MODULE 12

1. Subsequent Events

• Definition: Subsequent events are events occurring after the date of the financial
statements but before the auditor’s report is signed. These include facts that become
known after the auditor’s report is issued.

• Types (PAS 10):

o Adjusting Events: Events providing evidence of conditions existing at the balance

sheet date, requiring adjustments.

▪ Examples: Settlement of a court case, inventory valuation adjustments.

o Non-Adjusting Events: Events arising after the balance sheet date, not requiring
adjustments but needing disclosure if material.

▪ Examples: Major acquisitions, natural disasters.

• Audit Objectives (PSA 560):

1. Ensure all material subsequent events are properly accounted for or disclosed.

2. Amend the audit report if new significant information arises after issuance.

• Audit Procedures for Subsequent Events:

o Inquiries of Management:

▪ Changes in commitments, borrowings, guarantees, or litigation.

▪ Status of estimates or provisions.

o Other Audit Actions:

▪ Review minutes of meetings and latest interim financial statements.

▪ Analyze management’s identification of subsequent events.

• Timelines:

o Before Auditor’s Report Date: Procedures to identify events requiring

adjustments/disclosures.

o After Auditor’s Report but Before Issuance: Assess whether discovered facts
necessitate amendments.

o After Financial Statements Issuance: Limited obligations unless new information

affects prior conclusions.

• Actions if Events are Identified:

o Discuss with management and amend financial statements if necessary.

 o Issue a revised auditor’s report or modify the opinion if required.

2. Going Concern

• Definition: The assumption that an entity will continue operating for the foreseeable future,
without intent or necessity to liquidate or cease operations.

• Indicators of Doubt:

o Financial Indicators:

▪ Net liability or net current liability position.

▪ Inability to meet obligations, adverse financial ratios, or withdrawal of

financial support.

o Operational Indicators:

▪ Loss of significant customers, licenses, or management.

▪ Labor disputes or material shortages.

o Other Indicators:

▪ Non-compliance with regulations, pending litigation, or uninsured

catastrophes.

• Management Responsibilities:

o Assess and disclose material uncertainties related to going concern.

o Prepare financial statements using an appropriate basis (e.g., liquidation if

necessary).

• Auditor Responsibilities (PSA 570):

1. Evaluate the appropriateness of the going concern assumption.

2. Identify material uncertainties casting doubt on going concern.

3. Report findings, including necessary modifications to the audit opinion.

• Audit Procedures for Going Concern:

o Review financial projections, cash flows, and debt covenants.

o Confirm financing arrangements and inquire about management’s plans.

o Examine subsequent events for impacts on going concern.

• Audit Reporting Scenarios:

 o Material Uncertainty Adequately Disclosed: Unmodified opinion with an
emphasis of matter.

o Material Uncertainty Not Disclosed: Qualified or adverse opinion.

o Use of Going Concern Assumption Inappropriate: Adverse opinion.

o Management Refusal to Assess: Qualified or disclaimer of opinion.

3. Written Representations

• Definition: Written statements by management confirming certain matters or supporting

audit evidence.

• Purpose (PSA 580):

1. Confirm management’s responsibilities for financial statements.

2. Support other audit evidence, particularly on subjective areas like estimates or

contingencies.

3. Respond appropriately when representations are refused or unreliable.

• Key Areas Covered by Written Representations:

o Responsibilities for preparing financial statements.

o Full disclosure of information relevant to the audit.

o Assertions about compliance, estimates, fraud risks, and subsequent events.

• Reliability and Limitations:

o Written representations complement but do not replace other evidence.

o Discrepancies between representations and evidence require further investigation.

• Actions if Refused:

o Discuss concerns with management and governance.

o Evaluate implications for the audit and modify the report if necessary.

4. Overall Review of Financial Statements

• Purpose: Ensure financial statements align with audit evidence and present a true and fair
view.

• Steps in the Review Process:

o Evaluate compliance with applicable standards and regulatory requirements.

 o Apply analytical procedures to assess consistency and reasonableness.

• Key Considerations:

o Significant fluctuations and unexpected relationships requiring management

explanation.

o Consistency with audit findings and disclosures.

• Handling Misstatements (PSA 450):

o Types:

▪ Factual: Clear inaccuracies.

▪ Judgmental: Disputes in estimates or policies.

▪ Projected: Sampling-based misstatement estimates.

o Materiality Assessment:

▪ Consider size, nature, and cumulative impact of uncorrected

misstatements.

• Reporting of Misstatements:

o Communicate with governance on material uncorrected misstatements.

o Obtain written representations confirming immateriality where applicable.

o Document all misstatements and the rationale for conclusions.

Key Audit Documentation:

1. All misstatements (corrected and uncorrected).

2. Written representations.

3. Evidence for going concern evaluations.

4. Compliance and consistency checks on financial statements.

MODULE 13

1. The Auditor’s Report on Financial Statements

The auditor’s report is governed by key standards and outlines the findings of the audit, providing
users with an assessment of whether the financial statements are prepared, in all material
respects, in accordance with the applicable financial reporting framework.

2. Forming an Opinion on Financial Statements

Standards Governing Forming an Opinion:

• PSA 700: Guides auditors in forming an opinion and reporting.

• PSA 701: Communicating Key Audit Matters (KAM).

• PSA 705: Modifications to the auditor's opinion.

• PSA 706: Emphasis of Matter (EoM) and Other Matter (OM) paragraphs.

3. What the Auditor’s Conclusion Needs to Consider

When forming an opinion, the auditor evaluates whether the financial statements as a whole are
free from material misstatement. This conclusion is based on obtaining reasonable assurance and
involves considering several key factors:

1. Sufficient and Appropriate Audit Evidence:

o Evidence gathered during the audit must support the opinion.

o Evaluated in accordance with PSA 330.

2. Materiality of Uncorrected Misstatements:

o Assessed under PSA 450 to determine if they affect users' decisions.

3. Qualitative Aspects of Accounting Practices:

o Assessing management's accounting policies for relevance and clarity.

o Considering indicators of possible bias in management judgments.

4. Compliance with Financial Reporting Framework:

o Whether accounting policies are consistent with applicable standards.

o Appropriateness and proper disclosure of significant accounting policies.

5. Reasonableness of Accounting Estimates:

 o Evaluating the process and assumptions used by management in making
estimates.

6. Financial Statement Presentation:

o Overall structure, content, and clarity of the financial statements.

o Use of appropriate terminology.

7. Adequacy of Disclosures:

o Ensuring users can understand the impact of significant transactions and events.

o Verification that disclosures align with the requirements of the framework.

8. True and Fair Representation:

o Ensuring the financial statements represent underlying transactions and events

accurately.

9. Reference to Applicable Framework:

o Financial statements must appropriately describe the financial reporting framework

used (e.g., PFRS).

4. Basic Elements of the Auditor’s Report

The auditor’s report includes the following key components to maintain clarity and consistency:

1. Title: Indicates the report is from an independent auditor.

2. Addressee: Specifies the report's recipient (e.g., shareholders, governance bodies).

3. Opinion Paragraph: States whether the financial statements comply with the reporting
framework and present fairly.

4. Basis for Opinion:

o Describes the standards followed (e.g., PSAs).

o Confirms independence and sufficiency of evidence.

5. Key Audit Matters (KAM): Discusses significant matters encountered during the audit.

6. Other Sections:

o Responsibilities of Management and Those Charged with Governance.

o Auditor’s Responsibilities.

7. Signature and Details:

o Includes auditor's name, firm, location, and report date.

5. Types of Auditor Opinions

The opinion reflects the auditor’s assessment of the financial statements based on audit findings:

Unmodified Opinion:

• Issued when financial statements are free from material misstatement and comply with the
reporting framework.

Modified Opinions:

1. Qualified Opinion:

o Issued when:

▪ Misstatements are material but not pervasive.

▪ Auditor cannot obtain sufficient evidence, but the impact is not pervasive.

2. Adverse Opinion:

o Issued when misstatements are both material and pervasive, significantly affecting
the accuracy of the financial statements.

3. Disclaimer of Opinion:

o Issued when:

▪ Auditor cannot obtain sufficient evidence, and the impact could be material
and pervasive.

▪ Multiple uncertainties prevent forming an opinion.

6. Key Audit Matters (KAM)

KAM are issues that, in the auditor’s professional judgment, were of most significance during the
audit.

Purpose of KAM:

• Enhances transparency.

• Highlights areas requiring significant judgment.

Examples of KAM:

1. Goodwill Impairment:

o Complex valuation assumptions.

o Auditor evaluates assumptions like revenue growth and profit margins.

 2. Revenue Recognition:

o Ensures compliance with complex accounting policies for long-term contracts.

7. Emphasis of Matter (EoM) and Other Matter (OM) Paragraphs

EoM Paragraphs:

• Highlight significant matters disclosed in the financial statements.

• Example: Effects of a natural disaster or significant legal disputes.

OM Paragraphs:

• Refer to matters outside the financial statements relevant to users' understanding.

• Example: Reporting on a previous auditor’s opinion.

8. Modified Opinions in Practice

Qualified Opinion Example:

• Scenario: Inventory overstated due to not using net realizable value.

• Impact: Affects cost of sales, income, and equity but is not pervasive.

Adverse Opinion Example:

• Scenario: Non-consolidation of a significant subsidiary.

• Impact: Misleads users about the entity’s financial health.

Disclaimer of Opinion Example:

• Scenario: Lack of evidence for major accounts (e.g., inventory, receivables).

• Impact: Auditor cannot form an opinion.

9. Reports to Management

The auditor issues a Management Letter that:

• Identifies deficiencies in internal controls.

• Suggests recommendations for improvement.

• States that findings are based on the audit scope and may not cover all weaknesses.

10. Other Regulatory Reports

Supplemental Written Statement (SRC Rule 68):

• Confirms compliance with stockholder thresholds.

• Example: Reporting the number of shareholders owning 100+ shares.

Supplementary Information (RR 15-2010):

• Provides additional disclosures for regulatory agencies, such as tax information.

11. The Expectations Gap

This refers to the difference between public expectations and the actual role of auditors.

Misunderstandings:

1. Users may believe:

o Audited financial statements guarantee no fraud or errors.

o Auditors provide absolute assurance.

o The entity will continue as a going concern.

2. Reality:

o Audits provide reasonable, not absolute, assurance.

o Materiality and sampling limit detection of errors or fraud.

12. Importance of the Audit Report

• The audit report communicates findings to users, enabling informed decision-making.

• By maintaining transparency and adhering to standards, it ensures credibility and reliability

in financial reporting.