Acctg 163 Auditing Theory Review 6 tmhs

ACCTG 163 – AUDITING THEORY (AT-6)

6.0 Reports on Audited Financial Statements

6.1 The unqualified auditor's report
6.2 Basic elements of the unqualified auditor's report
6.3 Modified auditor's report
6.3.1 Matters that do not affect the auditor's opinion
6.3.2 Matters that do affect the auditor's opinion
6.4 Report on comparatives
___________________________________________________________________________________
PSA 700 Forming an Opinion and Reporting on Financial Statements” establishes standards and
provides guidance on the form and content of the auditor’s report as a result of an audit performed by an
independent auditor of the financial statements of an entity.
The objectives of the auditor are to:
(a) Form an opinion on the financial statements based on an evaluation of the conclusions drawn from the
audit evidence obtained; and
(b) To express clearly that opinion through a written report.
➢ The auditor shall form an opinion on whether the financial statements are prepared in all material
respects, in accordance with the applicable financial reporting framework
➢ In order to form that opinion, the auditor shall conclude as to whether the auditor has obtained
reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error.
The auditor shall take the ff. into account:
a. The auditor’s conclusion, in accordance with PSA 330, whether sufficient appropriate evidence has
been obtained.
b. The auditor’s conclusion, in accordance with PSA 450, whether uncorrected misstatements are
material, individually or in aggregate and;
c. The auditor’s evaluation on the ff:
c1.Whether the financial statements are prepared, in all material respects, in accordance with the
requirements of the applicable financial reporting framework. This evaluation shall include
consideration of the qualitative aspects of the entity’s accounting practices, including indicators
of possible bias in management’s judgments.
Qualitative Aspects of the Entity’s Accounting Practices
• Management makes a number of judgments about the amounts and disclosures in the financial
statements.
• PSA 260 (Revised) contains a discussion of the qualitative aspects of accounting practices. In
considering the qualitative aspects of the entity’s accounting practices, the auditor may become aware
of possible bias in management’s judgments. The auditor may conclude that the cumulative effect of a
lack of neutrality, together with the effect of uncorrected misstatements, causes the financial statements
as a whole to be materially misstated. Indicators of a lack of neutrality that may affect the auditor’s
evaluation of whether the financial statements as a whole are materially misstated include the following:
• The selective correction of misstatements brought to management’s attention during the audit
(e.g., correcting misstatements with the effect of increasing reported earnings, but not correcting
misstatements that have the effect of decreasing reported earnings).
• Possible management bias in the making of accounting estimates.
• PSA 540 addresses possible management bias in making accounting estimates. Indicators of
possible management bias do not constitute misstatements for purposes of drawing conclusions on the
reasonableness of individual accounting estimates. They may, however, affect the auditor’s evaluation
of whether the financial statements as a whole are free from material misstatement.

c2. Evaluation on whether:

c2.1 The financial statements adequately disclose the significant accounting policies selected and
applied
c2.2 The accounting policies selected and applied are consistent with the applicable financial
reporting framework and are appropriate
c2.3 The accounting estimates used by management are reasonable
c2.4 The information presented in the FS is relevant, reliable, comparable and understandable
c2.5 The FS provide adequate disclosure to enable the intended users to understand the effect of
material transactions and events on the information conveyed in the FS
c2.6 The terminology used in the FS, including the title of each FS, is appropriate
c3. Whether the FS achieve fair presentation which include consideration of:
c3.1 The overall presentation, structure and content of the FS
c3.2 Whether the FS, including related notes, represent the underlying transactions and events in
a manner that achieves fair presentation
c4. Whether the FS adequately refer to or describe the applicable financial reporting framework

Forms of Opinion

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1. Unmodified Opinion
– is expressed when the auditor concludes that the FS are prepared, in all material respects, in accordance
with the applicable financial reporting framework
2. Modified Opinion
- If the auditor concludes that, based on the audit evidence obtained, the FS as a whole, are not free from
material misstatement or
- If the auditor is unable to obtain sufficient appropriate evidence to conclude that the FS as a whole are
free from material misstatement

Parts of the Auditor’s report:

1.Title – A title indicating the report is the report of an independent auditor, for example, “Independent
Auditor’s Report,”
2. Addressee – The auditor’s report is normally addressed to those for whom the report is prepared, often
either to the shareholders or to those charged with governance of the entity whose financial statements are
being audited
3. Auditor’s Opinion – heading “Opinion”
The Opinion section of the auditor’s report shall also:
a) Identify the entity whose financial statements have been audited;
b) State that the financial statements have been audited;
c) Identify the title of each statement comprising the financial statements;
d) Refer to the notes, including the summary of significant accounting policies; and
e) Specify the date of, or period covered by, each financial statement comprising the financial
statements.

• When expressing an unmodified opinion on financial statements prepared in accordance with a fair
presentation framework, the auditor’s opinion shall, unless otherwise required by law or regulation, use
the following phrase:
“In our opinion, the accompanying financial statements present fairly, in all material respects, […]
in accordance with [the applicable financial reporting framework].”
• When expressing an unmodified opinion on financial statements prepared in accordance with a
compliance framework, the auditor’s opinion shall be that the accompanying financial statements are
prepared, in all material respects, in accordance with [the applicable financial reporting framework].
• If the reference to the applicable financial reporting framework in the auditor’s opinion is not to
PFRSs issued by the Financial Reporting Standards Council, the auditor’s opinion shall identify the
jurisdiction of origin of the framework.

When the auditor expresses an unmodified opinion, it is not appropriate to use phrases such as “with
the foregoing explanation” or “subject to” in relation to the opinion, as these suggest a conditional
opinion or a weakening or modification of opinion.

- PSA 210 explains that in some cases, law or regulation prescribes the wording of the auditor’s report in
terms that are significantly different from the requirements of PSAs. In these cases PSA 210 requires the
auditor to evaluate:
a. Whether users might misunderstand the assurance obtained from the audit of FS, and if so,
b. Whether additional explanation in the auditor’s report can mitigate possible misunderstanding.
- Description of information that the financial statements present
- Description of the applicable financial reporting framework (PFRS, IFRS, IFRS for SMEs)
- If 2 frameworks are applicable, state opinion for each (both unmodified, or one is unmodified, the other
modified)
- If disclosure to compliance with other framework is misleading, modified opinion
If disclosure is not misleading, an emphasis of matter paragraph is added

4. Basis for Opinion - following the Opinion section, with the heading “Basis for Opinion”
a. States that the audit was conducted in accordance with Philippine Standards on Auditing
b. Refers to the section of the auditor’s report that describes the auditor’s responsibilities under the
PSAs;
c. Includes a statement that the auditor is independent of the entity in accordance with the relevant
ethical requirements relating to the audit, and has fulfilled the auditor’s other ethical responsibilities
in accordance with these requirements. The statement shall identify the jurisdiction of origin of the
relevant ethical requirements [Code of Ethics for Professional Accountants in the Philippines
(Philippine Code of Ethics)] or refer to the International Ethics Standards Board for Accountants’
Code of Ethics for Professional Accountants (IESBA Code); and
d. States 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.

5. Going Concern – Implications for the Auditor’s Report

A. Use of Going Concern Basis of Accounting Is Inappropriate

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• If the financial statements have been prepared using the going concern basis of accounting but, in
the auditor’s judgment, management’s use of the going concern basis of accounting in the
preparation of the financial statements is inappropriate, the auditor shall express an adverse
opinion.
B. Use of Going Concern Basis of Accounting Is Appropriate but a Material Uncertainty Exists
1. Adequate Disclosure of a Material Uncertainty Is Made in the Financial Statements
- If adequate disclosure about the material uncertainty is made in the financial statements, the
auditor shall express an unmodified opinion and the auditor’s report shall include a separate section
under the heading “Material Uncertainty Related to Going Concern” to: (Ref: Para. A28–A31, A34)
(a) Draw attention to the note in the financial statements that discloses the matter such as:
• The principal events or conditions that may cast significant doubt on the entity’s ability to continue
as a going concern and management’s plans to deal with these events or conditions
• The material uncertainty related to events or conditions that may cast significant doubt on the
entity’s ability to continue as a going concern and, therefore, that it may be unable to realize its
assets and discharge its liabilities in the normal course of business.
(b) State that these events or conditions indicate that a material uncertainty exists that may cast significant
doubt on the entity’s ability to continue as a going concern and that the auditor’s opinion is not modified in
respect of the matter.
2. Adequate Disclosure of a Material Uncertainty Is Not Made in the Financial Statements
-If adequate disclosure about the material uncertainty is not made in the financial statements, the
auditor shall:
a) Express a qualified opinion or adverse opinion, as appropriate, in accordance with PSA 705 and
b) In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a material
uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern
and that the financial statements do not adequately disclose this matter.

6. Key Audit Matters

- Key audit matters—Those matters that, in the auditor’s professional judgment, were of most significance
in the audit of the financial statements of the current period. Key audit matters are selected from matters
communicated with those charged with governance.
-The auditor shall take into account the following
(a) Areas of higher assessed risk of material misstatement, or significant risks identified in accordance with
PSA 315
(b) Significant auditor judgments relating to areas in the financial statements that involved significant
management judgment, including accounting estimates that have been identified as having high estimation
uncertainty.
(c) The effect on the audit of significant events or transactions that occurred during the period.

The auditor shall communicate key audit matters in the auditor’s report in accordance with PSA 701. For
audits of complete sets of general purpose financial statements of
➢ Listed entities, the auditor shall communicate key audit matters in the auditor’s report in
accordance with PSA 701.
➢ Public interest entities.
➢ For other entities, including those that may be of significant public interest, for example because
they have a large number and wide range of stakeholders and considering the nature and size
of the business. Examples of such entities may include financial institutions (such as banks,
insurance companies, and pension funds), and other entities such as charities.

7. “Responsibilities of Management for the Financial Statements.”

• Preparing the financial statements in accordance with the applicable financial reporting framework,
and for such internal control as management determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error; and
• Assessing the entity’s ability to continue as a going concern13 and whether the use of the going
concern basis of accounting is appropriate as well as disclosing, if applicable, matters relating to
going concern. The explanation of management’s responsibility for this assessment shall include a
description of when the use of the going concern basis of accounting is appropriate. (Ref: Para.
A43)
• identify those responsible for the oversight of the financial reporting process, when those
responsible for such oversight are different from those who fulfill the responsibilities described in
paragraph 33 above. In this case, the heading of this section shall also refer to “Those Charged
with Governance” or such term that is appropriate in the context of the legal framework in the
particular jurisdiction

8. Auditor’s Responsibilities for the Audit of the Financial Statements

(a) State that the objectives of the auditor are to:
(i) Obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error; and
(ii) Issue an auditor’s report that includes the auditor’s opinion. (Ref: Para. A46)

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(b) State that reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with PSAs will always detect a material misstatement when it exists; and
(c) State that misstatements can arise from fraud or error, and either:
(i) Describe that they are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis of these
financial statements; or
(ii) Provide a definition or description of materiality in accordance with the applicable financial
reporting framework.
(d) State that, as part of an audit in accordance with PSAs, the auditor exercises professional judgment
and maintains professional skepticism throughout the audit; and
(e) Describe an audit by stating that the auditor’s responsibilities are:
(i) To identify and assess the risks of material misstatement of the financial statements, whether
due to fraud or error; to design and perform audit procedures responsive to those risks; and to
obtain audit evidence that is sufficient and appropriate to provide a basis for the auditor’s opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or
the override of internal control.
(ii) To obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity’s internal control. In circumstances when the auditor also
has a responsibility to express an opinion on the effectiveness of internal control in conjunction with
the audit of the financial statements, the auditor shall omit the phrase that the auditor’s
consideration of internal control is not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control.
(iii) To evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by management.
(iv) To conclude on the appropriateness of management’s use of the going concern basis of
accounting and, based on the audit evidence obtained, whether a material uncertainty exists related
to events or conditions that may cast significant doubt on the entity’s ability to continue as a going
concern. If the auditor concludes that a material uncertainty exists, the auditor is required to draw
attention in the auditor’s report to the related disclosures in the financial statements or, if such
disclosures are inadequate, to modify the opinion. The auditor’s conclusions are based on the audit
evidence obtained up to the date of the auditor’s report. However, future events or conditions ma
cause an entity to cease to continue as a going concern.
(v) When the financial statements are prepared in accordance with a fair presentation framework,
to evaluate the overall presentation, structure and content of the financial statements, including the
disclosures, and whether the financial statements represent the underlying transactions and events
in a manner that achieves fair presentation.

9. Other reporting responsibilities

-Report on other legal and regulatory requirements
If other reporting responsibilities are presented in the same section as the related report elements
required by the PSAs, the auditor’s report shall clearly differentiate the other reporting responsibilities
from the reporting that is required by the PSAs.

10. Name of the Engagement Partner

-The name of the engagement partner shall be included in the auditor’s report for audits of complete sets
of general purpose financial statements of listed entities unless, in rare circumstances, such disclosure
is reasonably expected to lead to a significant personal security threat.

11. Signature of the auditor

-either in the name of the audit firm or personal name of auditor, or both
-may include auditor’s professional accountancy designation or
-may include the fact that the auditor or firm has been recognized by the appropriate licensing authority in
that jurisdiction

12. Auditor’s Address

-The auditor’s report shall name the location in the jurisdiction where the auditor practices.

13. Date of auditor’s report

-dated not earlier than the date the auditor has obtained sufficient appropriate evidence, including evidence
that:
a. All the statements comprising the FS, including notes, have been prepared
b. Those with recognized authority have asserted that they have taken responsibility for those FS
-In some jurisdictions, FS must be approved first by identified individuals or bodies, or by shareholders

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MODIFICATIONS TO AUDITOR’S REPORT

PSA 705 “Modifications to the Opinion in the Independent Auditor’s Report” deals with the auditor’s
responsibility to issue appropriate report in circumstances where auditor concludes that a modification to
the auditor’s opinion on the FS is necessary
Types of Modified Opinion
1. Qualified
2. Adverse
3. Disclaimer of Opinion

The decision regarding which type of modified opinion is appropriate depends upon:
(a) The nature of the matter giving rise to the modification, that is, whether the financial statements are
materially misstated or, in the case of an inability to obtain sufficient appropriate audit evidence, may be
materially misstated; and
(b) The auditor’s judgment about the pervasiveness of the effects or possible effects of the matter on the
financial statements.

Modified opinion on the financial statements that is necessary when:

a. The auditor concludes, based on the audit evidence obtained, that the financial statements as a
whole are not free from material misstatement; or
b. The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement.

Pervasive – A term used, in the context of misstatements, to describe the effects on the financial
statements of misstatements or the possible effects on the financial statements of misstatements, if any,
that are undetected due to an inability to obtain sufficient appropriate audit evidence. Pervasive effects on
the financial statements are those that, in the auditor’s judgment:
(i) Are not confined to specific elements, accounts or items of the financial statements;
(ii) If so confined, represent or could represent a substantial proportion of the financial statements; or
(iii) In relation to disclosures, are fundamental to users’ understanding of the financial statements.

Qualified Opinion -expressed when:

a. The auditor having obtained sufficient appropriate evidence, concludes that misstatements,
individually or in aggregate, are material but not pervasive to the FS or
b. The auditor is unable to obtain sufficient appropriate evidence on which to base the opinion, but
the auditor concludes that the possible effects of undetected misstatements on the FS, could be
material but not pervasive

Adverse Opinion -expressed when:

The auditor having obtained sufficient appropriate evidence, concludes that misstatements, individually or
in aggregate, are both material and pervasive to the FS

Disclaimer of Opinion -expressed when:

a. The auditor is unable to obtain sufficient appropriate evidence on which to base the opinion and
the auditor concludes that the possible effects of undetected misstatements on the FS, could be
both material and pervasive
b. In extremely rare circumstances, involving multiple uncertainties, the auditor concludes that,
notwithstanding having obtained sufficient appropriate evidence regarding each individual
uncertainties, it is not possible to form an opinion on the FS due to potential interaction of
uncertainties and their possible cumulative effect on the financial statements.
Nature of matter Auditor’s Judgement about the
giving rise to Pervasiveness of the Effect or Possible
modification Effects on the financial statements

Material but not Material and

Pervasive Pervasive
Financial statements
are materially QUALIFIED ADVERSE
misstated

Inability to obtain
sufficient
appropriate audit QUALIFIED DISCLAIMER
evidence

Limitations on the scope of the audit may preclude the auditor from obtaining sufficient appropriate
evidence due to:
a. Circumstances beyond the control of the entity;
b. Circumstances relating to the nature of timing of the auditor’s work or
c. Limitations imposed by management

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Client-imposed restrictions:
➢ Terms of engagement specify that audit procedures considered necessary are not carried out
Ex. Management prevents the auditor from observing the counting of physical inventory and/or
from requesting external confirmation of specific account balances
➢ Client’s attorneys may be unable or unwilling to respond to a letter of inquiry
➢ Management refuses to provide a representation letter that the auditor considers necessary (PSA
580)

Management-imposed Limitation After the Auditor Has Accepted the Engagement

1. If management refuses to remove the limitation, auditor informs BOD and determines whether it is
possible to perform alternative procedures to obtain sufficient appropriate evidence.
2. If auditor is unable to obtain sufficient appropriate evidence due to management-imposed limitation:
a. If possible effects of undetected misstatements on the FS could be material, but not pervasive,
then Qualified Opinion
b. If auditor concludes that the possible effects of undetected misstatements on the FS could be both
material and pervasive, so that a qualified opinion would be inadequate to communicate the gravity
of the situation, then the auditor will:
i) Withdraw from the audit, where practicable and not prohibited by law, or
ii) If withdrawal from the audit before issuing the auditor’s report, is not practicable or possible, then
the auditor will disclaim an opinion on the FS

Limitations imposed by circumstances or conditions

➢ Timing of auditor’s appointment is too late to observe the counting of physical inventory
➢ Inadequate accounting records preclude confirmation of accounts receivable
Ex. The entity’s accounting records have been destroyed and/or the accounting records of a
significant component have been seized indefinitely by governmental authorities
➢ Location of inventories makes it impossible to observe physical count
➢ The entity is required to use the equity method of accounting for an associated entity, and the
auditor is unable to obtain sufficient appropriate audit evidence about the latter’s financial
information to evaluate whether the equity method has been appropriately applied
➢ The auditor determines that performing substantive procedures alone is not sufficient, but the
entity’s controls are not effective

Part of examination made by component auditor

➢ Group engagement team concludes that the work of the component auditor cannot be used and
the group engagement team has not been able to perform sufficient additional procedures
regarding the financial information of the component audited by the other auditor.

Opinion Paragraph
When the auditor modifies the audit opinion, the auditor shall use the heading “Qualified Opinion,”
“Adverse Opinion,” or “Disclaimer of Opinion,” as appropriate, for the Opinion section.

Basis for Modification Paragraph

1. Basis for Qualified Opinion
2. Basis for Adverse Opinion
3. Basis for Disclaimer of Opinion

Basis for Modification Paragraph

- Material misstatement of the FS relating to specific amounts (description and quantification of the financial
effects of the misstatements). If it is not practicable to quantify the financial effects, the auditor will state it
in the basis for modification paragraph
- Material misstatement relating to narrative disclosures (state how the disclosures are misstated)
-Material misstatement relating to non-disclosure of information (description of the nature of omitted
information). If not prohibited by law or regulation, include the omitted disclosures, provided it is practicable
and the auditor has obtained sufficient appropriate evidence about the omitted information
- Inability to obtain sufficient appropriate evidence and the reasons for that inability

Qualified Opinion – state in the opinion paragraph “except for the effects of the matter(s) described in the
Basis for Qualified Opinion paragraph
a) The financial statements present fairly, in all material respects, in accordance with the applicable financial
reporting framework or
b) The financial statements have been prepared, in all material respects, in accordance with applicable
financial reporting framework

Adverse Opinion – state in the opinion paragraph “because of the significance of the matter(s) described in
the Basis for Adverse Opinion paragraph”:

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a) The financial statements do not present fairly in accordance with the applicable financial reporting
framework or
b) The financial statements have not been prepared, in all material respects, in accordance with applicable
financial reporting framework

Disclaimer of Opinion due to inability to obtain sufficient appropriate evidence – state in the auditor’s
responsibility paragraph
(a) State that the auditor does not express an opinion on the accompanying financial statements;
(b) State that, because of the significance of the matter(s) 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
(c) Amend the statement which indicates that the financial statements have been audited, to state
that the auditor was engaged to audit the financial statements.

Matters that do affect the auditor’s opinion (PSA 705)

-Qualified opinion, adverse opinion or disclaimer of opinion
➢ An auditor may not be able to express an unqualified opinion when either of the following
circumstances exist and in the auditor’s judgement, the effect of the matter is or may be material
to the financial statements.
o There is limitation on the scope of the auditor’s work
o There is disagreement with management regarding the acceptability of the accounting
policies selected, the method of their application or the adequacy of financial statement
disclosures.

Matters that do not affect the auditor’s opinion (PSA 706)

1. Emphasis of a matter that pertains to a) Going concern problem b) uncertainties c) early application of a
new accounting standard that has a pervasive effect on the financial statements in advance of its effective
date and d) additional statutory requirements
➢ The auditor should modify the auditor’s report by adding a paragraph to highlight the matter
➢ The paragraph would preferably be included after the paragraph containing the auditor’s opinion
but before the section on any reporting responsibilities, if any
➢ The emphasis of matter paragraph would ordinarily refer to the fact that the auditor’s opinion is not
qualified in this respect

Emphasis of Matter paragraph – A paragraph included in the auditor’s report that refers to a matter
appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such
importance that it is fundamental to users’ understanding of the financial statements.
The auditor shall include an Emphasis of Matter paragraph in the auditor’s report provided:
(a) The auditor would not be required to modify the opinion in accordance with PSA 705 as a result of the
matter; and
(b) When PSA 701 applies, the matter has not been determined to be a key audit matter to be
communicated in the auditor’s report.

The auditor shall:

(a) Include the paragraph within a separate section of the auditor’s report with an appropriate heading that
includes the term “Emphasis of Matter”;
(b) Include in the paragraph a clear reference to the matter being emphasized and to where relevant
disclosures that fully describe the matter can be found in the financial statements. The paragraph shall refer
only to information presented or disclosed in the financial statements; and
(c) Indicate that the auditor’s opinion is not modified in respect of the matter emphasized.

An Emphasis of Matter paragraph is not a substitute for:

(a) A modified opinion in accordance with PSA 705 (Revised) when required by the circumstances of a
specific audit engagement;
(b) Disclosures in the financial statements that the applicable financial reporting framework requires
management to make, or that are otherwise necessary to achieve fair presentation; or
(c) Reporting in accordance with PSA 570 (Revised)7 when a material uncertainty exists relating to events
or conditions that may cast significant doubt on an entity’s ability to continue as a going concern.

Example of circumstances which might be included in an Emphasis of matter paragraph:

1. An uncertainty relating to the future outcome of exceptional litigation or regulatory action
2. Early application of a new accounting standard
3. Philippine Financial Reporting Standard that has a pervasive effect on the FS in advance of its effective
date
4. A major catastrophe that has had, or continues to have a significant effect on the entity’s financial position

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Example:
Emphasis of matter
We draw attention to Note X in the financial statements which describes the uncertainty related to the
outcome of the lawsuit filed against the company by XYZ Company. Our opinion is not qualified in respect
of this matter.

Other Matter paragraph – A paragraph included in the auditor’s report that refers to a matter other than
those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’
understanding of the audit, the auditor’s responsibilities or the auditor’s report.

The auditor shall include an Other Matter paragraph in the auditor’s report, provided:
(a) This is not prohibited by law or regulation; and
(b) When PSA 701 applies, the matter has not been determined to be a key audit matter to be
communicated in the auditor’s report.

Placement of Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Auditor’s Report
-It depends on the nature of the information to be communicated, and the auditor’s judgment as to the
relative significance of such information to intended users compared to other elements required to be
reported in accordance with PSA 700 (Revised).
Emphasis of Matter Paragraphs
(a)When the Emphasis of Matter paragraph relates to the applicable financial reporting framework, including
circumstances where the auditor determines that the financial reporting framework prescribed by law or
regulation would otherwise be unacceptable, the auditor may consider it necessary to place the paragraph
immediately following the Basis of Opinion section.
(b) When a Key Audit Matters section is presented in the auditor’s report, an Emphasis of Matter paragraph
may be presented either directly before or after the Key Audit Matters section, based on the auditor’s
judgment as to the relative significance of the information included in the Emphasis of Matter paragraph.
The auditor may also add further context to the heading “Emphasis of Matter”, such as “Emphasis of Matter
– Subsequent Event”, to differentiate the Emphasis of Matter paragraph from the individual matters
described in the Key Audit Matters section.

Other Matter Paragraphs

(a) When a Key Audit Matters section is presented in the auditor’s report and an Other Matter paragraph is
also considered necessary, the auditor may add further context to the heading “Other Matter”, such as
“Other Matter – Scope of the Audit”, to differentiate the Other Matter paragraph from the individual matters
described in the Key Audit Matters section.
(b) When an Other Matter paragraph is included to draw users’ attention to a matter relating to Other
Reporting Responsibilities addressed in the auditor’s report, the paragraph may be included in the Report
on Other Legal and Regulatory Requirements section.
(c) When relevant to all the auditor’s responsibilities or users’ understanding of the auditor’s report, the
Other Matter paragraph may be included as a separate section following the Report on the Audit of the
Financial Statements and the Report on Other Legal and Regulatory Requirements.

COMPARATIVE INFORMATION
PSA 710 deals with the auditor’s responsibilities regarding comparative information in an audit of FS.
-when the FS of prior period have been audited by a predecessor auditor or were not audited, the
requirements and guidance in PSA 510 regarding opening balances also apply.
2 approaches
1. Corresponding figures – auditor’s opinion on the FS refers to the current period only
2. Comparative FS – auditor’s opinion refers to each period for which FS are presented
* The kind of approach is often specified by law or regulation or specified in the terms of engagement
* For publicly listed entities- SEC requires audited comparative FS

Audit procedures
-the auditor determines whether FS include the comparative information required by the applicable financial
reporting framework , and whether such information is appropriately classified:
a) The comparative information agrees with amounts and other disclosures presented in the prior period,
or when appropriate, have been restated
b) The accounting policies reflected in the comparative information are consistent with those applied in the
current period, or if there have been changes in accounting policies, whether those changes have been
properly accounted for and adequately presented and disclosed.

-If the auditor becomes aware of possible material misstatement in the comparative information while
performing current year audit, the auditor shall perform the necessary additional audit procedures to obtain
sufficient appropriate evidence to determine whether material misstatements exist.
-If the auditor audited the prior period FS, the auditor shall follow PSA 560.
-If prior period FS are amended, the auditor determines that the comparative information agrees with the
amended FS

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-PSA 580 requires the auditor to request for written representations for all periods referred to in the auditor’s
opinion, and representations regarding any restatement made to correct a material misstatement in prior
period FS that affect the comparative information

Corresponding Figures
-If the auditor’s report on the prior period, included a qualified opinion, adverse opinion or disclaimer of
opinion, and the matter which gave rise to the modification remain unresolved, the auditor shall modify the
auditor’s opinion on the current period’s FS. In the Basis for Modification paragraph, the auditor shall:
a) Refer to both the current period’s figures and the corresponding figures in the description of the matter
giving rise to the modification when the effects or possible effects of the matter on the current period’s
figures are material or,
b) In other cases, explain that the audit opinion has been modified because of the effects or possible effects
of the unresolved matter on the comparability of the current period’s figures and the corresponding figures

-If the auditor obtains evidence that a material misstatement exists in the prior period FS on which an
unmodified opinion was previously issued, and the corresponding figures have not been properly restated
or appropriate disclosures have not been made, the auditor shall express a qualified opinion, or adverse
opinion on the current period FS, modified with respect to the corresponding figures included therein.

Prior Period FS audited by predecessor auditor

-If the auditor is permitted by law or regulation to refer to the predecessor auditor’s report on the
corresponding figures and decides to do so, the auditor shall state in an “Other Matters” paragraph in the
auditor’s report:
a) That the FS of prior period were audited by the predecessor auditor
b) The type of opinion expressed by the predecessor auditor, and if the opinion was modified, the reasons
therefore and
c) The date of that report

Prior Period FS not audited

-If the prior period FS were not audited, the auditor shall state in an “Other Matter” paragraph in the auditor’s
report that the corresponding figures are unaudited. Such a statement does not however, relieve the auditor
of the requirement to obtain sufficient appropriate audit evidence that the opening balances do not contain
material misstatements that materially affect the current period FS

Comparative Financial Statements

-When comparative FS are presented, the auditor’s opinion shall refer to each period for which FS are
presented and on which an audit opinion is expressed
-When reporting on prior period FS in connection with the current period audit, if the auditor’s opinion on
prior period FS differs from the opinion the auditor previously expressed, the auditor shall disclose the
substantive reasons for the different opinion in an “Other Matter” paragraph in accordance with PSA 706

Prior Period FS audited by a predecessor auditor

-If the FS of prior period were audited by a predecessor auditor, in addition to expressing an opinion on the
current period FS, the auditor shall state in Other Matter paragraph:
a) That the FS of prior period were audited by the predecessor auditor
b) The type of opinion expressed by the predecessor auditor, and if the opinion was modified, the reasons
therefore and
c) The date of that report
*Unless the predecessor auditor’s report on the prior period FS is reissued with the FS

Prior Period FS audited by a predecessor auditor

-If the auditor concludes that a material misstatement exists that affect the prior period FS on which the
predecessor auditor had previously reported without modification, the auditor shall communicate with
management and BOD, and request that the predecessor auditor be informed.
-If the prior period FS are amended, and the predecessor auditor agrees to issue a new auditor’s report on
the amended FS of the prior period, the auditor shall only report on the current period.

Prior Period FS not audited

-the auditor shall state in an Other Matter paragraph that the comparative FS are unaudited. Such a
statement, however, does not relieve the auditor of the requirement to obtain sufficient appropriate audit
evidence that the opening balances do not contain misstatements that do not materially affect the current
period FS.

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AUDITOR’S RESPONSIBILITY IN RELATION TO OTHER INFORMATION INCLUDED IN THE

ANNUAL REPORT
PSA 720 “The auditor’s responsibilities relating to other information, whether financial or non-financial
information (other than financial statements and the auditor’s report thereon), included in an entity’s annual
report.
PSA 720 requires the auditor to read and consider the other information because other information that is
materially inconsistent with the financial statements or the auditor’s knowledge obtained in the audit may
indicate that there is a material misstatement of the financial statements or that a material misstatement of
the other information exists.

Other information – Financial or non-financial information (other than financial statements and the auditor’s
report thereon) included in an entity’s annual report.
Other information may include amounts or other items that are intended to be the same as, to summarize,
or to provide greater detail, about amounts or other items in the financial statements, and other amounts or
other items about which the auditor has obtained knowledge in the audit. Other information may also include
other matters.

Annual Report - A document, or combination of documents, prepared typically on an annual basis by

management or those charged with governance in accordance with law, regulation or custom, the purpose
of which is to provide owners (or similar stakeholders) with information on the entity’s operations and the
entity’s financial results and financial position as set out in the financial statements. An annual report
contains or accompanies the financial statements and the auditor’s report thereon and usually includes
information about the entity’s developments, its future outlook and risks and uncertainties, a statement by
the entity’s governing body, and reports covering governance matters.

Misstatement of the other information – A misstatement of the other information exists when the other
information is incorrectly stated or otherwise misleading (including because it omits or obscures information
necessary for a proper understanding of a matter disclosed in the other information).

Note: The auditor’s opinion on the financial statements does not cover the other information, nor does this
PSA require the auditor to obtain audit evidence beyond that required to form an opinion on the financial
statements.

Reading Other Information

-The auditor shall read the other information to identify material inconsistencies between other information
with the audited FS or with auditor’s knowledge obtained in the audit.
- To respond appropriately when the auditor identifies that such material inconsistencies appear to exist, or
when the auditor otherwise becomes aware that other information appears to be materially misstated; and
-To report in accordance with this PSA.
In reading the other information, the auditor may become aware of new information that has implications
for:
➢ The auditor’s understanding of the entity and its environment and, accordingly, may indicate the
need to revise the auditor’s risk assessment
➢ The auditor’s responsibility to evaluate the effect of identified misstatements on the audit and of
uncorrected misstatements, if any, on the financial statements.
➢ The auditor’s responsibilities relating to subsequent events

Material Inconsistencies
- If the auditor identifies that a material inconsistency appears to exist (or becomes aware that the other
information appears to be materially misstated), the auditor shall discuss the matter with management and,
if necessary, perform other procedures to conclude whether:
(a) A material misstatement of the other information exists;
(b) A material misstatement of the financial statements exists; or
(c) The auditor’s understanding of the entity and its environment needs to be updated.

Material Misstatements
- If the auditor concludes that a material misstatement of the other information exists, the auditor shall
request management to correct the other information. If management:
(a) Agrees to make the correction, the auditor shall determine that the correction has been made; or
(b) Refuses to make the correction, the auditor shall communicate the matter with those charged with
governance and request that the correction be made.

Material Misstatement exists in Other Information Obtained Prior to the Date of the Auditor’s Report, and
the other information is not corrected after communicating with those charged with governance,
- The auditor shall:
(a) Consider the implications for the auditor’s report and communicating with those charged with
governance about how the auditor plans to address the material misstatement in the auditor’s report
(b) Withdraw from the engagement, where withdrawal is possible under applicable law or regulation.

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Material Misstatements Exists in Other Information Obtained Subsequent to Date of Auditor’s Report
-If other information has been corrected, the auditor shall:
(a) Determine that the correction has been made and may
(b) Review the steps taken by management to communicate with those in receipt of the other information,
if previously issued, to inform them of the revision.

-If those charged with governance do not agree to revise the other information,
(a) The auditor shall take appropriate action to seek to have the uncorrected misstatement appropriately
brought to the attention of users for whom the auditor’s report is prepared (this requires the exercise of
professional judgment, and may be affected by relevant law or regulation in the jurisdiction).
(b) The auditor may consider seeking legal advice about the auditor’s legal rights and obligations.

- When a material misstatement of the other information remains uncorrected, appropriate actions that the
auditor may take to seek to have the uncorrected material misstatement appropriately brought to the
attention of users for whom the auditor’s report is prepared, when permitted by law or regulation, include,
(a) Providing a new or amended auditor’s report to management including a modified section in and
requesting management to provide this new or amended auditor’s report to users for whom the auditor’s
report is prepared. In doing so, the auditor may need to consider the effect, if any, on the date of the new
or amended auditor’s report, in view of the requirements of the PSAs or applicable law or regulation. The
auditor may also review the steps taken by management to provide the new or amended auditor’s report to
such users;
(b) Bringing the material misstatement of the other information to the attention of the users for whom the
auditor’s report is prepared (for example, by addressing the matter in a general meeting of shareholders);
(c) Communicating with a regulator or relevant professional body about the uncorrected material
misstatement; or
(d) Considering the implications for engagement continuance

Reporting
The auditor’s report shall include a separate section with a heading “Other Information”, or other appropriate
heading, when, at the date of the auditor’s report:
(a) The auditor has obtained, or expects to obtain, the other information in an audit of financial statements
of a listed entity; or
(b) The auditor has obtained some or all of the other information in an audit of financial statements of an
entity other than a listed entity.

When the auditor’s report is required to include an Other Information section in accordance with the
previous paragraph, this section shall include:
(a) A statement that management is responsible for the other information;
(b) An identification of:
(i) Other information obtained by the auditor prior to the date of the auditor’s report; and
(ii), Other information, expected to be obtained after the date of the auditor’s report for an audit of
financial statements of a listed entity;
(c) A statement that the auditor’s opinion does not cover the other information and, accordingly, that the
auditor does not express (or will not express) an audit opinion or any form of assurance conclusion thereon;
(d) A description of the auditor’s responsibilities relating to reading, considering and reporting on other
information as required by this PSA; and
(e) When other information has been obtained prior to the date of the auditor’s report, either:
(i) A statement that the auditor has nothing to report; or
(ii) If the auditor has concluded that there is an uncorrected material misstatement of the other
information, a statement that describes the uncorrected material misstatement of the other
information.

Material Misstatement of Fact (PSA 810- Reports on Summary FS)

-If, on reading other information for the purpose of identifying material inconsistencies, the auditor becomes
aware of an apparent material misstatement of fact, the auditor shall discuss the matter with management
-When after discussing, the auditor still considers that there is an apparent material misstatement of fact,
the auditor shall request management to consult with a qualified third party, such as the entity’s legal
counsel
-When the auditor concludes that there is a material misstatement of fact in other information which
management refuses to correct, the auditor shall notify the BOD and take appropriate action.

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