Acctg 151 Forming an Opinion on the FS.

tmsp

ACCTG 151 – AUDITING THEORY – FORMING AN

OPINION ON THE FINANCIAL STATEMENTS
Per CPALE syllabus
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;
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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

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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
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

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- 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].”

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 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

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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
 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

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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. NO Adequate Disclosure of a Material Uncertainty Is
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

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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
concern and whether the use of the going concern
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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)
(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.
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(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
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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

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-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

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

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(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
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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:
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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

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
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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
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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, except for or
b) The financial statements have been prepared, in all
material respects, in accordance with applicable financial
reporting framework, except for

Adverse Opinion – state in the opinion paragraph

“because of the significance of the matter(s) described in
the Basis for Adverse Opinion paragraph”:
a) The financial statements do not present fairly in
accordance with the applicable financial reporting
framework or

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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)
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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

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(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

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
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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.

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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

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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
-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:

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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
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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.
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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.

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.

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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:
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 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 of other information

- 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:
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(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.

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
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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

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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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