CHAPTER 12:Completing

the Audit/Post-Audit
Responsibilities
Completing the Audit
The auditor considers various issues before drafting the audit
report; such issues concern:
• Related party transactions
• Subsequent events review
• Letters of inquiry/review for contingent liabilities
• Evaluation of going concern assumption
• Management representations
• Analytical procedures
• Evaluating findings, formulating an opinion and drafting
the audit report
Related Party Transactions(PSA 550)(SFAS/IAS 24)
• A related party transaction is a transfer of resources or obligations
between related parties, whether or not, a price is charged.
• Management is responsible for the identification and disclosure of
related parties and related party transactions.
Related Party Relationships
• The auditor should have a level of knowledge of the entity's business
and industry to enable him to identify transactions and events with
related parties that may have a material effect on the financial
statements .
Audit Procedures
• In examining the identified related party transactions, the auditor should
obtain sufficient appropriate evidence as to whether these transactions
have been properly recorded and disclosed.
• During the course of the audit, the auditor carries out procedures to
identify transactions with related parties.
• The auditor reviews prior year working papers for names of known
related parties.
Disclosure Requirement
• The auditor obtains a written representation from management
concerning the completeness of information provided regarding the
identification of related parties and the adequacy of related party
disclosures in the financial statements.
• The auditor should be satisfied that the risk of significant related parties
remaining undetected is at an acceptably low level.
Subsequent Events Review(PSA 560)(SFAS/IAS 10)
• Subsequent events refer to both the events occurring between the period end and
the date of the auditor's report, which is the last day of field work; and the facts
discovered after the date of the auditor's report.
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• In addition to routine procedures to obtain audit evidence as to account balances as
of period end, the auditor performs procedures to ascertain that all events up to the
date of the auditor's report that may require adjustment of or disclosure in the
financial statements have been identified.
• Subsequent events providing evidence of condition existing at period end are
adjusted as of balance sheet date so that the financial statements will be presented at
the adjusted amounts.
• Subsequent events that are indicative of conditions that arose after period end are
disclosed in the financial statements.
Events Occurring up to the Date of the Auditor's Report
• The auditor performs as near as practicable to the date of the auditor's report,
procedures to identify events that may require adjustment of, or disclosure in the
financial statements.
• The auditor inquiries from management specific matters such as:
 the current status of items that were accounted for on the basis of preliminary or
inconclusive data
 any new commitments of guarantees entered into any sales of assets made or
planned
 any assets destroyed or appropriated by the government
 any development regarding risk and contingencies
 any unusual accounting adjustments made or contemplated
 and any events that occurred or are likely to occur that will bring into question
the appropriateness of accounting policies used in the financial statements.
 Facts Discovered After the Date of Auditor's Report
and Before Financial Statements are Issued
• When after the date of the auditor's report but before the financial
statements are issued the auditor becomes aware of a fact, which may
materially affect the financial statements, the auditor should consider
whether the financial statements need amendment.
• When management amends the financial statements, the auditor would
provide management with a new report on the amended financial
statements.
• After the financial statements have been issued, the auditor has no
obligation to make any inquiry regarding the financial statements.
Letters of Inquiry/Review for Contingent Liabilities
• In the auditor's review for contingent liabilities, he writes letters of
inquiry to management for information regarding the possibility of any
unrecorded contingencies; and to all major attorneys who perform legal
services for the client, for information as to the status of any pending
litigation or other contingent liabilities.
• Potential contingent liabilities could arise from guarantees of
indebtedness, accommodation endorsement, threat of expropriation of
assets, standby letters of credit and risks due to hazards.
The auditor should consider certain contingent liabilities that are
of significant concern such as:
• income tax disputes
• product warranties
• pending litigation for patent infringement
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Audit Inquiry Letter to Client's Lawyer
• A letter of inquiry, also termed an audit letter of inquiry, is the
auditor's primary means of corroborating the information provided by
management regarding litigation, claims and assessments.
• Pending litigation, claims and assessments are situations wherein a
claimant has filed, or plans to file, a lawsuit for a loss suffered for
which he seeks, or plans to seek remuneration.
• An unasserted
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Evaluation of Going Concern Assumption (PSA 570)
• When planning, performing and evaluating the results of audit procedures, the
auditor should consider the appropriateness of management's use of the going
concern assumption in preparing the financial statements.
• The auditor considers the entity's adverse key financial ratios; substantial
operating losses or significant deterioration in the value of assets used to
generate cashflows, arrears or discontinuance of dividends; inability to
comply with the terms of loan agreements; change from credit to COD
transactions with the suppliers; and inability to obtain financing for essential
new product development or other essential investments.
Audit Procedures
The auditor obtains sufficient appropriate evidence that management's plans are feasible and that the
outcome of these plans will improve the situation. Relevant procedures in this regard include:
• Analyzing and discussing cash flow, profit and other relevant forecasts, and the entity's latest available
interim financial statements with management;
• Reviewing the terms of debenture and loan agreements to determine any breach and the events after
period end to determine whether they mitigate or affect entity's ability to continue as a going concern;
• Reading minutes of meetings of shareholders, directors and committees for reference to any financing
difficulties; and considering entity's plans to deal with unfulfilled customers' orders.
• Inquiring of the entity's lawyer regarding existence of litigation and claims and reasonableness of
management's assessments of their outcome and estimate of their financial implications.
• Confirming the existence, legality and enforceability of arrangements to provide tr maintain financial
support with related and third parties and assessing the financial ability of such parties to provide
additional funds.
Management Representations (PSA 580)
• The auditor should obtain appropriate representations from management.
• The auditor should obtain written representation from management on matters
material to the financial statements when other sufficient appropriate audit evidence
cannot reasonably be expected to exist.
• If a representation by management is contradicted by other audit evidence, the
auditor should investigate the circumstances and, when necessary, reconsider the
reliability of other representations made by management.
Documentation of Representation by Management
• The auditor would ordinarily include in audit working papers the evidence of
management's representations in the form of a summary of oral discussions with
management or of a written representation from management.
Basic Elements of a Management Representation Letter
• When the auditor requests for a management representation letter, the auditor
requests that it should be addressed to the auditor; contain specified
information; be appropriately dated: and signed.
• A management representation letter would ordinarily be dated the same date as
the auditor's report.
• A management representation letter would be signed by members of
management with primary responsibilities for the entity and its financial
aspects.
• If management refuses to provide a representation that the auditor considers
necessary, this constitutes a scope limitation and the auditor should express a
qualified opinion or a disclaimer of opinion.
Analytical Procedures (PSA 520)
• The auditor should apply analytical procedures at the planning and overall
review stages and at be auditors of the audit.
• Analytical procedures also include consideration of relationship among
elements of financial information expected.
• The auditor applies analytical procedures at the planning stage to assist in
understanding the business and in identifying areas of potential risk.
• The auditor should apply analytical procedures at or near the end of the audit
when forming an overall conclusion as to whether the financial statements as a
whole, are consistent with auditor's knowledge of the business.
 Evaluating Findings, Formulating an Opinion and
01 Drafting the Audit03Report 04
• Upon completion of all the audit work, an auditor customarily makes a final
materiality and audit risk. He makes an evaluation of the results and gathered
and analyzed were sufficient and adequate. He reviews the adequacy of
disclosures and conformity with statutory and regulatory requirements. He
reviews evidence supporting the auditor's opinion; and proceeds to drafting the
audit report and the other deliverables to the client.
Making a Final Assessment of Materiality and Audit Risk
• As a result of the audit, because of a change in circumstances and in his
knowledge after evaluating audit findings, the auditor's assessment of materiality
and audit risk may be different from his assessment at the initial planning of the
audit.
• While the audit is being undertaken, the auditor considers numerous events and
conditions that could possibly increase audit risk. He determines whether there is
need to perform additional substantive procedures. If accumulated evidence
indicate level of audit risk is appropriately low, he may proceed to render an
opinion on the fair presentation of client's financial statements.
Evaluating the Results
• Upon completion of all audit fieldwork, the auditor reviews all working
papers on an account-by-account basis. He evaluates the procedures
performed, the evidence gathered and conclusions reached by the preparer
of the working papers.
• The audit partner in charge of engagement or the audit manager
performs the final working paper review.
• At the completion of the application of all the specific procedures for the
audit, it is necessary to integrate the results into one overall conclusion: that
financial statements are fairly presented in accordance with generally
accepted accounting principles.
Sufficiency and Adequacy of Evidence
• The auditor's examination consists mainly of gathering and evaluating evidence to
serve as basis for his opinion on client's financial statements.
• Generally, the auditor relies on evidential matter from outside sources more than on
evidence from within the client's organization; and gives more credence to evidence he
has obtained direct knowledge of through computations, inspections, physical
examination, and observation.
• The auditor considers materiality and relative risk in determining whether quality of
evidence accumulated is competent or persuasive and whether the quantity of evidence
gathered is sufficient or satisfactory.
• If the auditor concludes that sufficient evidence has not been obtained, he can either
obtain additional evidence or issue either a qualified opinion or a disclaimer of opinion.
 Adequacy of Disclosure and Conformity with Statutory
and Regulatory Requirements
• The financial statements must include adequate disclosures, qualifications and
necessary explanations or whatever data necessary to make them informative and
not misleading Informative disclosures required in the financial statements, it not
properly included, must be disclosed and included in the audit report.
• Among the standard disclosures to be included in financial statements are: basis
of valuation and liens on assets; maturity dates and interest rates of liabilities;
restrictions on capital stock and declaration of dividends; dividend arrearages and
other contingent liabilities; and subsequent events with material effect on
financial statements.
Evidence Supporting the Auditor's Opinion
• The auditor ascertains that the adequacy or quantity of evidence gathered is
sufficient. He determines that all the important aspects of the audit have been
adequately tested and that he has gathered satisfactory evidence to support his
opinion on client's financial statements.
• In the conduct of the audit examination, without restrictions, applying generally
accepted auditing standards, if the auditor has not discovered any material
errors or misstatements, and the financial statements are presented according to
generally accepted accounting principles: evidence gathered supports the
auditor's expression of an unqualified opinion.
• If the auditor believes that the audit evidence does not warrant a conclusion of
fairly presented financial statements, he may issue an unqualified opinion when
client revises the financial statements to the auditor's satisfaction. Otherwise, the
auditor renders a qualified opinion or an adverse opinion depending on the
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materiality of the non-adherence to accounting principles of the misstatement in
the financial statements.
• When the auditor was not able to apply without restriction the generally accepted
auditing standards necessary in the conduct of the audit, the audit evidence he has
gathered does not support an unqualified opinion. He renders a qualified opinion
or a disclaimer of opinion depending on the materiality of the account balance or
class of transaction for which he was not able to perform the required substantive
procedures.
Drafting the Audit Report and Other Deliverables to Clients
• In an audit engagement, the senior accountant takes charge of the fieldwork
and assumes the responsibility for the completion of the audit.
• The audit manager reviews the working papers and drafts the audit report.
• After ascertaining that the audit work has been performed in accordance with
generally accepted auditing standards and the terms of the audit engagement;
and that the results of the audit are fair presentations of financial condition and
results of operations, a partner signs the audit report.
• On or before the date agreed upon in the engagement letter/contract, the auditor
submits to the client the audit report and the accompanying complete set of
financial statements.
• The auditor also submits for the client's signature and filing with the pertinent
government agency the: Annual Income Tax Returns; the Statement of
Management Responsibility for Annual Income Tax Returns; and the Statement
of Responsibility for Financial Statements. The auditor also submits through the
client his CPA Representation to the SEC, which is his assurance to the
Securities and Exchange Commission that certain conditions pertaining to the
audit exist. He likewise submits a copy of his audit adjustments so corrections of
client's records can be made accordingly.
Post-Audit Responsibilities
• After an audit engagement, the auditor ordinarily indexes the working papers and
prepares a table of content to facilitate future referrals. He may, upon client's
request, confer with the client for any clarification of material items.
• A major post-audit responsibility of the auditor pertains to events or facts
existing at the date of the audit report, which he became aware about after the
audit report has already been released; and which would have caused him to
modify his report had such facts been known before the audit report was
released. Another post-audit responsibility of an auditor is the consideration of
procedures omitted during the audit which if performed would have caused him
to modify his report. In both cases, the auditor should take or follow procedures
to prevent future further reliance on the report.
CHAPTER 13:Reports on
Audited Financial
Statements
Auditor's Report on Financial Statements (PSA 700)
• The purpose of PSA 700 is to establish standards and provide guidance on the
form and content of the auditor's report issued as a result of an audit performed
by an independent auditor of the financial statements of an entity. The auditor
should review and assess the conclusions drawn from the audit evidence
obtained as a basis for the expression of an opinion on the financial statements.
Elements of the Auditor's Report in an Audit Conducted
in Accordance with PSAs
The auditor's report includes the basic elements:
1. Title
2. Addressee
3. Opening or introductory paragraph
• An identification of the financial statements audited
• A statement of the responsibility of the entity's management and
• A statement of the responsibility of the auditor.
4. Scope paragraph (describing the nature of the audit)
• A reference to generally accepted auditing standards in the Philippines
• A description of the work the auditor performed.
5. Opinion paragraph
• A reference to the financial reporting used to prepare the financial statements, that
is, the generally accepted accounting principles in the Philippines; and
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• An expression of opinion on the financial statements. 04
6. Date of the report
7. Auditor's address
8. Auditor's signature
The Auditor's Report
• In the auditor's report, an auditor expresses an opinion on the fair presentation
of client's financial statements based on conclusions he has reached from the
examination thereof according to generally accepted auditing standards.
Independent Auditor's Report on a Complete Set of General-Purpose
Financial Statements
An illustration of the entire auditor's report incorporating the aforementioned basic elements is set forth
hereunder:
An auditor's report for an audit conducted in accordance with both ISAs and PSAs is shown hereunder:
Unaudited Supplementary Information Presented with
Audited Financial Statements
• The annual audited financial statements that accompany the audit report are
covered by the auditor's opinion expressed on the fair presentation of the
financial statements.
• In many cases, the client requests the auditor to prepare graphs or diagrams
presenting comparative data regarding the entity's operations, which are
included in the annual report to stockholders in general assembly meetings.
• When unaudited supplementary information is presented with audited financial
statements, the auditor should take necessary precautionary measures to prevent
misleading the users of such unaudited information.
Modifications to the Independent Auditor's Report
• When audit was conducted in accordance with generally accepted auditing
standards. without restrictions; and presentation is in conformity with
generally accepted accounting principles; without material uncertainties or
inconsistencies; and all necessary disclosures have been included; an
unqualified opinion is expressed by issuing an independent auditor's report
without modifications.
• When an auditor's report is affected by matters that may or may not affect the
auditor's opinion, the independent auditor's report cannot be issued without
modifications. A modified independent auditor's report would accordingly
contain the necessary modifications.
Matters That Do Not Affect the Auditor's Opinion - Emphasis of Matter
• A modified report is issued expressing an unqualified opinion with an emphasis of matter
paragraph to highlight a matter affecting the financial statements.
An unqualified opinion is issued in the Independent Auditor's Report with modification in an
emphasis on matter paragraph for:
 Reference made to another CPA, whose work the auditor entirely relied upon and with whom the
unqualified opinion is shared
 Departure from accounting principles which the auditor entirely agreed with otherwise the
financial statements would be rendered misleading
 Emphasis made of an important subsequent event or a significant related party transaction
 Request of client for a report of either balance sheet or statement of income and retained earnings
or changes in equity only
Description of an accounting matter that may affect comparability with financial statements of the
preceding year
 A significant uncertainty regarding a "going concern" problem
Matters that Do Affect the Auditor's Opinion
An auditor may not express an unqualified opinion when these circumstances exist:
a) there is a limitation on the scope of the auditor's work; or
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b) there is disagreement with management regarding the acceptability of accounting policies
selected, method of their application, or the adequacy of financial statement disclosures.
Qualified Opinion
A qualified opinion should be expressed when the auditor concludes that because of a
material scope limitation or material departure from accounting principles, an unqualified
opinion cannot be expressed; but that the effect of any departure from accounting principles
or disagreement with management or limitation in scope is not so pervasive nor very
material as to require an adverse opinion or a disclaimer of opinion.
When a qualified opinion is expressed.
A qualified opinion is expressed when the auditor takes exception or objects to:
• restrictions imposed on the audit examination;
• lack of sufficient competent evidential matter;
• failure to perform necessary audit procedures because of certain scope
limitations on the examination; such as the auditor's
• material departures from generally accepted accounting principles;
disagreement with client who refuses to apply auditor's adjustments in
• Non-inclusion of disclosure of significant matters with material effect on the
financial statements, such as:
Disclaimer of Opinion
• An audit report may express no opinion at all, that is, the auditor states that he is not in a
position to express an opinion, and so he does not express an opinion on the financial
statements examined.
• A disclaimer of opinion should be expressed when the possible effect of a limitation on
scope or a non-compliance with generally accepted auditing standards, is so material and
pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence
and accordingly is unable to express an opinion on the financial statements.
• A limitation on the scope of the auditor's work may sometimes be imposed by the entity
when the terms of the engagement specify that the auditor shall not carry out an audit
procedure that the auditor believes is necessary.
• A scope limitation may also arise when, in the opinion of the auditor, the entity's
accounting records are inadequate; or when the auditor is unable to carry out an audit
procedure believed to be desirable.
• When there is a limitation on the scope of the auditor's work that requires the
expression of a qualified or disclaimer of opinion, the auditor's report should describe
the limitation and indicate the possible adjustments to the financial statements that
might have been determined to be necessary had the limitation not existed.
When a disclaimer of opinion is expressed
A disclaimer of opinion is expressed when:
 the scope limitation is so significant that its effect is so pervasive and very material to
the financial statements;
 the auditor is not independent;
 the auditor has not audited the financial statements;
 And the effect of the uncertainty is so material that the auditor is prevented from
expressing an opinion on the financial statements, as a whole.
Adverse Opinion
• An adverse opinion should be expressed when the effect of a disagreement with
management or a non-adherence to generally accepted accounting principles, 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.
• An adverse opinion states that the financial statements do not present fairly the
company's financial position, results of operations, cash flows and changes in
equity in conformity with generally accepted accounting principles.
• Although the auditor generally issues a disclaimer of opinion when an
uncertainty has a very material effect on the financial statements, it should be
noted that some uncertainties concern the realizability of an asset or the
recovery of an investment.
When an adverse opinion is expressed
An adverse opinion is expressed in the audited financial statements when:
 departure from GAAP is so material, it permeates the financial statements taken
as a whole.
 auditor believes fraud is so widespread that the representations in the financial
statements have been rendered materially misstated and misleading.
Circumstances That May Result in Other Than an Unqualified
Opinion

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A few of the circumstances that may result in other than an unqualified opinion in the auditor's report
is illustrated below:
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 MEMBERS:
AMPOG,LYKA
BIONO,HELEN MAE
GERMINAL,ZHARIANNE
GETINO,NATHALIE GRACE
PATINGO,JESSIE RHYL