San Mateo Municipal College Auditing & Assurance – Principles

Guitnang Bayan, San Mateo, Rizal Mr. Nilo N. Iglesias, CPA, MBA, REA

Module 12
THE AUDITOR’S REPORT
After studying this chapter, you should be able to:

✓ Describe the nature of and need for the auditor’s report

✓ Describe the process for deciding the appropriate audit report
✓ Determine the conditions that justify the issuing the standard unqualified audit report and
conditions requiring a departure from an unqualified audit report.
✓ Identify other reporting considerations in an audit of financial statements.

The objectives of the auditor are to:

a. Form an opinion on the financial statements based on an evaluation of the conditions drawn
from the audit evidence obtained; and

b. Express clearly that opinion through a written report that also describes the basis for the
opinion.

Basic Selections of the Auditor’s Standard Report

The auditor’s report shall be in writing and shall have the following basic sections:

a. Title.

The phrase “Independent Auditor’s Report” appears above the body of the audit report. A title
indicating the report is the report of an independent auditor, affirms that the auditor has met all
of the relevant ethical requirements regarding independence and, therefore, distinguishes the
independent auditor’s report from reports issued by others.

b. Addressee.

The auditor’s report should be addressed as required by the circumstances of the engagement.
Ordinarily, the auditor’s report on general purpose financial statements is addressed to those
for whom the report is prepared, often either to the shareholders or those charged with
government of the client.

Examples of How Audit Reports are Addressed

Client Entity Addressee of the Audit Report
The board of directors or stockholders or both if the dual address
is preferred. The audit report may instead be addressed to the
president and the board of directors but is not addressed only to
Incorporated Entity
an officer because it might be construed as being intended only
for his or her information, not for the board of directors, lawful
governing body.
Partnership The partners and the firm or to the firm.
Unincorporated joint venture The participants.
Proprietorship The proprietor
If the auditor was engaged by an outside party (for example,
prospective investor, creditor, prospective creditor, single
Outside party
stockholder, or court of law), the audit report is addressed to the
engaging party.
3. Auditor’s Opinion

The first section of the auditor’s report shall include the auditor’s opinion, and shall have the
heading “Opinion and 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 the 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 the financial statement 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
PFRSs issued by the Financial Reporting Standards Council, the auditor’s opinion shall identify
the jurisdiction of the origin of the framework.

4. Basis for Opinion

This section shall directly follow the Opinion section, with the heading “Basis for Opinion” and
shall also:

a. State that the audit was conducted in accordance with the Philippine Standards on Auditing;
b. Refer to the section of the of the auditor’s report that describes the auditor’s responsibilities
under PSAs;
c. Include 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’
d. State 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

Where applicable, the auditor shall report in accordance with PSA 570 (Revised). Under the
going concern basis of accounting, the financial statements are prepared in the assumption
that the entity is a going concern and will continue its assumption that the entity is a going
concern and will continue its operations for the foreseeable future. The auditor shall evaluate
whether sufficient appropriate audit evidence has been obtained regarding, and shall conclude
on, the appropriateness of management’s use of the going concern basis of accounting in the
preparation of the financial statements.

6. Key Audit Matters (KAM)

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
KAM are selected from matters which are communicated with those charged with governance.
Matters which are discussed with those charged with governance are then evaluated by the
 auditor who then determines those matters which required significant auditor attention during
the course of the audit. There are three matters which the PSA requires the auditor to take into
account when making this determination:

1. Areas which were considered to be susceptible to a higher risk of materials misstatements

or which were deemed to be ‘significant risks’ in accordance with PSA 315(Revised),
Identifying and Assessing the Risks of Material Misstatement through Understanding the
Entity and its Environment.

2. Significant auditor judgements in relation to areas of the financial statements that involved
significant management judgements. This might include accounting estimates which have
been identified by the auditor as having a high degree of estimation uncertainty.

3. The effect on the audit of significant events or transactions that have taken place during
the period.

The auditor must determine which matters are most significance in the audit of the financial
statements and these will be regarded as KAM.

7. Responsibilities of Management and Those Charge with Governance for the Financial
Statements.

The auditor’s reports shall include a section with a heading “Responsibilities of

Management for the Financial Statements.” The auditor’s report shall use the term
that is appropriate in the context of the legal framework in the particular jurisdiction
and need not refer specifically to “management”. In some jurisdictions, the appropriate
reference may be those charged with governance.

This section of the auditor’s report shall describe management’s responsibility for:

a) 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 the financial statements that are free from material misstatement,
whether due to fraud or error; and

b) Assessing the entity’s ability to continue as a going concern 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 use of the going concern basis of
accounting is appropriate.

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

The auditor’s report shall include a section with the heading “Auditor’s
Responsibilities for the Audit of the Financial Statements.”

This section shall state that the objectives of the auditor are to:

a. Obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatements, whether due to fraud or error; and

b. Issue an auditor’s report that includes the auditor’s opinion.

The Auditor’s responsibilities shall further state that:

a. As part of an audit in accordance with PSA’s, the auditor exercises professional judgement
and maintains professional skepticism throughout the audit;

b. Describe an audit by stating that the auditor’s responsibilities are:

• 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.
• 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.
• To evaluate the appropriateness of accounting policies used and the reasonableness
of accounting estimates and related disclosures made by the management.
• 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 going concern.
• 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 disclosures, and whether the financial statements represent the
underlying transactions and events in a manner that achieves fair presentation.

When PSA 600 (Special Considerations – Audit of Group Financial Statements, including the
Work of the Component Auditor) applies, the auditor shall further describe the responsibilities
stating that:

a. The auditor’s responsibilities are to obtain sufficient appropriate audit evidence regarding
the financial information of the entities or business activities within the group to express
an opinion on the group financial statements;
b. The auditor is responsible for the direction, supervision and performance of the group
audit; and
c. The auditor remains solely responsible for the auditor’s opinion.

9. Other Reporting Responsibilities

o The other reporting responsibilities shall be addressed in a separate section in the auditor’s
report titled “Report on Other Legal and Regulatory Requirements” or otherwise as
appropriate to the content of the section, unless these addressed the same topics as those
presented and required by the PSAs in which case the maybe presented in the same
section as the related report elements required by the PSAs.

o Are presented in the same section as the related report elements required by the PSA’s,
the auditor’s report shall clearly differentiate the other reporting responsibilities from the
reporting that is required by the PSAs.

o The auditor’s report contains a separate section that addresses other reporting
responsibilities, the requirements of paragraphs of this PSA shall be included under section
with a heading “Report on the Audit of the Financial Statements.” The “Report on Other
Legal and Regulatory Requirements” shall follow the “Report on the Audit of the Financial
Statements.”

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 a significant personal disclosure
is reasonably expected to lead a significant personal security threat. If the auditor intends not
to include the name of the engagement partner in the auditor’s report, the auditor then discuss
this intention with those charged with governance to inform the auditor’s assessment of the
likelihood and severity of a significant personal security threat.

11. Signature of the Auditor

The auditor’s report shall be signed.

12. Auditor’s Address

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

13. Date of the Auditor’s Report

The auditor’s report shall be dated no earlier that the date on which the auditor has obtained
sufficient appropriate evidence on which to base the auditor’s opinion on the financial
statements, including evidence that:

a. All the statements that comprise the financial statements, including the related notes have
been prepared; and
b. Those with the recognized authority have asserted that they have taken responsibility for
those financial statements.

Forms of Audit Report

1. Unmodified Opinion

Implies that the auditor is satisfied that the financial statements present fairly, in all material
respects, an entity’s financial position, results of operations, and cash flows in conformity with the
generally accepted accounting principles based on the auditor’s judgement as to whether:

a. The accounting principles selected and applied have general acceptance;

b. The accounting principles are appropriate in the circumstances;
c. The financial statements, including the related notes, are informative of matters that may
affect their use, understanding, and interpretation;
d. The information presented in the financial statements is classified and summarized in a
reasonable manner, that is, it is neither too detailed not too condensed, and
e. The financial statements reflect the underlying transactions and events in a manner that
presents the financial position, results of operations, and cash flows stated within a range
of acceptable limits, that is, limits that are reasonable and practicable to attain in financial
statements.

Illustrative Auditor’s Report on Financial Statements of a Listed Entity Prepared in

Accordance with a Fair Presentation Framework

• Audit of a complete set of financial statements of a listed entity using a fair presentation
framework. The audit is not a group audit.
• The financial statements are prepared by management of the entity in accordance with
PFRS (a general-purpose framework).
• The terms of the audit engagement reflect the description of management’s responsibility
for the financial statements in PSA 210.
• The auditor has concluded an unqualified opinion is appropriate based on the audit
evidence obtained.
• The relevant ethical requirements that apply to the audit comprise the International Ethics
Standards Board for Accountants’ Code of Ethics for Professional Accountants together
with the ethical requirements relating to the audit in the jurisdiction, the Code of Ethics for
Professional Accountants in the Philippines, and the auditor refers to both.
• Based on the audit evidence obtained, the auditor has concluded that a material uncertainty
does not exist related to the events or conditions that may cast significant doubt on the
entity’s ability to continue as a going concern in accordance with PSA 570(Revised)
• Key audit matters have been communicated in accordance with PSA 701.
• Those responsible for oversight of the financial statements differ from those responsible for
the preparation of the financial statements.
• The auditor has other reporting responsibilities required under local law.
2. Modified Opinion

There are 3 types of modified opinion:

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

The decision which types of modified opinion is appropriate depends on:

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, maybe materially misstated; and
b. The auditor’s judgment about the pervasiveness of the effects or possible effects of the
matter on the financial statements.

Audit Reports with Modified Opinion

Type of Audit
Description
Report
Expressed when the auditor concludes that an unqualified opinion
cannot be expressed but the effect of any misstatement, individually
or in aggregate, or due to inability of the auditor to obtain sufficient
Qualified Opinion appropriate audit evidence, are material, but not pervasive, as to
require an adverse opinion or a disclaimer of opinion. A qualified
opinion should be expressed as being “except for” the effects of the
matter to which the qualification relates.
Expressed when the effect of a misstatement is both material and
pervasive to the financial statements that the auditor concludes that
Adverse Opinion
a qualification of the report is not adequate to disclose the misleading
or incomplete nature of the financial statements.
Expressed when the possible effect of an auditor’s inability to obtain
sufficient appropriate audit evidence is both material and pervasive.
Also, in extremely rare circumstances involving multiple certainties,
Disclaimer of the auditor concludes that notwithstanding having obtained sufficient
Opinion appropriate audit evidence regarding each of the individual
uncertainties, it is not possible to form an opinion on the financial
statements due to the potential interaction of the uncertainties and
their possible cumulative effect on the financial statements.