ST.

VINCENT COLLEGE
Business School
• Leganes • Pototan • Ivisan

COO FORM 12

SUBJECT TITLE: AUDITING AND ASSURANCE: SPECIALIZED INDUSTRIES

INSTRUCTOR: MARY JANE A. INTAO, CPA
SUBJECT CODE: AT2

MODULE 2

TOPIC 1: REPORT ON AUDITED FINANCIAL STATEMENTS

Learning Objectives
At the end of this topic, students will be able to:
1. Understand the need of an independent auditor’s report;
2. Explain an unmodified audit opinion and when it is issued;
3. Enumerate the elements of an auditor’s report;
4. Discuss the modifications to an audit opinion;

NOTES:

AUDITOR’S OPINION

PSA 700 (Revised) was issued in connection with an audit of a complete set of general purpose
financial statements. It deals with the auditor’s responsibility to form an opinion on the
financial statements, and also with the form and content of the auditor’s report issued as a
result of an audit of financial statements. In accordance with said standard, the auditor should
form an opinion on the financial statements based on an evaluation of the conclusions drawn
from the audit evidence obtained, and express.

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. It must
be made in writing, and may be issued in hard copy format, or using an electronic medium.

IMPORTANCE OF AN AUDITOR’S OPINION

PSA 200 (Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Philippine Standards on Auditing) states that the purpose of an audit is to
enhance the degree of confidence of intended users in the financial statements.

The independent auditor's opinion lends credibility to the financial statements prepared and
presented by an entity's management.

FRAMEWORKS

1. The term "fair presentation framework" is used to refer to a financial reporting

framework that requires compliance with the requirements of the framework and:

a. Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial

statements, it may be necessary for management to provide disclosures beyond those
specifically required by the framework; Or

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b. Acknowledges explicitly that that it may be necessary for management to depart from
a requirement of the framework to achieve fair presentation of the financial
statements,

Uses “financial statements present fairly” or “financial statements give a true and fair view
of” in opinion

2. The term "compliance framework" is used to refer to a financial reporting framework

that requires compliance with the requirements of the framework, but does not contain
the acknowledgements in (i) or (ii) above (PSA 700 Revised, par, 7)'

Uses “financial statements present are prepared” in opinion.

3. “General Purpose framework” - a financial reporting framework designed to meet the

common financial information needs of a wide range of users. Produces General Purpose
Financial Statements.

Reference to "financial statements" in PSA 700 Revised means a complete set of general
purpose financial statements, including the related notes.

4. “Special Purpose Framework” – a financial framework designed to meet the financial

information needs of specific users. Produces Special Purpose Financial Statements.

PSA 800 (Special Considerations-Audit of Financial Statements Prepared in Accordance

with Special Purpose Framework).

FACTORS CONSIDERED IN FORMING AN AUDIT OPINION

In order to form an opinion, the auditor should conclude as to whether he has obtained
reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, taking into consideration the following:

a. The auditor’s conclusion whether sufficient appropriate audit evidence has been
obtained.
b. The auditor’s conclusion whether uncorrected misstatements are material, individually
or in aggregate.
c. The auditor’s evaluation that:
• The financial statements adequately disclose the significant accounting policies
selected and applied.
• The accounting policies selected and applied are consistent with the applicable
financial reporting framework and are appropriate.
• The accounting estimates made by management are reasonable.
• The information presented in the financial statements is relevant, reliable,
comparable, and understandable.
• The financial statements provide adequate disclosures to enable the intended
users to understand the effect of material transactions and events on the
information conveyed in the financial statements.
• The terminology used in the financial statements, including the title of each
financial statement, is appropriate.

FORMS OF OPINION

1. Unmodified Opinion (unqualified)

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

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UNMODIFIED or UNQUALIFIED OPINION:

Issued when the auditor:

a. Concludes that the financial statements are prepared, in all material respects, in
accordance with the applicable financial reporting framework.
b. Concludes that, based on the audit evidence obtained, the financial statements as a
whole are free from material misstatement. (just an immaterial misstatements)
c. Is able to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement
d. Have fully complied with the PSAs.

MODIFICATIONS TO THE OPINION

Auditor’s opinion shall be modified when:

A. If the financial statements are not free from material misstatements (able to obtain
sufficient appropriate opinion),

1. Qualified Opinion – if the misstatements, individually or in aggregate, are material

but not pervasive

2. Adverse Opinion - if the misstatements, individually or in aggregate, are material and

pervasive

B. If the auditor is unable to obtain sufficient appropriate audit evidence to conclude that
the financial statements as a whole are free from material misstatements.

1. Qualified Opinion – if the “possible effects” of the undetected misstatements are

material but not pervasive

2. Disclaimer of Opinion - if the “possible effects” of the undetected misstatements are

material and pervasive

According to the standard, pervasive effects on the financial statements are those that, in
the auditor's judgment:

1) Are not confined to specific elements, accounts or items of the financial statements;
2) If so confined, represent or could represent a substantial proportion of the financial
statements; or
3) In relation to disclosures, are fundamental to users' understanding of the financial
statements.

ELEMENTS OF AN INDEPENDENT AUDITOR’S REPORT

An independent auditor’s report includes the following elements:

1. Title
2. Addressee
3. Auditor’s Opinion
4. Basis for Opinion
5. Going Concern
6. Key Audit Matters (KAM)
7. Responsibilities of Management for the Financial Statements
8. Auditor’s Responsibilities for the Audit of the Financial Statements
9. Other Reporting Responsibilities
10. Name of the Engagement Partner
11. Signature of the Auditor
12. Auditor’s Address
13. Date of the Auditor’s Report

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AUDITOR’S REPORT
The auditor’s report shall be in writing. A written report encompasses reports issued in hard
copy and those using an electronic medium.

Title

The auditor’s report shall have a title that clearly indicates that it is the report of an
independent auditor (e.g. “Independent Auditor’s Report”).

The title “Independent Auditor’s Report” affirms that the auditor has met all of the relevant
ethical requirements regarding independence. It also distinguishes the independent auditor’s
report from reports that may be issued by others.

Addressee

The auditor’s report shall be addressed, as appropriate, based on the circumstances of the
engagement. Law, regulation, or the terms of the engagement may specify to whom the
auditor’s report is to be addressed in that particular jurisdiction.

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.

Auditor’s Opinion

The first section of the auditor’s report shall include the auditor’s opinion, and shall have the
heading “Opinion”.

The Opinion section shall:

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.

Basis for Opinion

The auditor’s report shall include a section, directly following the Opinion section, with the
heading “Basis for Opinion”. If the auditor is expressing a modified opinion, the title shall be
edited to whichever is appropriate for the expressed opinion.

The Basis for Opinion shall:

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

When the auditor disclaims an opinion, the auditor’s report shall not include the elements
required by paragraphs (b) and (d) stated in this section.

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Going Concern Section

When a material uncertainty exists related to going concern, the management should make
an adequate disclosure in the financial statements.

PSA 570 (Revised). According to the standard, the auditor should modify the auditor’s report
by adding a section with the heading “Material Uncertainty Related to Going Concern”
to highlight a material matter regarding a going concern problem of the client.

This section should

a. Draw attention to the note in the financial statements that adequately discloses 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, and that there is a 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.

KEY AUDIT MATTERS

PSA 701 (Communicating Key Audit Matters in the Independent Auditor's Report)

Key Audit Matters (KAM) are those matters that, in the auditor's professional judgment, were
of most significance in the audit of the financial statements of the current period. KAM are
selected from matters communicated with those charged with governance.

The requirement to communicate Key Audit Matters (KAM) under PSA 701:

a. applies to audits of complete sets of general purpose financial statements of listed

entities; or
b. when the auditor is otherwise required by law; or
c. regulation or decides to communicate key audit matters in the auditor’s report.

If, in an audit of a listed entity, the auditor determines that there are no key audit matters to
communicate, the auditor should include a statement to this effect.

The auditor, under certain circumstances, may also decide to communicate KAM for non-listed
entities.

In determining the key audit matters, the auditor shall take into account:

(a) Areas of higher assessed risk of material misstatements, or significant risks identified
while performing risks assessment procedures.
(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.

RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS

The auditor’s report 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

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in the context of the legal framework in the particular jurisdiction and need not refer
specifically to “management”.

This section 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 financial statements that are free from material
misstatements, 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 the use of the going concern basis
of accounting is appropriate.

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 Financial Statements”.

This section shall:

(a) 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.

(b) State that the 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:

a. 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
b. Provide a definition or description of materiality in accordance with the applicable
financial reporting framework.

This section of the auditor’s report shall further:

a. As part of an audit in accordance with PSAs, the auditor exercises professional judgment
and maintains professional skepticism throughout the audit.

b. 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.

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

The description of the auditor’s responsibilities for the audit of the financial statements
required shall be included:

(a) Within the body of the auditor’s report;

(b) Within an appendix to the auditor’s report, in which case the auditor’s report shall
include a reference to the location of the appendix; or
(c) By a specific reference within the auditor’s report to the location of such a description
on a website of an appropriate authority, where law, regulation or national auditing
standards expressly permit the auditor to do so.

Other Reporting Responsibilities

The independent auditor may have additional responsibilities to report on other matters that
are in addition to the auditor’s responsibility to express an opinion on the financial statements.

The auditor may choose to present these reporting responsibilities either:

a. In a separate report, or
b. Within the auditor’s report.

If the auditor presents other reporting responsibilities within the auditor’s report, it should be
addressed in a separate section in the auditor’s report and should be sub- titled “Report on
Other Legal and Regulatory Requirements”, or otherwise as appropriate to the content
of the section, and it must follow the “Report on the Audit of the Financial Statements”.

Name of 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.

In rare circumstances, such disclosure may not be made when it is reasonably expected to
lead to a significant personal security threat.

In the rare circumstances that the auditor intends NOT to include the name of the engagement
partner in the auditor’s report, the auditor shall 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.

Signature of the Auditor

The auditor’s report shall be signed.

The independent auditor’s report is usually signed in the name of the auditing firm registered
with the Board of Accountancy (BOA) and the Securities and Exchange Commission (SEC), or
in the personal name of the auditor, or both.
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Auditor’s Address

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

Date of the Auditor’s Report

The auditor’s report shall be dated no earlier than the date on which the auditor has obtained
sufficient appropriate audit 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 recognized authority have asserted that they have taken responsibility for
those financial statements.

Note: “A draft of an Audit Report is included at the end of this Module”.

EXERCISES:
1. A major purpose of the independent auditor’s report on financial statements is to
a. Assure investors of the complete accuracy of the financial statements.
b. Enhance the degree of confidence of intended users in the financial statements.
c. Deter creditors from extending loans in high-risk situations.
d. Describe the specific auditing procedures undertaken to gather evidence for the
opinion.

2. PSA 700 (Revised) requires that the independent auditor’s report must be titled and
that the title must:
a. Include the word “independent”.
b. Indicate if the auditor is a CPA.
c. Indicate if the auditor is a proprietorship, partnership, or incorporated.
d. Indicate the type of audit opinion issued.

3. In an audit of a listed entity, which of the following elements of the auditor’s report
affirms the auditor’s independence in accordance with PSA700 (Revised)?
I. Opinion section
II. Basis for Opinion section
III. Auditor’s Responsibilities section
a. I and II
b. I and III
c. II and III
d. I, II and III

4. PSA700 (Revised) asserts that the Auditor’s responsibilities section of an unmodified

auditor’s report includes a statement that the audit is designed to
a. Discover all errors and fraud.
b. Discover material errors and fraud.
c. Conform to Philippine Financial Reporting Standards.
d. Obtain reasonable assurance whether the financial statements as a whole are
free from material misstatement.

5. The Key Audit Matters section of the auditor’s report shall state the following, except
a. Key audit matters are those matters that, in the auditor’s professional judgment,
were of most significance in the audit of the financial statements.
b. Key audit matters are selected from matters communicated with those charged
with governance, but are not intended to represent all matters that were
discussed with them.
c. The auditor’s procedures relating to these matters were designed in the context
of the audit of the financial statements as a whole.

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d. The auditor’s opinion on the financial statements is not modified with respect to
any of the key audit matters, and the auditor may express an opinion on these
individual matters.

6. When the financial statements are fairly stated but the auditor concludes there is
significant doubt whether the client can continue in existence, the auditor should issue
a. Unmodified opinion
b. Qualified opinion
c. Adverse opinion
d. Unmodified opinion with a Material Uncertainty Related to Going Concern
section.

7. The date of the auditor’s opinion on the financial statements of a client entity should
be the date of the
a. Completion of all important audit procedures.
b. Submission of the auditor’s report to the client.
c. Receipt of the client’s letter of representation.
d. Closing of the client’s books.

8. There may be cases where the financial statements, although prepared in accordance
with the requirements of a fair presentation framework, do not achieve fair
presentation. If this is the case, it may be possible for management to
a. Include additional disclosures in the financial statements beyond those
specifically required by the framework.
b. Depart from a requirement in the framework in order to achieve fair
representation of the financial statements, in extremely rare circumstances.
c. Either A or B.
d. Neither A nor B.

9. Does an auditor make the following representations explicitly or implicitly in an

unmodified auditor’s report on financial statements?
Examining of evidence on a test basis Independence of the auditor
a. Explicitly Explicitly
b. Explicitly Implicitly
c. Implicitly Explicitly
d. Implicitly Implicitly

10. The Other Information section of the auditor’s report shall include
a. A statement that the auditor is responsible for the other information.
b. An identification of other information, if any, obtained by the auditor prior to the
date of the auditor’s report.
c. An identification of, for an audit of a non-listed entity, other information, if any,
expected to be obtained after the date of the auditor’s report.
d. A statement that the auditor’s opinion covers the other information.

11. Reference to “financial statements” in PSA 700 Revised means

a. A complete set of general purpose financial statements including the related

notes.
b. A complete set of financial statements prepared to meet the financial information
needs of specific users.
c. A complete set of financial statements prepared in accordance with a special
purpose framework.
d. A complete set of financial statements prepared in accordance with either a
general or special purpose framework.

12. Which of the following should be considered when forming an opinion on the audited
financial statements?
I. Whether sufficient appropriate audit evidence has been obtained.
II. Whether uncorrected misstatements are material, individually or in aggregate.
III. The qualitative aspects of the entity’s accounting practices, including indicators
of possible bias in management’s judgments.
a. I only
b. I and III only
c. I and II only
d. I, II, and III
13. The auditor’s report should be addressed

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a. Only to the shareholders of the entity whose financial statements are being
audited.
b. Only to the Board of directors of the entity whose financial statements are being
audited.
c. To the CEO or the CFO of the entity whose financial statements are being
audited.
d. Either to the shareholders or the board of directors of the entity whose financial
statements are being audited.

14. The Basis for the Opinion section of the auditor’s report shall
a. State that the financial statements have been audited.
b. State that the objective of the auditor is to issue an auditor’s report that includes
the auditor’s opinion.
c. Describe management’s responsibility for preparing the financial statements in
accordance with the applicable financial reporting framework.
d. State that the audit was conducted in accordance with Philippine Standards on
Auditing (PSAs).

15. Under PSA 700 (Revised), which of the following is a “modified” opinion?
a. Qualified opinion
b. Adverse opinion
c. Disclaimer of opinion
d. All of the above

- - - END OF TOPIC 1 - - -

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TOPIC 2: MODIFICATIONS TO THE OPINION

Auditor’s opinion shall be modified when:

A. If the financial statements are not free from material misstatements (able to obtain
sufficient appropriate opinion),

1. Qualified Opinion – if the misstatements, individually or in aggregate, are material

but not pervasive

2. Adverse Opinion - if the misstatements, individually or in aggregate, are material

and pervasive

B. if the auditor is unable to obtain sufficient appropriate audit evidence to conclude that
the financial statements as a whole are free from material misstatements.

1. Qualified Opinion – if the “possible effects” of the undetected misstatements are

material but not pervasive

2. Disclaimer of Opinion - if the “possible effects” of the undetected misstatements are

material and pervasive

An unmodified opinion may be appropriately expressed, when the possible effects of

the auditor’s inability to gather sufficient appropriate evidence is

• mitigated by the performance of other alternative procedures, or

• when the possible effects to the financial statements are considered immaterial.

CHANGES TO THE OPINION SECTION OF THE AUDITOR’S REPORT:

Qualified Opinion

If the auditor is expressing a qualified opinion due to a material misstatement, the auditor
shall state “except for the effects of the matter(s) described in the Basis for Qualified Opinion
section, the financial statements are presented fairly [...]”.

If the auditor is expressing a qualified opinion because of an inability to obtain sufficient

appropriate audit evidence, the auditor shall state “except for the possible effects of the
matter(s) described in the Basis for Qualified Opinion section, [...]”.

Adverse Opinion

If the auditor is expressing an adverse opinion, the auditor shall state, “because of the
significance of the matter(s) described in the Basis for Adverse Opinion, the financial
statements do not present fairly [...]”.

Disclaimer of Opinion

If the auditor is expressing a disclaimer of opinion, the auditor shall state that he does not
express an opinion on the financial statements. The auditor shall also 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.

CHANGES TO THE BASIS OF OPINION SECTION OF THE AUDITOR’S REPORT:

If there is a material misstatement of the financial statements that relates to specific amounts
in the financial statements, the auditor shall include a description and quantification of the
effects. If it is not practicable to quantify the financial effects, the auditor shall so state in this
section.

If there is a material misstatement that relates to narrative disclosures, the auditor shall
include an explanation of how the disclosures are misstated.
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If there is a material misstatement that relates to the non-disclosure of information required
to be disclosed, the auditor shall discuss the non-disclosure with those charged with
governance, describe in the Basis for Opinion the nature of the omitted information, and,
unless prohibited by law or regulation, include the omitted disclosure, provided it is practicable
to do so and the auditor has obtained sufficient appropriate audit evidence about the omitted
information.

If the modification results from inability to obtain sufficient appropriate audit evidence, the
auditor shall include the reasons for that inability.

ADDITIONS TO AUDITOR’S REPORT: EMPHASIS OF MATTER and OTHER MATTER

PSA 706 (Revised) deals with additional communication in the auditor’s report when the auditor
considers it necessary to add an ‘emphasis of matter’ paragraph or an ‘other matter’ paragraph
to the independent auditor’s report.

Emphasis of Matter

The auditor believes that it is necessary to draw users’ attention to a matter presented or
disclosed in the financial statements that is of such importance that it is fundamental to users’
understanding of the financial statements, provided the auditor would not be required to
modify his opinion as a result of the matter.

Other Matter

When a matter other than those that are presented or disclosed in the financial statements
that, in the auditor’s judgment, is relevant to:

(1) users’ understanding of the audit,

(2) the auditor’s responsibilities, or
(3) the auditor’s report and this is not prohibited by law or regulation, the auditor may
communicate it in a paragraph in the auditor’s report, with the heading “Other Matter”,
or other appropriate heading.

ADDITIONS TO AUDITOR’S REPORT: COMPARATIVE INFORMATION

PSA 710 deals with the auditor’s responsibilities regarding comparative information in an audit
of financial statements.

Comparative Information

Comparative information refers to amounts and disclosures included in the financial statements
in respect of one or more prior periods in accordance with the applicable financial reporting
framework.

The two different broad approaches to the auditor’s reporting responsibilities are:

a. Corresponding figures
b. Comparative financial statements

Corresponding figures.

Comparative information where amounts and other disclosures for the prior period are
included as an integral part of the current period financial statements, and are intended to be
read only in relation to the amounts and other disclosures relating to the current period
(referred to as “current period figures”).

The auditor’s opinion does not refer to the corresponding figures because the auditor’s opinion
is on the current period financial statements as a whole, including the corresponding figures.

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CASE EFFECT ON CURRENT AUDIT OPINION
• Modification in Auditor’s Report on • the auditor shall modify the auditor’s
the Prior Period Unresolved opinion on the current period’s financial
statements.

• Modification in Auditor’s Report on • the auditor’s opinion on the current

the Prior Period Resolved period need not refer to the previous
modification

• Misstatement in Prior Period Financial • the auditor shall express a qualified

Statements exists on which an opinion or an adverse opinion in the
unmodified opinion has been auditor’s report on the current period
previously issued, and the financial statements, modified with
corresponding figures have not been respect to the corresponding figures
properly restated or appropriate included therein.
disclosures have not been made

• Prior Period Financial Statements Not • the auditor shall state in an Other Matter
Audited paragraph in the auditor’s report that the
corresponding figures are unaudited.

• Prior Period Financial Statements • the successor auditor shall state in an

Audited by a Predecessor Auditor Other Matter paragraph in the auditor’s
report:

a. That the financial statements of the

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.

Comparative Information

Comparative information where amounts and other disclosures for the prior period are
included for comparison with the financial statements of the current period but, do not form
part of the current period financial statements.

When comparative financial statements are presented, the auditor’s opinion shall refer to
each period for which financial statements are presented and on which an audit opinion is
expressed.

As such, the auditor may express a qualified opinion or an adverse opinion, disclaim an
opinion, or include an Emphasis of Matter paragraph with respect to one or more periods,
while expressing a different auditor’s opinion on the financial statements of the other period.

When reporting on prior period financial statements in connection with the current period’s
audit, if the auditor’s opinion on such prior period financial statements differs from the opinion
the auditor previously expressed, the auditor shall disclose the substantive reasons for the
different opinion in an Other Matter paragraph.

A. Prior Period Financial Statements Audited by a Predecessor Auditor

the successor auditor may request the predecessor auditor to reissue his auditor’s report
on the prior period’s financial statements.

If the predecessor auditor’s report is not presented, however, the successor auditor
should, in addition to expressing an opinion on the current period’s financial statements,
include an Other Matter paragraph which states:

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a. that the financial statements of the prior period were audited by a 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

B. Prior Period Financial Statements Not Audited

The auditor shall state in an Other Matter paragraph that the comparative
financial statements are unaudited.

ADDITIONS TO AUDITOR’S REPORT: OTHER INFORMATION

It is customary for an entity to issue an annual report, which includes audited financial
statements and additional information such a president’s letter, as well as various unaudited
financial and non-financial information (required either by law or custom). Such other
financial and non-financial information is called other information.

The auditor has no obligation to perform any procedures to the other information, beyond
reading, to consider whether:

a. There is a material inconsistency between the other information and the financial
statements.
b. There is a material inconsistency between the other information and the auditor’s
knowledge obtained in the audit, in the context of audit evidence obtained and
conclusions reached in the audit.
c. The other information appears to be materially misstated.

A separate section with a heading “Other Information”, or other appropriate heading,

shall be included in the auditor’s report when, at the date of the auditor’s report:

• For an audit of financial statements of a listed entity, the auditor has obtained, or
expects to obtain, the other information; or
• For an audit of financial statements of an entity other than a listed entity, the
auditor has obtained some or all of the other information.

The Other Information section shall include:

a. A statement that management is responsible for the other information.

b. An identification of:

• Other information, if any, obtained by the auditor prior to the date of the
auditor’s report.
• For an audit of financial statements of a listed entity, other information, if
any, expected to be obtained after the date of the auditor’s report.

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.

e. When other information has been obtained prior to the date of the auditor’s report,
either:
• A statement that the auditor has nothing to report; or

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• 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.

ADDITIONS TO AUDITOR’S REPORT: SUPPLEMENTARY INFORMATION

Supplementary information are information that is presented together with the financial
statements that is not required by the applicable financial reporting framework used to
prepare the financial statements. They are normally presented in either supplementary
schedules or as additional notes.

If supplementary information is presented with the audited financial statements, the auditor
shall evaluate whether such supplementary information is clearly differentiated from the
audited financial statements.

If such supplementary information is not clearly differentiated from the audited financial
statements, the auditor shall ask management to change how the supplementary information
is presented.

EXERCISES:

1. The least severe type of opinion for disclosing departures from an unmodified report is
the

a. Qualified opinion
b. Adverse opinion
c. Disclaimer of an opinion
d. Negative assurance

2. A qualified opinion can only be issued when the auditor believes that the overall
financial statements are

a. Fairly stated.
b. Not fairly stated.
c. Materially misstated.
d. Materially misleading.

3. A misstatement in the financial statements can be considered material if

a. It overshadows the financial statements as a whole.
b. Knowledge of the misstatement would affect a decision of a reasonable user of
the statements.
c. It affects more than one account on the statements.
d. It affects only one account on the statements.

4. When an adverse opinion is issued because of a material misstatement that is both

material and pervasive, an auditor should indicate in the Basis for Adverse Opinion
section the reasons thereof. The auditor should also modify the
I. Responsibilities of Management for the Financial Statements section.
II. Opinion section.
III. Basis for Opinion section.
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III

5. When the client fails to make adequate disclosures in the notes to the financial
statements, it is the responsibility of the auditor to
a. Inform the readers that disclosure is not adequate, and to issue an adverse
opinion.
b. Inform the readers that disclosure is not adequate, and to issue a qualified
opinion.
c. Present the information in the auditor’s report and to issue a qualified or an
adverse opinion.
d. Present the information in the auditor’s report and to issue an unmodified or a
qualified opinion.

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6. When disclaiming an opinion because of a client-imposed scope limitation, an auditor
should indicate in the Basis for Disclaimer of Opinion section why the audit did not
comply with PSAs. The auditor should also modify the
Opinion section Auditor’s Responsibilities section
a. YES YES
b. YES NO
c. NO YES
d. NO NO

7. An auditor will issue an adverse opinion if

a. The scope of the audit is limited by the client.
b. The exception to the fairness of presentation is so material that an “except for”
opinion is not justified.
c. The auditor did not perform audit procedures to form an opinion on the financial
statements taken as a whole.
d. Major uncertainties exist concerning the client entity’s future.
8. In using the work of an expert, an auditor referred to the expert’s findings in the
auditor’s report. This is an appropriate reporting practice if
a. Auditor is not familiar with the professional certification, personal reputation, or
particular competence of the expert.
b. Auditor, as a result of the expert’s findings, adds an explanatory paragraph
emphasizing a matter regarding the financial statements.
c. Expert is aware that his work will be used to evaluate the assertions in the
financial statements.
d. Auditor, as a result of the expert’s findings, decides to indicate a division of
responsibility with the expert.

9. When comparative financial statements are presented, the auditor’s opinion on the
financial statements shall refer to
a. Current period only.
b. Current period and those of the other periods presented.
c. Current and immediately preceding period only.
d. Periods presented plus one preceding period.

10. The following statements relate to the auditor’s reporting responsibilities regarding
comparative information. Which is/are correct?
I. For corresponding figures, the auditor’s report only refers to the financial
statements of the current period.
II. For comparative financial statements, the auditor’s report refers to each period
that financial statements are presented.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

- - - END OF TOPIC 2 - - -

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TOPIC 3: REVIEW AND OTHER ENGAGEMENTS

I. REVIEW ENGAGEMENTS

Philippine Standards on Review Engagements (PSRE) 2400 (Revised), “Engagements to

Review Historical Financial Statements”,

Objective of Review Engagements:

To obtain limited assurance about whether the financial statements as a whole are free from
material misstatement, thereby enabling the practitioner to express a conclusion on whether
anything has come to the practitioner’s attention that causes the practitioner to believe the
financial statements are not prepared, in all material respects, in accordance with an
applicable financial reporting framework.

A review engagement provides a moderate or limited level of assurance that the information
subject to review is free of material misstatement.

This is expressed in the form of negative assurance.

There is a greater risk that misstatements will not be detected in a review than in an audit

The practitioner who performs a review engagement should:

a. Comply with the ethical requirements of the Code of Professional Ethics for Certified
Public Accountants relating to review engagements.
b. Conduct a review in accordance with Philippine Standards on Review Engagements
(PSREs).
c. Plan and perform the review with professional skepticism recognizing that
circumstances may exist which cause the financial statements to be materially
misstated.
d. Exercise professional judgment in conducting a review engagement.
e. Obtain sufficient appropriate evidence through inquiry and analytical procedures to
be able to issue a negative assurance.

Procedures:

1. The practitioner should determine materiality for the financial statements as a whole.

2. Apply professional judgment in designing the procedures and in evaluating the results
obtained from those procedures.

3. The practitioner should obtain an understanding of the entity and its environment,
including the applicable financial reporting framework. Such understanding include the
following:

a) Relevant industry, regulatory, and other external factors including the applicable
financial reporting framework.
b) The nature of the entity.
c) The entity’s accounting systems and accounting records.
d) The entity’s selection and application of accounting policies.

4. The practitioner should obtain sufficient appropriate evidence primarily through inquiry
and analytical procedures to be able to draw conclusions.

5. The practitioner should request management to provide a written representation that

management has fulfilled its responsibilities described in the agreed terms of
engagement.

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Elements of a Review Report

The practitioner’s review report includes the following elements:

a. Title.
b. Addressee.
c. Introductory paragraph.
d. Management’s responsibility.
e. Practitioner’s responsibility.
f. Practitioner’s conclusion.
g. Other reporting responsibilities (if applicable).
h. Practitioner’s signature.
i. Date of the practitioner’s report.
j. Practitioner’s address.

Unmodified Conclusion

An unmodified conclusion should be expressed when the practitioner has obtained limited
assurance to be able to conclude that nothing has come to the practitioner’s attention that
causes the practitioner to believe that the financial statements are not prepared, in all
material respects, in accordance with the applicable financial reporting framework.

Examples:

(1) When a fair presentation framework is used in preparing financial statements,

“Based on our review, nothing has come to our attention that causes us to believe that the
financial statements do not present fairly, in all material respects (or do not give a true and
fair view), ... in accordance with the applicable financial reporting framework”.

(2) When a compliance framework is used in preparing financial statements,

“Based on our review, nothing has come to our attention that causes us to believe that the
financial statements are not prepared, in all material respects, in accordance with the
applicable financial reporting framework”

Modified Conclusion

The practitioner should express a modified conclusion when:

A. When there are material misstatements, the following conclusions may be issued by
the practitioner:

• Qualified conclusion. When the effects of the misstatement to the financial

statements are material but not pervasive.
• Adverse conclusion. When the effects of the misstatement to the financial
statements are both material and pervasive.

B. When there is inability to obtain sufficient appropriate evidence, the practitioner may
consider the following conclusions:

• Qualified conclusion. When the possible effects of the matter to the financial
statements are material but not pervasive.
• Disclaimer of conclusion. When the possible effects of the matter to the financial
statements are both material and pervasive.

II. ENGAGEMENTS ON AGREED-UPON PROCEDURES

PSRS 4400 (Engagements on Agreed-upon Procedures) states, in an engagement to perform

agreed-upon procedures, an auditor is engaged to carry out those procedures of an audit
nature to which the auditor and the entity and any appropriate third parties have agreed
and to report on factual findings.

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The report contains no assurance and is restricted to those parties that have agreed to the
procedures to be performed, since others, unaware of the reasons for the procedures, may
misinterpret the results.

According to PSRS 4400, the report of factual findings should contain:

a) Title
b) Addressee (ordinarily the client who engaged the auditor to perform the agreed-upon
procedures)
c) Identification of specific financial or non-financial information to which the agreed-
upon procedures have been applied
d) A statement that the procedures performed where those agreed-upon with the
recipients
e) A statement that the engagement was performed in accordance with the Philippine
Standard on Related Services applicable to agreed-upon procedures engagements
f) A statement that the auditor is not independent if such is the case
g) Identification of the purpose for which the agreed-upon procedures were performed
h) A listing of the agreed-upon procedures performed
i) A description of the auditor’s factual findings including sufficient details of errors and
exceptions found
j) A statement that the procedures performed do not constitute either an audit or a
review and as such, no assurance is expressed
k) A statement that had the auditor performed additional procedures, an auditor or
review, other matters might have come to light that would have been reported
l) A statement that the report is restricted to those parties that have agreed to the
procedures to be performed
m) A statement (when applicable) that the report relates only to the elements, accounts,
items or financial and non-financial information specified that it does not extend to
the entity’s financial statements taken as a whole
n) Date of the report
o) Auditor’s address; and
p) Auditor’s signature

III. ENGAGEMENTS TO COMPILE FINANCIAL INFORMATION

PSRS 4410 (Revised), in a compilation engagement, the practitioner applies accounting

and financial reporting expertise to assist management in the preparation and presentation
of financial information of an entity in accordance with an acceptable financial reporting
framework. The procedures employed in compilation engagements are not designed and
do not enable the practitioner to express any assurance on the financial information.

The practitioner is not required to verify the accuracy or completeness of the information
provided by management, or otherwise to gather evidence to express an audit opinion or
a review conclusion on the preparation of the financial information.

The standard requires the practitioner to obtain an understanding of the following matters:

a) The entity’s business and operations, including the entity’s accounting system and
accounting records; and
b) The applicable financial reporting framework, including its application in the industry in
which the entity operates.

The practitioner is not ordinarily required to:

a) Make any inquiries of management to assess the reliability and completeness of the
information provided;
b) Assess internal controls;
c) Verify any matters; or
d) Verify any explanations.

If the practitioner becomes aware that information supplied by management is incorrect,

incomplete, or otherwise unsatisfactory, he/she should request management to provide
additional information or correct the deficiencies. The practitioner should withdraw from
the engagement if management refuses to do so.

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IV. SPECIAL-PURPOSE AUDIT ENGAGEMENTS

PSA 800 (Revised), “Special Considerations – Audits of Financial Statements Prepared in

Accordance with Special Purpose Frameworks”

A special purpose framework is a financial reporting framework designed to meet the financial
information needs of specific users. Financial statements prepared in accordance with a special
purpose framework are called special purpose financial statements.

Examples of special purpose frameworks are:

a. A tax basis of accounting for a set of financial statements that accompany an entity’s
tax return.
b. The cash receipts and disbursements basis of accounting for cash flow information that
an entity may be requested to prepare for creditors.
c. The financial reporting provisions established by a regulator to meet the requirements
of that regulator.
d. The financial reporting provisions of a contract, such as a bond indenture, a loan
agreement, or a project grant.

In addition to the form and content of the independent auditor’s report as prescribed in PSA
700 (Revised), the auditor’s report on special purpose financial statements should also:

a. Describe the purpose for which the financial statements are prepared and, if necessary,
the intended users, or refer to a note in the special purpose financial statements that
contains that information.

b. Include an Emphasis of Matter paragraph alerting users of the auditor’s report that the
financial statements are prepared in accordance with a special purpose framework and
that, as a result, the financial statements may not be suitable for another purpose.

III. Audits of Single Financial Statements and Specific Elements, Accounts or

Items of a Financial Statement

If the auditor is engaged to audit the entity’s complete set of financial statements, and at the
same time also undertakes an engagement to report on a single financial statement or on a
specific element of a financial statement of the same entity, a separate opinion should be
expressed for each engagement.

Audit of Specific Elements, Accounts or Items of a Financial Statements

In accordance with PSA 805 (Revised), “Special Considerations – Audits of Single Financial
Statements and Specific Elements, Accounts or Items of a Financial Statement”, an auditor
may be asked to examine specific elements, accounts or items of a financial statement that
include:

a. Accounts receivable, allowance for doubtful accounts receivable, inventory, the liability
for accrued benefits of a private pension plan, the recorded value of identified
intangible assets, or the liability for “incurred but not reported” claims in an insurance
portfolio.
b. A schedule of externally managed assets and income of a private pension.
c. A schedule of net tangible assets, including related notes.
d. A schedule of disbursements in relation to a lease property.
e. A schedule of profit participation or employee bonuses.

If the auditor concludes that it is necessary to express an adverse opinion or disclaim an

opinion on the entity’s complete set of financial statements as a whole, the auditor is not
permitted to include in the same auditor’s report an unmodified opinion on a single financial
statement that forms part of those financial statements or on a specific element that forms
part of those financial statements. This is because such an unmodified opinion would
contradict the adverse opinion or disclaimer of opinion on the entity’s complete set of financial
statements as a whole and would be tantamount to expressing a piecemeal opinion.

If the auditor concludes that it is necessary to express an adverse opinion or disclaim an

opinion on the entity’s complete set of financial statements as a whole but, in the context of
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a separate audit of a specific element that is included in those financial statements, the auditor
nevertheless considers it appropriate to express an unmodified opinion on that element, the
auditor shall only do so if

a. The auditor is not prohibited by law or regulation from doing so.

b. That opinion is expressed in an auditor’s report that is not published together with
the auditor’s report containing the adverse opinion or disclaimer of opinion.
c. The specific element does not constitute a major portion of the entity’s complete set
of financial statements.

Audit of Specific Financial Statements

The auditor shall not express an unmodified opinion on a single financial statement of a
complete set of financial statements if the auditor has expressed an adverse opinion or
disclaimed an opinion on the complete set of financial statements as a whole. This is the case
even if the auditor’s report on the single financial statement is not published together with
the auditor’s report containing the adverse opinion or disclaimer of opinion. This is because a
single financial statement is deemed to constitute a major portion of those financial
statements.

IV. Report on Summary Financial Statements

PSA 810 (Revised), “Engagements to Report on Summary Financial Statements”,

Summary Financial statements as historical financial information that is derived from financial
statements but that contains less detail than the financial statements, while still providing a
structured representation consistent with that provided by the financial statements of the
entity’s economic resources or obligations at a point in time or the changes therein for a period
of time.

The auditor can only accept an engagement to report on summary financial statements when
he has also been engaged to conduct an audit in accordance with PSAs of the financial
statements from which the summary financial statements are derived.

When the auditor has concluded that an unmodified opinion on the summary financial
statements is appropriate, the auditor’s opinion should use the following phrases:

(a) The accompanying summary financial statements are consistent, in all material
respects, with the audited financial statements, in accordance with [the applied
criteria]; or

(b) The accompanying summary financial statements are a fair summary of the audited
financial statements, in accordance with [the applied criteria].

V. Report on Prospective Financial Information

As defined in Philippine Standards on Assurance Engagements (PSAE) 3400, “The Examination

of Prospective Financial Information”, prospective financial information refers to financial
information based on assumptions about events that may occur in the future and possible
actions by an entity.

Prospective financial information can be in the form of a forecast, projection or a combination

of both (e.g., a forecast for next year and a projection for the years thereafter).

A forecast refers to prospective financial information prepared on the basis of assumptions as

to future events which management expects to take place and the actions management
expects to take as of the date the information is prepared (best- estimate assumptions).

Conversely, a projection refers to prospective financial information prepared on the basis of:
a. Hypothetical assumptions about future events and management actions which are not
necessarily expected to take place, such as when some entities are in a start- up phase
or are considering a major change in the nature of operations; or
b. A mixture of best-estimate and hypothetical assumptions.

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Prospective financial information may be issued for either general or limited use. General use
refers to use by any third party. Limited use refers to use by third parties with whom the
responsible party is negotiating directly.

Forecasts can be provided for both general and limited use, but projections can only be issued
for limited use. This is because limited users (e.g., banks, management) are in the position
to obtain a better understanding of the prospective statements and related circumstances,
most especially matters that concern about the hypothetical assumptions used in a projection.

The report by an auditor on an examination of prospective financial information should

contain:

a. A reference to the purpose and/or restricted distribution of the prospective financial

information, in the case of a projection.

b. A statement of negative assurance as to whether the assumptions provide a

reasonable basis for the prospective financial information.

c. An opinion as to whether the prospective financial information is properly prepared on

the basis of the assumptions and is presented in accordance with generally accepted
accounting principles in the Philippines.

d. Appropriate caveats concerning the achievability of the results indicated by the

prospective financial information.

REPORT

When the auditor believes that the presentation and disclosure of the prospective financial
information is not adequate, the auditor should:

a. Express a qualified or adverse opinion in the report on the prospective financial

information, or
b. Withdraw from the engagement as appropriate.

When the auditor believes that one or more significant assumptions do not provide a
reasonable basis for the prospective financial information prepared on the basis of best-
estimate assumptions or that one or more significant assumptions do not provide a reasonable
basis for the prospective financial information given the hypothetical assumptions, the auditor
should:

a. Express an adverse opinion in the report on the prospective financial information, or

b. Withdraw from the engagement.

When the examination is affected by conditions that preclude application of one or more
procedures considered necessary in the circumstances, the auditor should:

a. Disclaim the opinion and describe the scope limitation in the report on the
prospective financial information, or
b. Withdraw from the engagement.

VI. Report on Greenhouse Gas Statements

GHG statement sets out constituent elements, quantifies an entity’s GHG emissions for a
period (emissions inventory), shows the comparative information and explanatory notes,
including a summary of significant quantification and reporting policies, and gives a
categorized listing of removals or emissions deductions.

PSAE 3410, “Assurance Engagements on Greenhouse gas statements”, was issued in response
to the societal demands for a standard that supports quality-assurance services in a regulated
sector. It deals with assurance engagements to report on an entity’s greenhouse gas (GHG)
statement.

PSAE 3410 requires the practitioner to:

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a. Obtain reasonable or limited assurance about whether the GHG statement is free from
material misstatement, whether due to fraud or error.

b. Report, in accordance with the practitioner’s findings, about whether:

• In the case of a reasonable assurance engagement, the GHG statement is

prepared, in all material respects, in accordance with the applicable criteria; or
• In the case of a limited assurance engagement, anything has come to the
practitioner’s attention that causes the practitioner to believe, on the basis of the
procedures performed and evidence obtained, that the GHG statement is not
prepared, in all material respects, in accordance with the applicable criteria.

c. Report back to the Board and communicate the findings.

Greenhouse gases (GHGs) include carbon dioxide (CO2) and any other gases required
by the applicable criteria to be included in the GHG statement, such as methane,
nitrous oxide, sulfur hexafluoride, hydrofluorocarbons, perfluorocarbons, and
chlorofluorocarbons. Gases other than carbon dioxide are often expressed in terms of
carbon dioxide equivalents (CO2-e).

Emissions are the GHGs that, during the relevant period, have been emitted to the
atmosphere or would have been emitted to the atmosphere had they not been captured
and channeled to a sink.

a. Direct emissions (Scope 1 emissions). These are emissions from sources that are
owned or controlled by the entity.

It may include stationary combustion (from fuel burned in the entity’s stationary
equipment, such as boilers, incinerators, engines, and flares), mobile combustion
(from fuel burned in the entity’s transport devices, such as trucks, trains, airplanes
and boats), process emissions (from physical or chemical processes, such as
cement manufacturing, petrochemical processing, and aluminum smelting), and
fugitive emissions (intentional and unintentional releases, such as equipment leaks
from joints and seals and emissions from wastewater treatment, pits, and cooling
towers).

b. Indirect emissions. These are emissions that are a consequence of the activities of
the entity, but which occur at sources that are owned or controlled by another
entity.

Indirect emissions can be further categorized as:

• Scope 2 emissions. These are emissions associated with energy that is

transferred to and consumed by the entity. For instance, emissions associated
with electricity that the entity purchases occur at the power station, which is
outside the entity’s organizational boundary.

• Scope 3 emissions. These are all other indirect emissions, including emissions
associated with, for example, employee business travel, outsourced activities,
consumption of fossil fuel or electricity required to use the entity’s products,
extraction and production of materials purchased as inputs to the entity’s
processes, and transportation of purchased fuels.

Emissions deduction refers to any item included in the entity’s GHG statement that is
deducted from the total reported emissions, but which is not a removal.

Removal pertains to the GHGs that the entity has, during the period, removed from the
atmosphere, or that would have been emitted to the atmosphere had they not been captured
and channeled to a sink. A sink is a physical unit or process that removes GHGs from the
atmosphere.

Emissions deduction commonly includes purchased offsets, but can also include a variety of
other instruments or mechanisms such as performance credits and allowances that are
recognized by a regulatory or other scheme of which the entity is a part.

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Purchase offset is a form of emissions deduction in which the entity pays for the lowering
of another entity’s emissions (emissions reductions) or increasing of another entity’s removals
(removal enhancements), compared to a hypothetical baseline.

EXERCISES:
1. The practitioner shall only accept a review engagement if he is satisfied that (choose
the incorrect answer)
a. There is a rational purpose for the engagement.
b. A review engagement would be appropriate in the circumstances.
c. There is no reason to believe that all ethical requirements will not be satisfied,
d. There is no doubt as to management’s integrity.

2. While performing a review of financial statements, which of the following shall a

practitioner least likely do when there is an indication that fraud or non-compliance
with laws or regulations has occurred in the client entity?
a. Communicate the matter to the appropriate level of senior management.
b. Request management’s assessment of the effect(s), if any, on the financial
statements.
c. Consider the effect, if any, of management’s assessment of the effect(s), of
fraud or noncompliance communicated to the practitioner on the practitioner’s
conclusion on the financial statements and on the practitioner’s review report.
d. Report the occurrence of fraud or noncompliance to a party outside the entity.

3. A special purpose framework may be

a. A fair presentation framework.
b. A compliance framework.
c. Either a fait presentation framework or a compliance framework.
d. Neither a fait presentation framework nor a compliance framework.

4. An audit of specific elements, accounts or items of a financial statement may include

I. A schedule of externally managed assets and income of a private pension plan.
II. A schedule of net tangible assets.
III. A schedule of profit participation or employee bonuses.
a. I and II
b. I and III
c. II and III
d. I, II, and III

5. The auditor can only accept an engagement to report on summary financial statements
only when
a. The distribution of the report on summary financial statements is restricted.
b. He has expressed an unmodified opinion on the financial statements from which
the summary financial statements are derived.
c. He has been engaged to conduct an audit of the financial statements from which
the summary financial statements are derived.
d. The report on summary financial statements contains a negative assurance.
6. A “projection” means prospective information prepared on the basis of
I. Assumptions as to future events which are expected to take place.
II. Hypothetical assumptions about future events.
III. A mixture of best-estimate and hypothetical assumptions.
a. I and II
b. I and III
c. II and III
d. I, II, and III

7. Which of the following is a prospective financial statement for general use upon which
a practitioner may appropriately report?
a. Financial projection.
b. Partial presentation.
c. Financial forecast.
d. Any of these.

8. Statement 1: PSAE 3410 deals with statements of emissions other than GHG
emissions, such as nitrogen oxide and sulfur dioxide.
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Statement 2: PSAE 3410 deals with instruments, processes or mechanisms used
by other entities as emissions deductions.

a. Statement 1 is correct.
b. Statement 2 is correct.
c. Both statements are correct.
d. Both statements are incorrect.

9. An engagement to perform agreed-upon procedures may involve the practitioner in

performing certain procedures concerning
Individual items of A financial statement A complete set of
financial data financial statements
a. YES YES YES
b. YES YES NO
c. YES NO YES
d. NO YES YES

10. A CPA’s report of agreed-upon procedures related to management’s assertion about

an entity’s compliance with specified requirements should contain
a. A statement of limitations on the use of report.
b. An opinion about whether client’s assertion is fairly stated.
c. Negative assurance that control risk has been assessed.
d. An acknowledgement of responsibility for the sufficiency of the procedures.

11. An entity may compile an entity’s financial statements that omit all of the disclosures
required by PFRSs only if the omission is
I. Clearly indicated in the practitioner’s report.
II. Not undertaken with the intention of misleading the financial statement users.
a. I only
b. II only
c. Both I and II
d. Either I or II

12. May a practitioner accept an engagement to compile or review the financial statements
of an entity other than a listed entity if the practitioner is unfamiliar with the specialized
industry accounting policies, but plans to obtain the required level of knowledge before
compiling or reviewing the financial statements?
Compilation Review
a. YES YES
b. YES NO
c. NO YES
d. NO NO

END OF MIDTERM MODULE

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 ST. VINCENT COLLEGE
Business School
• Leganes • Pototan • Ivisan

EXAMPLE OF AN AUDITOR’S REPORT

PSA 700 (Revised) (Forming an Opinion and Reporting on Financial Statements) gives the
following example of an in dependent auditor's report:

INDEPENDENT AUDITOR'S REPORT

To the Shareholders of ABC Company [or Other Appropriate Addressee]

Report on the Audit of the Financial Statements

[This sub-title is unnecessary in circumstances when the second sub-title "Report on Other
Lega/ and Regulatory Requirements" is not applicable.]

Opinion

We have audited the financial statements of ABC Company (the Company), which comprise
the statement of financial position as at December 31, 20Xl, and the statement of
comprehensive income, statement of changes in equity and statement of cash flows for the
year then ended, and notes to the financial statements, including a summary of significant
accounting policies.

In our opinion, the accompanying financial statements present fairly, in all material respects,
the financial position of the Company as at December 31, 20Xl, and its financial performance
and its cash flows for the year then ended in accordance with Philippine Financial Reporting
Standards (PFRSs).

Basis for Opinion

We conducted our audit in accordance with Philippine Standards on Auditing (PSAs). Our
responsibilities under those standards are further described in the Auditor's Responsibilities
for the Audit of the Financial Statements section of our report. We are independent of the
company in accordance with the Code of Ethics for Professional Accountants in the Philippines
(Code of Ethics) together with the ethical requirements that are relevant to our audit of the
financial statements in the Philippines, and we have fulfilled our other ethical responsibilities
in accordance with these requirements and the Code of Ethics. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the financial statements of the current period. These matters were
addressed in the context of our audit of the financial statements as a whole, and in forming
an opinion thereon, and we do not provide a separate opinion on these matters.

[Description of each key audit matter in accordance with PSA 701]

Responsibilities of Management and Those Charged with Governance for the

Financial Statements

Management is responsible for the preparation and fair presentation of the financial
statements in accordance with PFRSs 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.

In preparing the financial statements, management is responsible for assessing the

Company's ability to continue as a going concern, disclosing, as applicable, matters related to
going concern and using the going concern basis of accounting unless management ether
intends to liquidate the Company or to cease operations, or has no realistic alternative but to
do so.

Those charged with governance are responsible for overseeing the Company's financial
reporting process.

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 ST. VINCENT COLLEGE
Business School
• Leganes • Pototan • Ivisan

Auditor's Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as
a whole are free from material misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. 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. Misstatements can arise from fraud or error and 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.

As part of an audit in accordance with PSAs, we exercise professional judgment and

maintain professional skepticism throughout the audit. We also:
o Identify and assess the risks of material misstatement of the financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those
risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for
our 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.

o 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 Company's internal control.

o Evaluate the appropriateness of accounting policies used and the reasonableness of

accounting estimates and related disclosures made by management.

o 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 Company's
ability to continue as a going concern. If we conclude that a material uncertainty exists,
we are required to draw attention in our auditor's report to the related disclosures in the
financial statements or, if such dis closures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of our auditor's
report. However, future events or conditions may cause the Company to cease to continue
as a going concern

o 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.

We communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit and significant audit findings, including any significant
deficiencies in internal control that we identify during our audit.

We also provided those charged with governance with a statement that we have complied
with relevant ethical requirements regarding independence, and to communicate with them
all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those
matters that were of most significance in the audit of the financial statements of the current
period and are therefore the key audit matters. We describe these matters in our auditor's
report unless law or regulation precludes public disclosure about the matter or when, in
extremely rare circumstances, we determine that a matter should not be communicated in
our report because the adverse consequences of doing so would reasonably be expected to
outweigh the public interest benefits of such communication.

Report on Other Legal and Regulatory Requirements

[The form and content of this section of the auditor's report would vary depending on the
nature of the auditor's Other reporting responsibilities.]

The engagement partner on the audit resulting in this independent auditor's report is
[name].

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 ST. VINCENT COLLEGE
Business School
• Leganes • Pototan • Ivisan
[Signature in the name of the audit firm, the persona/ name of the auditor, or both, as
appropriate for the particular jurisdiction.]

[Auditor's Address]

[Date]

EXAMPLES OF AUDIT OPINIONS

(1) Unmodified Opinion

OPINION

We have audited the financial statements of ABC Company (the Company), which comprise
the statement of financial position as at December 31, 2016, and the statement of
comprehensive income, statement of changes in equity and statement of cash flows for the
year then ended, and notes to the financial statements, including a summary of significant
accounting policies.

In our opinion, the accompanying financial statements present fairly, in all material respects,
the financial position of the Company as at December 31, 2016, and its financial performance
and its cash flows for the year then ended in accordance with Philippine Financial Reporting
Standards (PFRSs).

(2) Qualified Opinion due to material misstatements

QUALIFIED OPINION

We have audited the financial statements of ABC Company (the Company), which comprise
the statement of financial position as at December 31, 2016, and the statement of
comprehensive income, statement of changes in equity and statement of cash flows for the
year then ended, and notes to the financial statements, including a summary of significant
accounting policies.

In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion
section of our report, the accompanying financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 2016, and its financial
performance and its cash flows for the year then ended in accordance with Philippine Financial
Reporting Standards (PFRSs).

(3) Qualified Opinion due to inability to obtain sufficient appropriate audit evidence

QUALIFIED OPINION

We have audited the financial statements of ABC Company (the Company), which comprise
the statement of financial position as at December 31, 2016, and the statement of
comprehensive income, statement of changes in equity and statement of cash flows for the
year then ended, and notes to the financial statements, including a summary of significant
accounting policies.

In our opinion, except for the possible effects of the matter described in the Basis for Qualified
Opinion section of our report, the accompanying financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2016, and its
financial performance and its cash flows for the year then ended in accordance with Philippine
Financial Reporting Standards (PFRSs).

(4) Adverse Opinion

ADVERSE OPINION

We have audited the financial statements of ABC Company (the Company), which comprise
the statement of financial position as at December 31, 2016, and the statement of
comprehensive income, statement of changes in equity and statement of cash flows for the
year then ended, and notes to the financial statements, including a summary of significant
accounting policies.

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 ST. VINCENT COLLEGE
Business School
• Leganes • Pototan • Ivisan
In our opinion, because of the significance of the matter discussed in the Basis for Adverse
Opinion section of our report, the accompanying financial statements do not present fairly, in
all material respects, the financial position of the Company as at December 31, 2016, and its
financial performance and its cash flows for the year then ended in accordance with Philippine
Financial Reporting Standards (PFRSs).

(5) Disclaimer of Opinion

DISCLAIMER OF OPINION

We have audited the financial statements of ABC Company (the Company), which comprise
the statement of financial position as at December 31, 2016, and the statement of
comprehensive income, statement of changes in equity and statement of cash flows for the
year then ended, and notes to the financial statements, including a summary of significant
accounting policies.

We do not express an opinion on the accompanying financial statements of the Company.

Because of the significance of the matter described in the Basis for Disclaimer of Opinion
section of our report, we have not been able to obtain sufficient appropriate audit evidence to
provide a basis for an audit opinion on the financial statements.

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