropriateness of the management’s use of the going
concern basis of accounting.
 To evaluate the fair presentation of the financial statements
6. Auditor’s Responsibilities for the
Audit of the Financial Statement
The description of the auditor’s responsibilities in the auditor’s report may be presented
in the following ways:
 Within the body of the auditor’s report;
 Within an appendix to the auditor’s report; or
 By a specific reference to the location of such a description on the website of the
Board of Accountancy or the Auditing and Assurance Standards Council.
f. State that the auditor communicates with those charged with governance the
planned scope and timing of the audit and significant audit findings including any
significant deficiencies in internal control identified during the audit.
7. Other Reporting Responsibilities

 Auditor may have additional responsibilities to report on other matters that are
supplementary to the auditor’s responsibility to report on the financial statements
information to comply with the requirements of the BIR Revenue Regulation No. 15-
2010.
 under PSA. For example, auditors are required to report on supplementary If the auditor’s
report contains a separate section on other reporting responsibilities, the auditor’s report
on financial statements should have a sub-title “Report on the Audit of the Financial
Statements” to clearly distinguish the auditor’s responsibility to report on the financial
statements from the auditor’s other reporting responsibilities
7. Other Reporting Responsibilities
As a minimum, the auditor should inquire from management how the supplementary information was
prepared; determine whether the supplementary information is consistent with the financial statements
and the auditor’s overall knowledge of the entity; and consider whether there is a need for client
representation letter to make reference to the supplementary information.
8. Auditor’s signature
The report should be signed in the name of the audit firm and/or the personal name of the
auditor as appropriate. For financial statements be submitted to SEC, Securities Regulations

Code requires that the auditor’s report be signed in the personal name of the partner.

9. Auditor’s address
The auditor’s report should name the location in the jurisdiction where the auditor
maintains his office.
10. Date of the report
 The date of the report is important because this is the date when the auditor’s responsibility for
subsequent events ends. This date informs the reader that the auditor has considered the
financial statement effects of subsequent events that occurred up to the date of the auditor’s
report. At this date, the auditor must have completed all essential audit procedures to provide a
basis for his opinion. The auditor is not ordinarily required to carry out any audit procedures after
the date of the report.
 Since the auditor’s opinion is provided on the financial statements that are the responsibility of
management, the auditor is not in a position to conclude that sufficient appropriate audit evidence
has been obtained until the financial statements have been prepared and management has
accepted responsibility for them. Consequently, the auditor cannot date the auditor’s report
earlier than the date of the approval of the financial statements. In fact, most auditors use the
date of the approval of the financial statements as the date of their audit reports.
Modifications to the Opinion
 The unmodified opinion is issued only when the auditor is satisfied that
1. The financial statements have been prepared in accordance with the applicable
financial reporting framework such as PFRS; and
2. The auditor was able to conduct the audit in accordance with PSA.

 Failure to meet any of the above requirements will cause the auditor to modify his
opinion on the financial statements.
 Material Misstatement/
Departure from PFRS
 Fair presentation of the financial statements is presumed to have been achieved
whenever the financial statements are presented in accordance with the applicable
financial reporting framework. Needless to say, any departure from the specific
requirements of the reporting framework will cause the financial statements to
contain material misstatement.

 A material misstatement of the financial statements may arise from:

1. Inappropriate accounting policy selected;
2. Misapplication of selected accounting policy; or
3. Inappropriate of inadequate disclosure.
 Scope limitation
 Scope limitation arises when the auditor is unable to perform necessary audit
procedures required by PSA or the auditor is unable to obtain sufficient appropriate
evidence about an assertion because of the restrictions imposed by the management or
because of the limitations brought about by the circumstances.
Client Imposed Scope Limitation
 Management sometimes prevents the auditor from performing certain audit procedures which are
essential to support the auditor’s opinion.
 When the auditor believes that such limitation is likely to result to a modification of the opinion
on the financial statements, the auditor should request the management to remove the
limitation.
 Failure to obtain sufficient appropriate evidence will cause the auditor to:
1. Express a qualified opinion if the effect is material but not pervasive; or
2. If the effect is both material and pervasive, the auditor may resign from the engagement or
disclaim an opinion on the financial statements.
Circumstance Imposed Scope Limitation

 During the audit of financial statements, the auditor may encounter circumstances that may
affect his ability to obtain sufficient appropriate evidence. Circumstance imposed scope
limitations can be either:
1. due to the nature or timing of the auditor’s work, like when the auditor is appointed
to audit the financial statements of a client only after the client’s fiscal year has ended; or
2. due to circumstances that are beyond the control of the entity, like when the client’s
accounting records are not adequate.
Materiality and Pervasiveness
Consideration
 Determining the appropriate audit opinion to express requires a great deal of
professional judgement. In making this decision, both materiality and
pervasiveness of effect on financial statements should be taken into
consideration.

 If the magnitude of misstatement is significant enough to affect the readers of

the financial statements, but not enough to overshadow the fair presentation of
the financial statements taken as a whole, the auditor would most likely
express a qualified opinion.
Materiality and Pervasiveness
Consideration
 On the other hand, if the auditor believes that the misstatement is highly material and
there are several items in the financial statements that are affected by the misstatement
as to render the overall financial misstatement materially misleading, the auditor
would most likely express an adverse opinion.
 For example, an auditor may conclude that a material error in inventory could have a
pervasive effect on the financial statements because inventory errors affect a number
of financial statement items such as cost of sales, gross profit, income tax expense, net
income, asset, liability and equity accounts
 Modification to the Opinion

Material Misstatement Scope Limitation

Material but not Material and Material but not Material and
Pervasive Pervasive Pervasive Pervasive

Qualified Adverse Qualified Disclaimer

Opinion Opinion Opinion of Opinion
Modification of the Auditor’s Report

 As mentioned earlier, the consistency in the auditor’s report helps promote

users’ understanding of the report and it helps alert users about unusual
circumstances when they occur. Although uniformity in the wording of a
modified opinion and in the description of the basis for the modification may not
be possible, consistency in both the form and content of the auditor’s report
is desirable even when issuing modified reports. PSA 705 provides clear
guidelines on how the report should be modified when the auditor expresses
modified opinions.
Modification of the Auditor’s Report

Material Misstatement Disclaimer of Opinion

Qualified Adverse Qualified Disclaimer

Opinion Section Modified Modified Modified Modified

Basic for Opinion Section Modified Modified Modified Modified

Responsibilities for the FS section No modification No modification No modification No modification

Auditor's responsibilities Section No modification No modification Modified Modified

A. OPINION SECTION

 Qualified Opinion Due to Material Misstatement

 Qualified Opinion Due to Scope Limitation
 Adverse Opinion
 Disclaimer of Opinion
Qualified Opinion Due to
Material Misstatement
When the auditor expresses a qualified opinion due to a material misstatement, the
auditor should:

 Use the heading “Qualified Opinion” in the opinion section of the report; and

 State that, in the auditor’s opinion, except for the effects of the matter described in
the Basis for Qualified Opinion section, the financial statements present fairly, in all
material respects, the financial position and financial performance of the entity in
accordance with the applicable financial reporting framework.
Qualified Opinion Due to Scope
Limitation
When the auditor expresses a qualified opinion due to a scope limitation, the auditor
shall:

 Use the heading “Qualified Opinion” in the opinion section of the report; and

 State that, in the auditor’s opinion, except for the possible effects of the matter
described in the Basis for Qualified Opinion section, the financial statements
present fairly, in all material respects, the financial position and financial
performance of the entity in accordance with the applicable financial reporting
framework.
Adverse Opinion

When the auditor expresses an adverse opinion because the financial statements are
materially misleading, the auditor shall:

 Use the heading “Adverse Opinion” in the opinion section of the report; and

 State that, in the auditor’s opinion, because of the significance of the matter
described in the Basis for Adverse Opinion section, the financial statements do
not present fairly the financial position and financial performance of the entity in
accordance with the applicable financial reporting framework.
Disclaimer of Opinion
When the auditor disclaims an opinion due to scope limitation, the auditor shall:
 use the heading “Disclaimer of Opinion” in the opinion section of the report;
 state that the auditor does not express an opinion on the financial statements;
 state that because of the significance of the matter described in the Basis for
Disclaimer of Opinion section, the auditor has not been able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion on the financial
statements; and
 amend the opening statement which indicates that the auditor has audited the
financial statements, to state that the auditor was engaged to audit the financial
statements.
B. Basis for Opinion
When the auditor modifies the opinion on the financial statements, the auditor’s report
provide a description of the matter giving rise to the modification with appropriate
heading such as “Basis for Qualified Opinion,” “Basis for Adverse Opinion,” or “Basis
for Disclaimer of Opinion.”

 Material Misstatement (Qualified or Adverse Opinion)

 Omission of the narrative disclosure (Qualified or Adverse Opinion)
 Scope Limitation (Qualified or Disclaimer of Opinion)
Material Misstatement (Qualified
or Adverse Opinion)
If there is a material misstatement that relates to specific amounts or
quantitative disclosure in the financial statements, the auditor should include
in the “Basis for Opinion” section:

 A description of the nature of misstatements; and

 A quantification of the financial effects of the misstatement or a

disclosure of omitted information, if practicable.
Omission of narrative disclosure
(Qualified or Adverse Opinion)
If the misstatement relates to non-disclosure of information in the notes to the
financial statements, the auditor should discuss the non-disclosure with those
charged with governance.
In addition, the auditor should:

 Describe the nature of the omitted information in the Basis for Opinion
section of the report; and
 Include the omitted information, if practicable.
Omission of narrative disclosure
(Qualified or Adverse Opinion)
 Whenever the auditor expresses a qualified or an adverse opinion, the auditor
needs to amend the last sentence in the Basis for Opinion section to state that the
audit evidence obtained is sufficient and appropriate to provide a basis for the
auditor’s “qualified” or “adverse” opinion as appropriate.
Scope Limitation (Qualified or
Disclaimer of Opinion)
 If the modification results from inability to obtain sufficient appropriate
audit evidence, the basis for opinion section shall only explain the reason
for that inability.
 When the auditor disclaims an opinion on the financial statements, the
auditor’s report shall omit the elements in the Basis for Opinion section that:
1. make reference to the auditor’s responsibility; and
2. state that the audit evidence obtained is sufficient and appropriate to provide
a basis for the auditor’s opinion.
C. Auditor’s Responsibility
 When the auditor expresses a qualified or an adverse opinion on the financial
statements, the Auditor’s Responsibility section will not be modified.
However, if the auditor disclaims an opinion on the financial statements, the
Auditor’s Responsibility section should be modified to include only the
following statements:
1. that the auditor’s responsibility is to conduct an audit of financial statements in
accordance with PSA and to issue an auditor’s report;
2. that because of the matter described in the Basis for Disclaimer of Opinion section,
the auditor was not able to obtain sufficient appropriate audit evidence to provide a
basis for an audit opinion on the financial statements; and
3. that the auditor is independent of the entity and the auditor has fulfilled his ethical
responsibilities.
Piecemeal Opinion

 Piecemeal opinion is an unmodified opinion expressed on one or more

components of the financial statements while expressing an adverse or
disclaimer of opinion on the financial statements taken as a whole. PSA does
not allow this reporting practice because piecemeal opinion tends to contradict
or even overshadow the disclaimer or adverse opinion expressed on the
financial statements taken as a whole.
Going Concern

 Under the going concern basis of accounting, the financial statements are prepared on
the assumption that the entity is a going concern and will continue to operate for the
foreseeable future.
 When planning and performing audit procedures, the auditor should consider the
appropriateness of management use of the going concern basis of accounting in the
preparation of the financial statements and should evaluate whether there are
material uncertainties about the entity’s ability to continue as a going concern that
need to be disclosed in the financial statements.
Going Concern Assumption is Appropriate
and No Material Uncertainty Exists
 When events or conditions have been identified that may cast significant doubt on the
entity’s ability to continue as a going concern but, based on the audit evidence
obtained, the auditor concludes that no material uncertainty exists, the auditor should
evaluate whether the financial statements contain adequate disclosures about:
 Principal events or conditions identified
 Management’s evaluation of the significance of those events or conditions in relation
to the entity’s ability to meet its obligations;
 Management’s plans that mitigate the effect of these events or conditions; or
 Significant judgments made by management as part of its assessment of the entity’s
ability to continue as a going concern.
Going Concern Appropriate-
Material Uncertainty Exists
 A material uncertainty exists when the impact of the going concern problem is
significant such that, in the auditor’s judgment, clear disclosure of the nature and
implications of the uncertainties is necessary for the fair presentation of the financial
statements.
 When the auditor believes that the use of the going concern basis of accounting is
appropriate but material going concern uncertainty exists, the nature of the opinion
and the audit report to be issued will depend on whether the financial statements
adequately disclose the material uncertainty in the notes to the financial statements.
Going Concern Appropriate-
Material Uncertainty Exists
 The auditor should evaluate whether the financial statements:

 Adequately describe the principal conditions and events that give rise to
the significant doubt including management plans to deal with these events
or conditions.
 State clearly that there is a material uncertainty about the entity’s ability to
continue as a going concern and that the entity may not be able to realize
its assets or discharge its liabilities in the normal course of business.
If the auditor concludes that adequate disclosure about the material uncertainty is made
in the financial statements, the auditor should issue a report that contains an unmodified
opinion with a separate section “Material Uncertainty Related to Going Concern” that:
1. Draws the readers’ attention to the note in the financial statements that discloses the
matter; and
2. State that these events or conditions indicate the existence of material uncertainty
that may cast significant doubt about the entity’s ability to continue as a going
concern and that the auditor’s opinion is not modified in respect of this matter.
Going Concern Assumption
Inappropriate
 If the auditor believes that the entity will not be able to continue as a going concern,
the financial statement should not be prepared on a going concern basis.
 Instead, an alternative basis must be used in presenting the financial statements. The
Philippine Interpretations Committee of the FRSC requires that assets an liabilities
of an entity be measured in accordance with the applicable accounting standards.
For example, financial instruments and investment properties will be accounted for
under PFRS 9 and PAS 40 respectively while other assets and liabilities may be
accounted for using PFRS 5.
 If the entity insists on using the going concern basis of accounting in presenting
its financial statements, the financial statements will be misleading. Consequently,
the auditor’s report on the financial statements must contain an adverse opinion.
Multiple uncertainties affecting
the financial statements
 However in extreme cases, such as situations involving multiple
uncertainties that are significant to the financial statements, the auditor may
consider it appropriate to issue a disclaimer of opinion instead of adding an
emphasis of matter paragraph in the report.
Key Audit Matters
 Traditionally, the format of auditor’s report on the financial statements has
always been standardized. The auditor’s report would only contain an expression
of opinion as to whether or not the financial statements are fairly presented in
accordance with the applicable financial reporting framework.

 PSA 701 requires auditors to communicate key audit matters in the auditor’s
report whenever they audit financial statements of listed entities.
Identifying Key Audit Matters
 Key audit matters are those matters that, in the auditor’s professional judgment,
were of most significance in the audit of the financial statements of the current
period.

 The auditor’s determination of key audit matters involves three steps:

 Key Audit Matters
Matters that were communicated
with those charged with governance
Matters that required
significant auditor
attention
Matters of
most
significanc
e
Identifying Key Audit Matters

The auditor should take into account areas of significant auditor attention in
performing the audit, like:
 Areas identified as significant risks or those that involved significant auditor
judgment;
 Areas in which the auditor encountered significant difficulty with respect to
obtaining audit evidence; and
 Circumstances that required significant modification of the auditor’s planned
approach to the audit.
The number of key audit matters to be included in the auditor’s report may be
affected by the size and complexity of the entity, the nature of its business and
environment, and the facts and circumstances of the audit engagement.

The auditor’s objective is to select a smaller number of matters, from the

matters communicated with those charged with governance. In general, the
greater the number of key audit matters, the less useful the auditor’s
communication of key audit matters will be.
Manner of Communicating and
Documenting Key Audit Matters
 As a minimum, the auditor’s report should clearly identify each of the key
audit matters, with reference to the notes in the financial statements, and
explain:
1. Why the matter was considered to be most significant; and
2. How the matter was addressed in the audit.

In addition, PSA 701 also requires auditors to communicate the key audit
matters to be included in the report with those charged with governance.
 An issue that causes the auditor to modify an opinion on an entity’s financial
statements as well as going concern uncertainties are by their nature
considered key audit matters. These matters, however, should not be included
in the Key audit Matters section of the auditor’s report but rather these should
be described in the Basis for (Qualified or Adverse) Opinion or Going
Concern sections of the report as appropriate.

 It is to be emphasized that the communication of the key audit matters is not a

substitute for expressing a modified opinion on the client’s financial
statements. Furthermore, the auditor’s report should not include key audit
matters when the auditor disclaims an opinion on the financial
statements.
Emphasis of Matter and Other Matter
Paragraphs
 In some instances, it may be appropriate for the auditor to include additional
paragraphs in the report to emphasize important matters affecting the financial
statement or affecting the auditor’s report. The addition of these paragraphs
does not negate the auditor’s unmodified opinion and is not to be construed as a
modification to the opinion or a substitute for the modified opinion. These
paragraphs are presented in order to promote readers’ understanding of the
financial statements or the auditor’s report.
Emphasis of Matter
 An emphasis of matter paragraph is included in the audit report to draw the readers’
attention to a matter presented or disclosed in the financial statements that, in the auditor’s
judgment, is of such importance that it is fundamental to the readers’ understanding of the
financial statements.
 Examples of circumstances where the auditor may consider it necessary to include an
Emphasis of Matter paragraph:
1. Significant uncertainty
2. Early application of new accounting standard in advance of its effective date
3. A major catastrophe that has a significant effect on the entity’s financial position.
4. A subsequent discovery of facts affecting the previously issued opinion.
5. Financial statements prepared using a special purpose framework.
 Emphasis of Matter

Significant
Uncertainty

Early Application of
New Accounting
Standards
Unmodified
opinion with
Major Catastrophe Adequate
emphasis of
Disclosures
matter
Subsequent paragraph
Discovery of facts

Special Purpose FS
1. Significant Uncertainty

 When there are significant uncertainties which are adequately

accounted for and disclosed in the notes to the financial statements, the
auditor should consider modifying the report by adding an emphasis of
matter paragraph to highlight the material uncertainty.
2. Early application of new
accounting standards

 The accounting standard setters sometimes allow or even encourage

entities to apply new accounting standards prior to their mandatory
effective date. If the application of this new standard has a pervasive
effect on the financial statements of the entity, the auditor should
include an Emphasis of Matter paragraph to draw the readers’ attention
to the note to the financial statements that discusses the matter.
3. Major catastrophe

 A major catastrophe that has had, or continues to have, a significant

effect on the entity’s financial position will have to be disclosed in
the notes to the financial statements. Besides, the disclosure required
by accounting standards, the auditor’s reports should include an
Emphasis of Matter paragraph to give emphasis on the note that
discusses this event.
4. Subsequent discovery of facts
that affect the auditor’s opinion.
 A new audit report on the amended financial statements is
required. The new audit report shall include an Emphasis of
Matter (or Other Matter) paragraph to put emphasis on the note
that discusses the reason for such amendment and for the readers to
understand the auditor’s responsibility and auditor’s report
5. Financial statements prepared
using a special purpose framework
 Auditors often report on financial statements prepared using general purpose
framework such as PFRS. There are also instances, however, where the CPA will
be required to issue a report on financial statements prepared using cash basis of
accounting, modified cash basis or other bases of accounting, modified cash basis
or other bases of accounting. These financial statements are referred to in PSA
800 as special purpose financial statements. When reporting on special purpose
financial statements, the auditor’s report must include a separate paragraph in
order to emphasize the fact that the financial statements are prepared using a
special purpose framework.
 A widespread use of Emphasis of Matter paragraphs diminishes the
effectiveness of the auditor’s communication of such matters. Additionally,
to include more information in an Emphasis of Matter Paragraph rather
than presenting them in financial statements may imply that the matter has
not been appropriately presented or disclosed. Accordingly, the use of
Emphasis of Matter paragraph should be limited only to matters
presented or disclosed in the financial statements.
Relationships between Emphasis
of Matter and Key Audit Matters
Auditors may wish to emphasize key audit matters because the auditor
believes that these matters are also essential to readers’ understanding of the
financial statements. The auditor may do so by:
1. Presenting the matter more prominently than other matters like
presenting it as the first matter in the Key Audit matters Section; or
2. By including additional description that indicates the importance of
the matter to readers’ understanding of the financial statements.
Other Matter Paragraph
 There are instances when the auditor considers it necessary to communicate a
matter that is not presented or disclosed in the financial statements but,
in the auditor’s judgment, is relevant to users’ understanding of the audit, the
auditor’s responsibilities or the auditor’s report. The auditor may do so by
including an additional paragraph to an unmodified opinion with the heading
“Other Matter”
 Circumstances which require Other Matter paragraph include:
1. Reporting on comparative information
2. Financial statements prepared using more than one financial frameworks.
3. Limiting the use of the auditor’s report.
4. Subsequent discovery of facts.
Financial statement prepared using
more than one financial framework
 An entity may prepare one set of financial statements in accordance with
general purpose framework (e.g., PFRS) and another set for financial
reporting framework(e.g. GAAP), and the auditor to report on the
financial statements.
 If the auditor has determined that the framework are acceptable in the
respective circumstances, the auditor may include “Other Matter”
paragraph in the auditor’s report, stating the fact that another set of
financial statements have been prepared by the same entity in accordance
with another genera; purpose framework.
Limiting the use of the
Auditor’s Report
 Financial statements prepared for a specific purpose may be prepared in
accordance with a general purpose framework. This is usually the case when the
intended users have determined that the general purpose financial statements also
meet their financial information needs. Since the auditor’s report is intended for
specific users, the auditor ,may consider it necessary in the circumstances to
include an “Other Matter” paragraph, stating that the auditor’s report is intended
solely for specific group of users, and should not be distributed to or used by
other parties.
Subsequent Discovery of Facts
 As discussed earlier, when amended financial statements are issued because of
subsequent discovery of facts after the financial statements are issued, a new
auditor’s report should also be issued on the amended financial statements. The new
auditor’s report may include either an Emphasis of Matter or Other Matter
paragraph to place emphasis on the note explaining the reason for the amendment.
Reporting on Comparative
Information
PSA 710 has identified two financial frameworks for comparative, namely;
 Comparative Financial Statements where amounts and other disclosures for the
preceding period are included for comparison with the financial statements of the
current period, but do not form part of the current period financial statement.
 Corresponding Figures where amounts and other disclosures for the preceding
period are included as part of the current period financial statements, and are
intended to be read in relation to the amounts and other disclosures relating to the
current period.
Reporting on Comparative Financial
Statement
 When reporting on comparative financial statement, the auditor should issue a report in
which the comparative financial statements are specially identified.
 It to be emphasized that when the term “ comparative financial statements” is used, the PSA
710 is referring only to the financial statements of the prior period that are presented with
the current year’s financial statements.
 Report on comparative financial statements can be illustrated under the following scenarios:
1. Prior Period Financial Statements were audited by a continuing auditor
2. Prior Period Financial Statements were audited by another auditor
3. Prior Period Financial Statement were not audited
Prior Period Financial Statements were
Audited by a Continuing Auditor
 The continuing auditor’s report should cover the current year’s financial statements as
well those for the prior periods that were audited by the firm.
 The Auditor should not simply reissue the prior year’s report but the auditor is required
to update the report on the financial statements of the prior period to determine if the
report is still appropriate.
 Updated the report involves either:
1. Re-expressing the opinion originally issued; or
2. Expressing an opinion different from the one originally issued.
For example:
 A material misstatement in the financial statements that caused the auditor to issue a
qualified or adverse opinion on the prior period financial statements was corrected by the
client when these financial statements are presented in the current period. Since the reason
for modification of opinion no longer exists, the auditor’s report on the comparative
financial statements should include an unmodified opinion.
 Multiple uncertainties that caused the auditor to disclaim an opinion on the prior period
financial statements were resolved during the current year. Because the uncertainties that
triggered the disclaimer of opinion no longer exist, an unmodified opinion can now be
issued on the prior period financial statement.
 When a continuing auditor’s updated report on prior year’s financial
statements is different from the report previously issued, the auditor’s
report should include an “Other Matter” paragraph stating:
1. The fact that the updated report is different from the previous opinion;
2. The date of the prior year’s period;
3. The type of opinion previously issued; and
4. The reasons for changing the auditor’s opinion.
2. Prior Period Financial Statements
were audited by another auditor
 The predecessor auditor reissue the report on the prior period financial
statements.
Certain steps should be undertaken to determined whether the previously issued
report is still appropriate. These may include:
a. Comparing the current period financial statements with the financial statements
audited;
b. A discussion the successor auditor about any circumstances or events that may affect
the financial statements of the period; and
c. Obtaining a letter of representation from the successor auditor stating that the successor
auditor is not aware of any significant subsequent events that could have an effect on the
predecessor auditor’s report.
 The predecessor auditor does not reissue on the prior period
financial statement
Under this circumstances, the successor auditor’s report on the current
year’s financial statements should include an “ Other Matter”
paragraph stating.
1. The fact that the prior period financial statements were audited by
another auditor;
2. The date of the predecessor auditor’s report; and
3. The type of opinion issued by the predecessor auditor and if the
opinion is modified, the reasons therefore.
3. Prior Period Financial Statements
not audited
 The auditor’s report on the current year’s financial statement must have
an “Other Matter” paragraph stating the fact that the prior period financial
statements are unaudited.
 In situation where the successor auditor identifies that the prior period
financial statements contain misstatement, the auditor should request the
management to revise the financial statement, otherwise, the auditor
express either qualified or adverse opinion depending on its impact on the
current period’s financial statements.
Report on Corresponding Figures
 The comparatives are not specifically identified because the auditor’s opinion is
on the current period’s financial statements as a whole (including the
corresponding figures).
 In certain conditions, such as when the report on the prior period’s financial
statements included a qualified, adverse or disclaimer of opinion and the matter
that gave rise to the modification has not yet been resolved, it may be necessary
for the auditor to modify the current period financial statements to make specific
reference to the corresponding figures.
Other Information Accompanying
Audited Financial Statement
 An entity may publish documents that contain audited financial statement. For
example, listed companies often publish annual reports to shareholders that
include financial statements and auditor’s report.
 All information included in the annual report, other than the financial statements
and the auditor’s report thereon, re referred to as 2other information” in PSA 720.
Auditor’s responsibilities regarding
other information
 The auditor’s overall responsibility is to express an opinion about the fair presentation of the
financial statements.
 PSA 720, however, requires the auditor’s to read the other information to consider:
1. Whether material inconsistencies exist between the other information and the financial
statements; and
2. Whether material and the inconsistency exists between the other
Information and the auditor’s knowledge of the entity obtained in the audit.
The auditor’s would normally compare selected items in the other information with similar items
in the financial statements.
Material Inconsistency
 If the auditor identifies a material inconsistency: it should
discuss the matter with management and determined
whether;
1. The audited financial statement statements need to be amended;
2. The other information needs to be amended; or
3. The auditor’s understanding of the entity needs to be updated.

If an amendment is necessary in the financial statements and the entity refuses to make the amendment, the
auditor should express a qualified or an adverse opinion due to material misstatement in the financial
statements.
 On the other hand, the auditor should consider:
1. Whether the rationale given by the management and those charged with governance for not
making the amendment raises doubt about the integrity of management or those charged with
governance, such as when the auditor suspects that there is an intention to mislead;
2. Issuing a report that contains a disclaimer of opinion on the financial statements because such
refusal casts doubt on the integrity of management and those charged with governance as to
call into question the reliability of audit evidence in general; or
3. Withdrawing from the engagement.
Material misstatement of fact
 The auditor should remain alert for indications that the other information, not related to the
financial statements, is incorrectly stated or presented. This is called material misstatement
of fact.
 If the auditor becomes aware that a material misstatement of fact exists, the auditor should
discuss the matter with the entity’s management and request management to consult a
qualified third party to resolve the matter.
 If the auditor concludes that there is a material misstatement of fact in the other information
and the management refuses to correct the other information, the auditor should notify the
audit committee of the auditor’s concern regarding the other information and if necessary,
obtain legal advice.
Other information section in auditor’s report

 The auditor’s report should include a separate section for “Other

Information” when at date of the auditor’s report, the auditor’ has
obtained or, for audit of listed entities, the auditor has obtained or
expects to obtain the other information. This section should identify
the other information and clearly describe the responsibilities of the
management and the auditor with respect to other information
included in the annual report. Also, if the auditor believes that the
other information is materially misstated, the auditor must state the
nature of misstatement in the “Other information” section of the
auditor’s report.
Audit of Group Financial Statements

Audit of Group Financial Statements

When one or more audit firms participate in an audit engagement, one firm has to act as the
group auditor. A Group Auditor is the auditor with responsibility for reporting on the financial
statements of an entity when those financial statements include financial information of one or
more components audited by another auditor.
The auditor should consider whether his own participation is sufficient to able to act as the
group auditor who will express an opinion on group financial statements. This consideration
involves assessment of
 The materiality of the portion of the financial statement audited;
 The auditor’s knowledge of the overall financial statements; and
 The importance of the components audited by another auditor.
Component is not significant
When the group auditor believes that the component is not significant, the group auditor’s
produces may be limited to performing analytical procedures at the group level. The results of
these analytical procedures should be sufficient enough to enable the group auditor to conclude that
there are no significant risks of material misstatement in the financial statements of the components
that could materially affect the group financial statements.
Components is significant
When the component that is being audited by another auditor is significant to the group financial
statements, the group auditor should decide whether the work of the component auditor can be
relied upon to express opinion on the group financial statements. For the purpose, the group
auditor should obtain understanding about:
 Whether the component auditor understands and will comply with the ethical requirements
particularly the independence requirement;
 The component auditor’s professional competence; and
 Whether sufficient appropriate evidence about the work of the component auditor can be
obtained.
Reporting Responsibility
 The group auditor is responsible for the direction, supervision and performance of the
group audit engagement in compliance with professional standards and regulatory and
legal requirements, and whether the auditor’s report that is appropriate in the
circumstances. Although component auditors may perform work on the financial
statements of the components and such are responsible for their overall findings,
conclusion or opinions, the group auditor should take sole responsibility for the audit
opinion on the group financial statements. Accordingly, the group auditor should not
refer to the component auditor in the auditor’s report on the group financial
statements.
Report on Special Purpose Financial Statements
Financial statement audit is ordinarily conducted by an independent CPA to serve as basis
for the expression of opinion regarding the fairness of the financial statements, for the
consumption of the general public. These are called general purpose framework such as
PFRS.
Some entities may be required by their contractual commitments of government
regulators to present financial statements that comply with a financial reporting framework
designed to meet the needs of specific users. Such framework is referred to in PSA 800 as
special purpose framework.
Examples of special purpose frameworks include:
1. Other comprehensive basis of accounting such as cash basis, modified cash basis, or
other basis of accounting that has authoritative support;
2. Financial reporting provisions established by government regulators such as the Banko
Sentral ng Pilipinas (BSP) or Cooperative Development Authority (CDA); and
3. Financial reporting provision of a contract, such as bond indenture, a loan agreement
or a project grant.
Audit of Single FS or Specific Element of a Financial Statement
Auditors are often engaged to audit and express opinion on financial statements taken as a whole. In some
instances however, auditors may also be requested to express an opinion on a single financial statements or
one or more components of a financial statements. This is usually the case for example on some franchise
agreements that require payments of the royalty based on the revenue of the franchisee. A report on revenue
account is therefore necessary to have a reliable basis for computing the amount of royalty payments.
Since this type of engagements does not result to an expression of an opinion on financial statements taken
as a whole, the auditor’s opinion should be confirmed only to the specific account or element of a financial
statements identified in the report.
When accepting this type of engagements, it is important to remember the following:
1. The auditor may need to examine other related accounts to be able to express opinion on a specific
component of a financial statement,
2. Materiality should be related to the specific account rather than to the financial statement as a whole and
accordingly, the auditor’s examination will ordinarily be more extensive than if the same component were
to be audited in connection with a report on the entire financial statements, and
3. The auditor’s report on a component of financial statements should not accompany the financial
statements of the entity to avoid giving the user the impression that the report relates to the entire
financial statements.
Reporting Responsibility
When the auditor undertakes an engagement to report on a single financial statement or on a
specific element of a financial statement in conjunction with an engagement to audit the
entity’s complete set of financial statements, the auditors should express a separate opinion for
each engagement.
If the auditor concludes that it necessary to express an adverse opinion on the entity’s
complete set of financial statement taken as a whole, but the auditor considers it appropriate to
express an unmodified opinion on that element, the auditor shall only do so provided:
1. The auditor is not prohibited by law or regulation from doing so;
2. The report on specific element is not published together with the auditor’s report on the
complete set of financial statement; and
3. The specific element does not constitute a major portion of the entity’s complete set of
financial statement.
Reporting of Summary Financial Statements
The auditor may be requested to report on summary financial statements which highlight the
entity’s financial position and results of operations. This type of engagement may be accepted
only if the auditor has also been engaged to express an audit opinion on the financial
statements from which the summary financial statements were derived. The audit of financial
statements, provides the auditor with the necessary knowledge to discharge his responsibilities
in relation to the summary financial statements in accordance with PSA.
Since the summary financial statements are derived only from the complete set of financial
statements, the auditor’s report on summary financial statements should express an opinion
about whether the summary financial statements are consistent with the audited financial
statements or whether the summary financial statements are a fair summary of the audited
financial statements.
When the auditor’s report on the audited financial statements contains
qualified opinion, emphasis of matter or other matter paragraph but the
auditor is satisfied that the summary financial statements are consistent, in
all material respects, with the audited financial statements, the auditor shall
state this fact on the report on summary financial statements.
 When the auditor’s report on the audited financial statements contains an
adverse opinion or a disclaimer of opinion, the auditor’s report on the
summary financial statements should state the fact that an adverse or
disclaimer of opinion was issued on the audited financial statements and,
as a result, it is inappropriate for the auditor to express an opinion on the
summary financial statements
 SALAMAT PO!
GOD BLESS YOU