CHAPTER 11- AUDIT REPORTS ON FINANCIAL STATEMENTS PART 1
LEARNING OBJECTIVES:
At the end of this chapter, the student should be able to:
1. Explain Auditor’s Opinion
2. Explain the Types of Audit Opinion
3. Explain the Components of the Audit Report
4. Explain Corresponding Figures and Comparative Financial Statements
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PSA REFERENCES FOR AUDIT REPORT
PSA 700: Forming an Opinion and Reporting on Financial Statements
PSA 701: Communicating Key Audit Matters in the Independent Auditor’s Report
PSA 705: Modifications to the Opinion in the Independent Auditor’s Report
PSA 706: Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
Auditor’s Report
PSA 710: Comparative Information – Corresponding Figures and Comparative Financial
Statements
PSA 720: The Auditor’s Responsibility in Relation to Other Information in Documents
Containing Audited Financial Statements.
AUDITOR’S OPINIONS
Types of Auditor’s Opinions
Unmodified (unqualified) opinion—The opinion expressed when the FSs are prepared, in all
material respects, in accordance with the applicable financial reporting framework.
Modified opinion—The three types of are:
✓ Qualified opinion – the auditor is satisfied that the FSs are presented fairly, except for a
specific aspect of them.
• The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are material but not pervasive, to the
financial statements; or
• The auditor is unable to obtain sufficient appropriate audit evidence on which to the base
the opinion, but the auditor concludes that the possible effects on the financial statements
of undetected misstatement, if any, could be material but not pervasive.
✓ Adverse opinion – the auditor does not believe the FSs are fairly presented.
The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are both material and pervasive to the
financial statements
✓ Disclaimer of opinion – the auditor does not know if the FSs are presented fairly.
• The auditor is unable to obtain sufficient appropriate audit evidence on which to base the
opinion, and the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive.
In extremely rare circumstances involving multiple uncertainties, the auditor concludes
that, notwithstanding having obtained sufficient 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
Type of opinion to be expressed.
Nature of Matter giving rise to Material but not Material but Pervasive
modification Pervasive
The problem is
both material (the
foundation is bad)
and pervasive (it affects
the entire structure).
FS are materially misstated Qualified Opinion Adverse Opinion
Scope Limitation
Nature of Matter giving rise Material but not Pervasive Material but Pervasive
to modification
Due to management- Qualified Opinion Resign, if appropriate; or
imposed limitation Disclaimer of opinion
Other Limitations Qualified Opinion Disclaimer of Opinion
Auditor’s Reports
The auditor’s report shall be in writing (hard copy format or an electronic medium).
Standard Auditor’s Report
The following are the parts of a standard auditor’s report with unqualified opinion without
emphasis of matter paragraph and other matter paragraph:
1. Title
The auditor’s report shall have a title that clearly indicates that it is the report of an
independent auditor. For example, “Independent Auditor’s Report,” affirms that the auditor has
met all of the relevant ethical requirements regarding independence and distinguishes the
independent auditor’s report from reports issued by others.
2. Addressee
The auditor’s report is normally addressed to those for whom the report is prepared, often
either to the shareholders and/or to those charged with governance of the entity.
3. Auditor’s Opinion
The section in the auditor’s report shall include:
✓ Reference to the financial statements that have been audited.
✓ Description of the financial statements and the matters they present.
✓ Description of the applicable financial reporting framework and how it may affect the
auditor’s opinion.
4. Basis for Opinion
✓The Basis for Opinion section provides important context about the auditor’s opinion.
Accordingly, this PSA requires the Basis for Opinion section to directly follow the Opinion
section in the auditor’s report.
✓The reference to the standards used conveys to the users of the auditor’s report that the audit
has been conducted in accordance with established standards.
5. Key Audit Matters
Law or regulation may require communication of key audit matters for audits of entities other
than listed entities, for example, entities characterized in such law or regulation as public
interest entities.
The auditor may also decide to communicate key audit matters for other entities, including
those that may be of significant public interest, for example because they have a large number
and wide range of stakeholders and considering the nature and size of the business
6. Management’s Responsibilities
Management and, where appropriate, those charged with governance accept responsibility for
the preparation of the financial statements in accordance with the applicable financial reporting
framework, including, where relevant, their fair presentation.
Management also accepts responsibility for such internal control as it determines is necessary
to enable the preparation of financial statements that are free from material misstatement,
whether due to fraud or error.
The description of management’s responsibilities in the auditor’s report includes reference to
both responsibilities as it helps to explain to users the premise on which an audit is conducted.
7. Auditor’s Responsibilities
The auditor’s report explains that the objectives of the auditor 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 the
auditor’s opinion.
These are in contrast to management’s responsibilities for the preparation for the financial
statements.
8. Other Reporting Responsibilities
In some jurisdictions, the auditor may have additional responsibilities to report on other
matters that are supplementary to the auditor’s responsibilities under the PSAs. For example,
the auditor may be asked to report certain matters if they come to the auditor’s attention during
the course of the audit of the financial statements.
In some cases, the relevant law or regulation may require or permit the auditor to report on
these other responsibilities as part of their auditor’s report on the financial statements. In other
cases, the auditor may be required or permitted to report on them in a separate report
9. Name of the Engagement Partner
Naming the engagement partner in the auditor’s report is intended to provide further
transparency to the users of the auditor’s report of a complete set of general-purpose financial
statements of a listed entity.
10. Signature of the Auditor
The auditor’s signature is either in the name of the audit firm, the personal name of the auditor
or both, as appropriate for the particular jurisdiction.
In addition to the auditor’s signature, in certain jurisdictions, the auditor may be required to
declare in the auditor’s report the auditor’s professional accountancy designation or the fact
that the auditor or firm, as appropriate, has been recognized by the appropriate licensing
authority in that jurisdiction
11. Auditor’s Address
The auditor's report should name the location in jurisdiction where the auditor maintains his
office.
12. Date of the Auditor’s Report
The date of the auditor’s report informs the user of the auditor’s report that the auditor has
considered the effect of events and transactions of which the auditor became aware and that
occurred up to that date.
Modifications to Auditor’s Report
The instances of modifications include when the auditor:
✓ Adds “Emphasis of Matter Paragraph”
✓ Includes “Other of Matter Paragraph”
✓ Provides modified auditor’s opinion
Emphasis of Matter Paragraph
A paragraph included in the auditor’s report that refers to a matter appropriately presented or
disclosed in the FSs, in the auditor’s judgment, is of such importance that it is fundamental to
users’ understanding of the FSs.
The auditor can include emphasis of matter paragraph provided the auditor has obtained SAAE
that the matter is not materially misstated in the FSs.
The inclusion of this paragraph in the auditor’s report does not affect the auditor’s opinion.
Circumstances in which an Emphasis of Matter paragraph may be necessary include:
• An uncertainty relating to the future outcome of exceptional litigation or regulatory action.
• Early application (where permitted) of a new accounting standard that has a pervasive
effect on the financial statements in advance of its effective date.
• A major catastrophe that has had, or continues to have, a significant effect on the entity’s
financial
position.
• A significant subsequent event that occurs between the date of the financial statements and
the date of the auditor’s report.
Other Matter Paragraph
A paragraph included in the auditor’s report that refers to a matter other than those presented
or disclosed in the FSs that, in the auditor’s judgment, is relevant to users’ understanding of the
audit, the auditor’s responsibilities or the auditor’s report.
The auditor shall include this paragraph immediately after the Opinion paragraph and any
Emphasis of Matter paragraph, or elsewhere in the auditor’s report if the content of the Other
Matter paragraph is relevant to the Other Reporting Responsibilities section.
Corresponding figures
The auditor’s opinion shall not refer to the corresponding figures because the auditor’s opinion
is on the current period FSs includes corresponding figures, except:
✓ Modification in auditor’s report on the prior period remain unresolved.
✓ Misstatement in prior period FSs.
✓ Prior period FSs not audited.
✓ Prior period FSs audited by a predecessor auditor
If the auditor obtains audit evidence that a material misstatement exists in the prior period FSs
on which an unmodified opinion has been previously issued, and the corresponding figures
have not been properly restated, the auditor shall express a qualified opinion or an adverse
opinion in the auditor’s report on the current period FSs.
When the prior period FSs that are misstated have not been amended and an auditor’s report
has not been reissued, but the corresponding figures have been properly restated or
appropriate disclosures have been made in the current period FSs, the auditor’s report may
include an Emphasis of Matter paragraph.
Prior period FSs audited by a predecessor auditor
The auditor shall state (if nor prohibited by law to do so) in an Other Matter paragraph in the
auditor’s report:
✓ That the FSs of the prior period were audited by the predecessor auditor;
✓ The type of opinion expressed and, if the opinion was modified, the reasons therefore; and
✓ The date of that report.
Comparative financial statements
The auditor’s opinion shall refer to each period for which FSs are presented on which an audit
opinion is expressed.
REFERENCES:
CPA Review School of the Philippines Auditing Theory Notes
Salosagcol, Jekell G. Tiu, Michael F., Hermosilla, Roel E. (2021. Auditing Theory, A guide in
understanding the Philippine Standards on Auditing. Manila, Philippines: GIC Entreprises & Co. Inc.
Roque, Gerardo 2023-2024, Auditing Theory. Manila, Philippines
Villaluz, Brian Christian, Limheya, Lester Glenn, De Castro Kenneth Michael A. 2022. Audiing and
Assurance Principles. Manila, Philippines
Various Auditing Theory Notes and Review Materials from review centers.