THE AUDITOR’S REPORT ON FINANCIAL STATEMENTS

NOTE:

The objective of an audit of financial statements is to enable the auditor to express an opinion about
whether the FSs are prepared in all material respects, in accordance with the applicable financial
reporting framework.

Financial reporting framework provides a context for the auditor’s evaluation of the fair
presentation of the FSs. Without this framework, the auditor would not have a benchmark for
evaluating the fairness of the financial statements

FAIR PRESENTATION FRAMEWORK

- Used to refer to a financial reporting framework that requires compliance with the requirements
of the framework and:
 To achieve fair presentation of the FSs, it may be necessary for management to provide
disclosures beyond those specifically required by the framework (acknowledges
explicitly or implicitly)
 Necessary for management to depart from a requirement of the framework to achieve
fair presentation of the FSs (acknowledges explicitly)

COMPLIANCE FRAMEWORK
- 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.

The auditor must form judgment as to whether:

 Accounting policies selected and applied are consistent with the financial reporting framework
 Accounting estimates are reasonable in the circumstances
 Information presented in the FSs is relevant, reliable, comparable, and understandable
 FSs provide sufficient disclosures to enable users to understand the effects of material
transactions and events conveyed in the financial statements
AUDIT REPORT
- end product of the FSs audit
- Contains the auditor’s opinion about the fair presentation of the FSs

THE UNMODIFIED REPORT

- issued when the auditor concludes that based on the audit evidence obtained, that the FSs is
fairly presented, in all material aspects in accordance with the applicable financial reporting
framework.

BASIC ELEMENTS OF THE UNMODIFIED REPORT

1. Title (to emphasize the independence of the auditor and to distinguish the report from others)
 Must have a title to clearly indicates that it is the report of an independent auditor
2. Addressee (report should be addressed to those parties for whom the report is prepared such
as shareholders, BOD, third parties)
 To emphasize auditor’s independence from client’s management, the auditor would
normally address the report to the shareholders of the client company
3. Auditor’s opinion (name of entity, FS audited, title of each FS including date and period
covered by FS, summary of significant accounting policies and notes, and express an opinion
on the FSs)
 To give more prominence on the auditor’s opinion, the opinion is placed in the
first section of the report (should have the heading “Opinion”)
4. Basis for Opinion (audited in accordance with PSA, auditor’s responsibilities under
PSAs, auditor is independent and fulfilled auditor’s ethical responsibilities, and auditor
believes that obtained evidence is sufficient and appropriate to provide an opinion)
 Auditor’s report should have a section with the heading “Basis for Opinion”
 This part describes the framework for an audit that enables the auditor to
express an opinion on the FSs.
5. Responsibilities for the FS (management’s responsibility for the preparation and fair
presentation of the FSs and for the internal control; management’s responsibility in assessing
the entity’s ability to continue as a going concern; responsibility of those charged with
governance for overseeing the financial reporting process)
  Section with a heading “Responsibilities of Management and Those Charged with
Governance for the Financial Statements”
6. Auditor’s Responsibility for the Audit of FSs (responsibilities description may be presented:
within the body of the report; within an appendix to the report; or specific reference on the
website of a regulatory body
- Readers of the FSs should be informed of the objectives of the audit and the degree of
responsibility being assumed by the auditor
 State the objectives of the auditor
 Obtain reasonable assurance
 Issue a report that includes the auditor’s opinion
 State that reasonable assurance is a high level but not guarantee will always
detect a material misstatement when it exists
 State that misstatement can arise from fraud and error
 Considered material, if individually or in aggregate, influence economic
decisions
 Definition or description of materiality
 State that auditor exercises professional judgment and maintains professional
skepticism throughout the audit
 Stating that the auditor’s responsibilities are:
 Identify and assess the risks of material misstatements of the FSs
 Obtain an understanding of internal control in order to design appropriate
audit procedures
 Evaluate the appropriateness of the accounting policies used and the
reasonableness of the accounting estimates
 Conclude on the appropriateness of management’s use of the going
concern basis of accounting
 Evaluate the fair presentation of the financial statements
7. Other Reporting Responsibilities
 If the auditor’s report contains a separate section on other reporting
responsibilities, the auditor’s report on financial statements has a subtitle
“Report on the Audit of the Financial Statements” to clearly distinguish the
auditor’s responsibility to report on the FSs from the auditor’s other reporting
responsibilities
 8. Auditor’s Signature (should be signed in name of audit firm and the personal name of the
auditor)
9. Auditor’s Address (location in the jurisdiction where the auditor maintains his office)
10. Date of Report (the auditor must have completed all essential audit procedures to provide a
basis for the opinion)
 Date of the report is important because this is the date when the auditor’s
responsibility for subsequent events ends.
 The auditor is not ordinarily required to carry out any audit procedures after the
date of the report
 The auditor cannot date the auditor’s report earlier than the date of the approval
of the FSs.
 In fact, most auditors use the date of the approval of the FSs as the date
of their audit reports

MODIFICATION TO THE OPINION

Unmodified opinion is issued only when the auditor is satisfied that:

1. FSs have been prepared in accordance with the applicable financial reporting framework
2. 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 the opinion on the FSs.
Failure to obtain sufficient appropriate evidence will cause the auditor to:
 QUALIFIED OPINION = Material but not pervasive
 RESIGN FROM THE ENGAGEMENT/DISCLAIM AN OPINION = Material and pervasive
Resigning from the audit may depend on the stage of completion of the engagement at the time that
management imposes the scope limitation

 If the auditor has substantially completed the audit

 Auditor may decide to complete the audit to the extent possible, disclaim an
opinion, and explain the scope limitation in the report prior to resigning

CIRCUMSTANCE IMPOSED SCOPE LIMITATION

May make certain procedures impossible to perform (should design and perform alternative
procedures)

Can be either:

 Due to nature or timing of the auditor’s work

 Due to circumstances that are beyond the control of the entity

If there are no alternative procedures that can be performed or the results of the alternative procedures
performed do not enable the auditor to obtain sufficient appropriate evidence, auditor should express
QUALIFIED OPINION or DISCLAIMER OF OPINION on the FSs depending on the MATERIALITY and
PERVASIVENESS of the possible effect on the FSs

 Magnitude of misstatement is significant QUALIFIED OPINION

enough to affect the readers of the
financial statements but not enough to
overshadow the fair presentation of the
FSs take as a whole

 Auditor believes that the effect of ADVERSE OPINION

misstatements is highly material and
there are several items in the FSs that are
affected by the misstatement as to
render the overall FSs materially
misleading

MATERIALITY AND PERVASIVENESS CONSIDERATION

MODIFICATION OF THE AUDITOR’S REPORT
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.

OPINION SECTION
- Summarizes the modification that should be made to the Opinion section of the auditor’s report

QUALIFIED OPINION DUE TO MATERIAL MISSTATEMENT

When auditor expresses this, 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

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

ADVERSE OPINION
When the auditor expresses this 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

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; and
 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 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 FSs, the auditor’s report shall omit the elements in the
Basis for Option section that:

1. Makes reference to the auditor’s responsibility; and

2. States that the audit evidence obtained is sufficient and appropriate to provide a basis for the
auditor’s opinion

AUDITOR’S RESPONSIBILITIES
QUALIFIED OR AN ADVERSE OPINION on the financial statements = the Auditor’s Responsibilities
section will not be modified

DISCLAIMS AN OPINION = the Auditor’s Responsibilities sections should be modified to include only
the following statements:

1. Auditor’s responsibility is to conduct an audit of financial statements in accordance with PSA and
to issue an auditor’s report
2. 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 of opinion
on the FSs
3. Auditor is independent of the entity and has fulfilled his ethical responsibilities

PIECEMEAL OPINION
It is an unmodified opinion expressed on one or more components of the FS while expressing an adverse
or disclaimer of opinion as a whole.

- PSA 705 does not allow this practice because it tends to contradict or even overshadow the
disclaimer or adverse opinion expressed on the FSs taken as a whole
GOING CONCERN
- When planning and performing audit procedures, the AUDITOR SHOULD CONSIDER THE
APPROPRIATENESS OF MANAGEMENT USE OF THE GOING CONCERN AND SHOULD EVALUATE
WHETHER THERE ARE MATERIAL UNCERTAINTIES

Going Concern Assumption is Appropriate and No Material Uncertainty Exists

Auditor should evaluate whether the financial statements contain adequate disclosures about the:

 Principal events or conditions identified

 Management’s evaluations of the significance of those events or conditions
 Management’s plans that mitigate the effect of these events or conditions
 Significant judgments made by management

If adequate disclosures are made by the entity and there are no other issues involved, the auditor may
issue a report that contains an UNMODIFIED OPINION on the FSs

Going Concern Appropriate – Material Uncertainty Exists

A material uncertainty exists when, in the auditor’s judgment, clear disclosure of the nature and
implications of the uncertainties is necessary.

Auditor believes that the use of the going concern basis of accounting is appropriate but material going
concern uncertainty exists, opinion and report will depend on whether FSs adequately disclose the
material uncertainty in the notes to the FSs.

The auditor should evaluate whether the FSs:

 Adequately describe the principal conditions and events that give rise to the significant doubt
 State clearly that there is a material uncertainty and the entity may not be able to realize its
assets or discharge its liabilities in the normal course of business

Going Concern Assumption Appropriate

Entity will not continue as going concern = FSs should not be prepared on a going concern basis =
alternative basis must be used

KEY AUDIT MATTERS

Although standardizing the format of the report has some benefits, there is an increasing demand from
the public and investors for auditors to issue a report that is tailor-made for each engagement.

PSA 701
- Requires auditors to communicate key audit matters in the auditor’s report whenever they audit
financial statements of listed entities.
  It is intended to assist the readers in understanding those matters that were of most
significance in the audit of FSs of the current period.
 Also assists the readers in understanding areas in the FSs that required significant
management judgment or areas of focus in performing the audit

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 FSs of the current period.

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

Step 1: Categorize the matters that were communicated with those charged with governance

Step 2: Determine which of these matters required significant auditor’s attention

Step 3: Which of these matters that required significant attention are the most significance to the

audit of the current period.

MANNER OF COMMUNICATING AND DOCUMENTING KEY AUDIT MATTERS

EMPHASIS OF MATTER PARAGRAPH (Placed after Auditor’s Opinion Paragraph)

Multiple uncertainties may cause the auditor to issue a DISCLAIMER OF OPINION.

 Only if GC uncertainty is adequately disclosed.

 If it was not adequately disclosed, the auditor will issue a QUALIFIED OR ADVERSE OPINION.
 If the GC assumption is inappropriate and the entity insists to use GC principle, the auditor will
issue an ADVERSE OPINION.

Addition of “emphasis of matter paragraph” does not affect the auditor’s opinion.

The use of an “Emphasis of Matter” paragraph shall be limited only to those matters disclosed in the
financial statements.
OTHER MATTER PARAGRAPH

OTHER INFORMATION ACCOMPANYING FINANCIAL STATEMENTS

PSA 720 states that the auditor has no responsibility to corroborate the other info (such as in annual
reports), but he should read the other info to determine that it is not materially inconsistent with the
FS and whether the other information needs to be amended).

 If an amendment is necessary in the FS, and the entity refuses to make an amendment, the
auditor will issue either a QUALIFIED OR ADVERSE OPINION.
 If an amendment is necessary in the other information, and the entity refuses to make an
amendment, the auditor should consider making an Other Matter paragraph indicating the
material inconsistency, withhold the auditor’s opinion, or withdraw from the engagement

MATERIAL MISSTATEMENT OF FACTS: This exists when other information, not related to matters
appearing to FS, is incorrectly presented. If the auditor concludes that there is a material misstatement
of fact and the mgmt. refuses to correct the other information, the auditor should notify the audit
committee and if necessary, obtain legal advice.

AUDIT OF GROUP FINANCIAL STATEMENTS

 A group auditor is the auditor with responsibility for reporting the FS of an entity when those FS
include financial information of one or more components audited by another auditor.
 If the group auditor has not become satisfied about the professional competence and the
independence of the component, the group auditor should obtain sufficient appropriate audit
evidence relating to the financial information of the entity by auditing the FS of the component.
  Auditor’s report on group financial statements shall not refer to a component auditor.

REPORTS ON SPECIAL PURPOSE FINANCIAL STATEMENTS

 SPFS are made by entities that are complying with a special financial reporting framework
designed to meet the needs of specific users (PSA 800). Examples include other comprehensive
basis of accounting like cash basis accounting, financial reporting framework established by SEC,
IC, or BSP, and financial reporting provisions of a contract such as bond indenture, loan
agreement or a project grant.
 Audit report of SPFS should include an EMPHASIS OF MATTER PARAGRAPH.

AUDIT OF SINGLE FINANCIAL STATEMENT OR SPECIFIC ELEMENT OF A FINANCIAL

STATEMENT
 These are engagements that requested to express an opinion on a single FS or one of
components of a FS. This type of engagement does not result to an expression of an opinion on
FS taken as a whole.
 When accepting this type of engagement: the auditor may need to examine other related
accounts, materiality should be related to the specific account, and auditor’s report on a
component of FS should not accompany the FS of the entity.
 When the auditor undertakes an engagement to report on a single FS or on a specific element of
a FS, the auditor should express a separate opinion for each engagement.
 In case the auditor expresses an adverse or disclaimer of opinion as a whole but the auditor
consider it appropriate to express an unmodified opinion on the single FS/specific element
(which is a piecemeal opinion), the auditor shall only do so if:
1. the auditor is not prohibited by law or regulation,
2. the report on the element is not published together with the auditor’s report on the
complete FS, and
3. the specific element does not constitute a major portion of the entity’s complete FS.

REPORTING ON SUMMARY FINANCIAL STATEMENTS

 Summary financial statements are derived only from the complete set of FS (to highlight the
entity’s financial position and results of operation).
 The auditor’s report on the audited FS should express an opinion about whether the summary FS
are consistent with the audited FS or whether the summary FS are a fair summary of the audited
FS.