Chapter 11

THE AUDITOR’S REPORT ON

FINANCIAL STATEMENTS

Auditor’s Report on Financial Statements

Unmodifi Modification Emphasis of Key Audit Report Special

ed Report Matters & Matters & on Group Purpose
to the
Other Matter Other FS FS
Opinion Paragraphs Information

The objective of an audit of financial statements is to enable the auditor to express an opinion
about whether the financial statements are prepared, in all material respects, in accordance with
the applicable financial reporting framework. The preparation of the financial statements by
management and, where appropriate those charged with governance requires the inclusion of an
adequate description of the applicable financial reporting framework in the financial statements.
The financial reporting framework provides a context for the auditor’s evaluation of the fair
presentation of the financial statements. Without this framework, the auditor would not have a
benchmark for evaluating the fairness of the financial statements.

General purpose financial statements may be prepared using either “compliance framework” or
“fair presentation framework”. The term “fair presentation framework” is used to refer a
financial reporting framework that requires compliance with the requirements of the framework
and:

(i) Acknowledge 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
(ii) Acknowledge explicitly that in may be necessary for management to depart from a
requirement of the framework to achieve fair presentation of the financial statements.

In contrast, 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) mentioned above. In the Philippines, fair presentation
frameworks include the Philippine Financial Reporting Standards (PFRS) and PFRS for small
and Medium Sized Entities (SMEs).

PSA 700 requires the auditor’s report to contain a clear expression of the auditor’s opinion on the
financial statements. In forming this opinion, the auditor should evaluate whether the financial
statements taken as a whole are free from material misstatement. The auditor must form
judgment as to whether:

1. The accounting policies selected and applied are consistent with the financial reporting
framework and are appropriate in the circumstances;
2. The accounting estimates made by management are reasonable in the circumstances;
3. The information presented in the financial statements; including accounting policies, is
relevant, reliable, comparable and understandable; and
4. The financial statements provide sufficient disclosure to enable users to understand the
effects of material transactions and events conveyed in the financial statements.

 The Unmodified Report

The end product of the financial statement audit is an audit report that contains the auditor’s
opinion about the fair presentation of the financial statements. The most common type of
auditor’s report contains a clean opinion or unmodified opinion. This type of opinion is
issued when the auditor concludes, based on audit evidence obtained, that the financial
statements are presented fairly, in all material respects in accordance with the appliable
financial reporting framework.

When the audit is conducted in accordance with PSAs, uniformity in the wording of the
auditor’s report is required. The accountancy profession has deemed it essential to
standardize the format and content of the auditor’s report in order to enhance the credibility
of the report and promote the readers’ understanding of the report. In addition, uniformity in
reporting also alerts the readers in circumstances where the auditor expresses an audit report
that contains modified opinions.

Basic Elements of the Unmodified Report

Each part of the audit report is significant in terms of the information conveyed to the users and
the responsibility assumed by the auditors. PSA 700 sets out of the following requirements
relating to the elements of the unmodified report:
 Basic Elements of the Unmodified Report

Title

Addressee

Auditor’s opinion

Basis for the Opinion

Responsibilities of Management and

those charged with Governance for
the Financial Statements

Auditor’s Responsibilities for the

Audit of the Financial Statements

Other Reporting Responsibilities

Auditor’s Signature

Auditor’s Address

Date
1. Title

The auditor’s report must have a title that clearly indicates that is the report of an
independent auditor. This is done in order to:

o To distinguish the auditor’s report from the reports that might be issued by others;
and
o To emphasize the independence of the auditor with respect to the client being
audited.

2. Addressee

The report should be addressed to those parties for whom the report is prepared. Ordinarily
the audit report is addressed to the shareholders or the board of directors of the entity whose
financial statements are being audited. To emphasize auditor’s independence from client’s
management, the auditor would normally address the report to the shareholders of the client
company.

It would not be appropriate for the auditor to address the report to the company’s president,
chief executive officer or chief financial officer because these are members of management
who are responsible for the preparation and presentation of the financial statements audited.

As a regulatory requirement, if the audit report accompanying the financial statements is to

be filled with the regulatory agencies, the Philippine Securities and Exchange Commission
(SEC) requires the auditor’s report to indicate the complete mailing address of the client.

3. Auditor’s Opinion

The readers of the financial statements are very much interested in the type of opinion
expressed by the auditors. To give more prominence on the auditor’s opinion, the opinion of
the auditor is placed in the first section of the auditor’s report. This section shall have the
heading “Opinion” and shall:

a. Identify the name of the entity whose financial statements have been audited;
b. State that the financial statements have been audited;
c. Identify the title of each of the financial statements audited including the date and
period covered by the financial statements; and
d. Refer to the summary of significant accounting policies and explanatory notes.

4. Basis for Opinion

The auditor’s report shall have a section with the heading “Basis for Opinion”. This part of
the report describes the framework for an audit that enables the auditor to express an opinion
on the financial statements. This shall be presented immediately after the Opinion section and
shall:
 a. State that the audit was conducted in accordance with the 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 and has fulfilled the
auditor’s ethical responsibilities; and
d. State whether the audit believes that the audit evidence the auditor has obtained is
sufficient and appropriate to provide a basis for the auditor’s opinion.

5. Responsibilities for the financial statements are the responsibilities of the client and this
fact is reiterated in the auditor’s report. The auditor’s report shall have a section with a
heading “Responsibilities of Management and Those Charged with Governance for the
Financial Statements”. This section shall describe:

a. Management’s responsibility for the preparation and fair presentation of the financial
statements in accordance with the applicable financial reporting, framework, and for
such internal control necessary to enable the preparation of financial statements that
are free from material misstatement.

b. Responsibility of the management in 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; and

c. The responsibility of those charged with governance for overseeing the financial
reporting process.

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

The readers of the financial statements should be informed of the objectives of the audit and
the degree of responsibility being assumed by the auditor. The auditor’s report shall include a
section with a heading “Auditor’s Responsibilities for the Audit of the Financial Statements”
and this shall:

a. State that the objectives of the auditor are to:

 Obtain reasonable assurance about the whether the financial statements as a whole are
free from material misstatement whether due to fraud or error, and
 Issue a report that includes the auditor’s opinion.

b. State that reasonable assurance is a high level of assurance but is not a guarantee that
an audit conducted in accordance with PSAs will always detect a material
misstatement when it exists; and
c. State that misstatement can arise from fraud and error, and either:
  Describe that they are considered material if individually or in aggregate, they could
reasonably expect to influence the economic decisions of users taken on the basis of
the financial statements; or
 Provide a definition or description of materiality in accordance with the applicable
financial reporting framework.

d. State that, as part of the audit in accordance with PSAs the auditor exercises
professional judgement and maintains professional judgement and maintains
professional skepticism throughout the audit; and

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

 To identify and assess the risks of material misstatement of the financial statements.
 To obtain an understanding of internal control relevant to the audit in order to design
appropriate audit procedures.
 To evaluate the appropriateness of the accounting policies used and the
reasonableness of the accounting estimates and related disclosures.
 To conclude on the appropriateness of management’s use of the going concern basis
of accounting.
 To evaluate the fair presentation of the financial statements.

The description of the auditor’s responsibilities in the auditor’s report may be presented
in the following ways:

 Within the body of the auditor’s report;

 Within an appendix to the auditor’s report; or
 By specific reference to the location of such a description on the website of the Board
of Accountancy or the Auditing and Assurance Standards Council.

f. State that the auditor communicates with those charged with governance the planned
scope and timing of the audit and significant audit findings including any significant
deficiencies in internal control identified during the audit.

7. Other Reporting Responsibilities

Auditor may have additional responsibilities to report on other matters that are
supplementary to the auditor’s responsibility to report on the financial statements under PSA.
For example, auditors are required to report on supplementary information to comply with
the requirements of the BIR Revenue Regulation No. 15-2010.

If the auditor’s report contains a separate section on other reporting responsibilities, the
auditor’s report on financial statements should have a sub-title “Reporting on the Audit of the
Financial Statements” to clearly distinguish the auditor’s responsibility to report on the
financial statements from the auditor’s other reporting responsibilities.
As a minimum, the auditor should inquire from management how the supplementary
information was prepared; determine whether the supplementary information is consistent
with the financial statements and the auditor’s overall knowledge of the entity; and consider
whether there is a need for client representation letter to make reference to the supplementary
information.

8. Auditor’s Signature

The report should be signed in the name of the audit firm and/or the personal name of the
auditor as appropriate. For financial statements be submitted to SEC, Securities Regulations
Code requires that the auditor’s report be signed in the personal name of the partner.

9. Auditor’s Address

The auditor’s report should name the locations in the jurisdiction where the auditor maintains
his office.

10. Date of the report

The date of the report is important because this is the date when the auditor’s responsibility
for subsequent events ends. This date informs the readers that the auditor has considered the
financial statement effects of subsequent events that occurred up to the date of the auditor’s
report. At this date, the auditor must have completed all essential audit procedures to provide
a basis for his opinion. The auditor is not ordinarily required to carry out any audit
procedures after the date of the report.

Since the auditor’s opinion is provide on the financial statements that are the responsibility of
management, the auditor is not in a position to conclude that sufficient appropriate audit
evidence has been obtained until the financial statements have been prepared and
management has accepted responsibility for them. Consequently, the auditor cannot date the
auditor’s report earlier than the date of the approval of the financial statements as the date of
their audit reports.
INDEPENDENT AUDITOR’S REPORT

To the Shareholders of CRC-ACE Company

Report on the Audit of the Financial Statements

Opinion

We have audited the financial statements of CRC-ACE Company (the company), which
comprise the statements of financial position as at December 31, 20X2 and 20X1, and the
statements of comprehensive income, statements of changes in equity and statements of cash
flows for the years 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, 20X2 and 20X1, and its financial
performance and its cash flows for the years ended in accordance with Philippines Financial
Reporting Standards (PRRSs)

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 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.

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 PRFSs, 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
either 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 finial
reporting process.
Auditor’s Responsibility 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 material
misstatement when it exists. Misstatements can arise from fraud 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 judgement and maintain
professional skepticism throughout the audit. We also:

 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, international omissions,
misrepresentations, or the override of internal control.
 Obtain an understanding of internal control relevant to the audit and 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.
 Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by management.
 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 disclosures 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 of conditions may cause the Company to cease to continue as a
going concern.
 Our audits were conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supplementary information for the year ended
December 31, 20X2 required by the Bureau of Internal Revenue presented for purpose of
additional analysis and is not required part of the basic financial statements prepared in
accordance with PFRS. Such supplementary information is the responsibility of
management. The supplementary information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic financial statements taken as a
whole.
  Modification to the Opinion

The unmodified opinion is issued only when the auditor is satisfied that

1. The financial statements have been prepared in accordance with the applicable
financial reporting framework such as PFRS; and
2. The auditor was able to conduct the audit in accordance with PSA.

Failure to meet any of the above requirements will cause the auditor to modify his opinion on the
financial statements.

 Material Misstatement/ Department from PFRS

Fair presentation of the financial statements is presumed to have been achieved whenever the
financial statements are presented in accordance with the applicable financial reporting
framework. Needless to say, any departure from the specific requirements of the reporting
framework will cause the financial statements to contain material misstatement.

A material misstatement of the financial statements may arise from:

1. Inappropriate accounting policy selected.

2. Misapplication of selected accounting policy; or
3. Inappropriate or inadequate disclosure.

When the auditor in covers material misstatement, the auditor should inform the client of such
misstatement and should insist that the financial statements be revised. If management refuses to
correct misstatements, the auditor should express either a qualified or an adverse opinion
depending on the material and pervasiveness of effect of the misstatements on the financial
statements.

 Scope Limitation

Scope limitation arises when the auditor is unable to perform necessary audit procedures
required by PSA or the auditor is unable to obtain sufficient appropriate evidence about an
assertion because of the restrictions imposed by the circumstances.

.
Client Imposed Scope Limitation

Management sometimes prevents the auditor from performing certain audit procedures which are
essential to support the auditor’s opinion. For example, management may request the auditor not
to confirm receivable balances with selected customers. When the auditor believes that such
limitation is likely to result to a modification of the opinion on the financial statements, the
auditor should request the management to remove the limitation.

If management refuses to remove the limitation, the auditor should communicate the matter to
those charged the governance and determine whether it is possible to perform alternative
procedures to obtain sufficient appropriate evidence. Failure to obtain sufficient appropriate
evidence will cause the auditor to:

1. Express a qualified opinion if the effect is material but not pervasive, or

2. If the effect is both material and pervasive, the auditor may resign from engagement or
disclaim an opinion on the financial statements.

The practically of resigning from the audit may depend on the stage of completion of the
engagement at the time that management imposes the scope limitation. If the auditor has
substantially completed the audit, the auditor may decide to complete the audit to the extent
possible, disclaim an opinion and explain the scope limitation in the report prior to resigning.

Circumstance Imposed Scope Limitation

During the audit of financial statements, the auditor may encounter circumstances that may affect
his ability to obtain sufficient appropriate evidence. Circumstances imposed scope limitations
can be either:

1. Due to the nature or timing of the auditor’s work, like when the auditor is appointed to
audit the financial statements of a client
2. Due to circumstances that are beyond the control of the entity, like when the client’s
accounting records are not adequate.

Circumstances imposed scope limitations may make certain procedures impossible to

perform. When this happens, the auditor should design and perform alternative procedures to
obtain satisfaction about the assertions in the financial statements. An auditor’s inability to
perform a specific procedure does not constitute a limitation in the scope of the audit if the
results of applying alternative procedures enable the auditor to obtain sufficient appropriate
audit evidence. However, if there are np alternative procedures that can be performed or the
results of the alternative procedures performed do not enable the auditor to obtain sufficient
appropriate evidence, the auditor should express either a qualified opinion or disclaimer of
opinion on the financial statements depending on the materiality and pervasiveness of the
possible effect on the financial statements.
Materiality and Pervasiveness Consideration

Determining the appropriate audit opinion to express requires a great deal of professional
judgement. In making this decision, both materiality and pervasiveness of effect on the financial
statements should be taken into consideration.

If the magnitude of misstatement is significant enough to affect the readers of the financial
statements, but not enough to overshadow the fair presentation of the financial statements taken
as a whole, the auditor would most likely express a qualified opinion. On the other hand, if the
auditor believes that the effect of misstatements is highly material and there are several items
on the financial statements that are affected by the misstatement as to render the overall
financial statements materially misleading, the auditor would most likely express and adverse
opinion. For example, an auditor may conclude that a material error in inventory could have a
pervasive effect on the financial statements because inventory errors affect a number of financial
statement items such as cost of sales, gross profit, income tax expense, net income, asset, liability
and equity accounts.

Modification to the Opinion

Material Misstatement Scope Limitation

Material Material Material Material

but not and but not and
Pervasive Pervasive Pervasive Pervasive

Qualified Adverse Qualified Adverse

Opinion Opinion Opinion Opinion
Modification of the Auditor’s Report

As mentioned earlier, the consistency on the auditor’s report helps promote users’ understanding
of the report and it helps alert users about unusual circumstances when they occur. Although
uniformity in the wording of a modified opinion and in the description of the basis for the
modification may not be possible, consistency in both the form and content of the auditor’s
report is desirable even when issuing modified report PSA 705 provides clear guidelines on how
the report should be modified when the auditor expresses modified opinions.

Material Misstatement Disclaimer of Opinion

Qualified Adverse Qualified Adverse

Opinion Section Modified Modified Modified Modified

Basis for Opinion

Section Modified Modified Modified Modified

Responsibilities for No No No No
the FS section modification modification modification modification

Auditor’s No No
responsibilities modification modification Modified Modified
section

A. OPINION SECTION

The following summarizes the modifications that should be made tp the Opinion section of
the auditor’s report:

 Qualified Opinion Due to Material Misstatement

When the auditor expresses a qualified opinion due to a material misstatement, the auditor
shall:
 Use the heading “Qualified Opinion” in the opinion section of the report; and
 State that, in the auditor’s opinion, expect for the effects of the matter described in the
Basis for Qualified Opinion section, the financial statements present fairly, in all material
respects, the financial position and financial performance of the entity in accordance with
the applicable financial reporting framework.
 Adverse Opinion

When the auditor expresses an adverse opinion because the financial statements are
materially misleading, the auditor shall:
 Use the heading “Adverse Opinion” in the opinion section of the report; and
 State that, in the auditor’s opinion, because of the significance of the matter described in
the Basis for Adverse Opinion section, the financial statements do not present fairly
the financial position and financial performance of the entity in accordance with the
applicable financial reporting framework.

 Disclaimer of Opinion

When the auditor disclaims an opinion due to scope limitation, the auditor shall:
 Use the heading “Disclaimer of Opinion” in the opinion section of the report;
 State that the auditor does not express and opinion on the financial statements;
 State that because of the significance of the matter described in the Basis for Disclaimer
of opinion section, the auditor has not been able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion on the financial statements; and
 Amend the opening statement which indicates that the auditor has audited the financial
statements, to state that the auditor was engaged to audit the financial statements.

B. BASIS FOR OPINION

When the auditor modifies the opinion on the financial statements, the auditor’s report should
provide a description of the matter giving rise to the modification with the appropriate
heading such as “Basis for Qualified Opinion,” “Basis for adverse Opinion,” or “Basis for
Disclaimer of Opinion”.

 Material Misstatement (Qualified or Adverse Opinion)

If there is a material misstatement that relates to specific amounts or quantitative disclosure

in the financial statements, the auditor should include in the “Basis for Opinion” section:
 A description of the nature of misstatements; and
 A quantification of the financial effects of the misstatement or a disclosure of omitted
information, if practicable.

 Omission of narrative disclosure (Qualified or Adverse Opinion)

If the misstatement relates to non-disclosure of information in the noters to the financial

statements, the auditor should discuss non-disclosure with those charged with governance. In
addition, the auditor should:
 Describe the nature of the omitted information in the Basis for Opinion section of the
report; and
 Include the omitted information, if practicable.
Whenever the auditor expresses a qualified or an adverse opinion, the auditor needs to amend
the last sentences in the Basis for Opinion section to state that the audit evidence obtain is
sufficient and appropriate to provide a basis for auditor’s “qualified” or “adverse” opinion as
appropriate.

 Scope Limitation (Qualified or Disclaimer of Opinion)

If the modification results to inability to obtain sufficient appropriate audit evidence, the
basis for opinion section shall only explain the reason for the inability.

When the auditor disclaims an opinion on the financial statements, the auditor’s report shall omit
the elements in the Basis for Opinion section that:

1. Makes reference to the auditor’s responsibility; and

2. States that the evidence obtained is sufficient and appropriate to provide a basis for the
auditor’s opinion.

C. AUDITOR’S RESPONSIBILITY

When the auditor expresses a qualified or an adverse opinion on the financial statements, the
Auditor’s Responsibility section will not be modified. However, if the auditor disclaims an
opinion on the financial statements, the Auditor’s Responsibility section should be modified to
include only the following statements:

1. That the auditor’s responsibility is to conduct an audit of financial statements in accordance

with PSA and to issue an auditor’s report;
2. That because of the matter described in the Basis for Opinion section, the auditor was not
able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on
the financial statements; and
3. That the auditor is independent of the entity and the auditor has fulfilled his ethical
responsibilities.

Piecemeal Opinion

Piecemeal opinion is an unmodified opinion expressed on one or more components of the

financial statements while expressing an adverse or disclaimer of opinion on the financial
statements taken as a whole. PSA does not allow this reporting practice because piecemeal
opinion tends to contradict or even overshadow the disclaimer or adverse opinion expressed
taken as a whole.

 Going Concern

Continuation of the entity as a going concern is assured in the financial statements in the
absence of explicit information to the contrary. Under the going concern basis of accounting,
the financial statements are prepared on the assumption that the entity is a going concern and
will continue to operate for foreseeable future.

When planning and performing audit procedures, the auditor should consider the
appropriateness of management use of the going concern basis of accounting in the
preparation of the financial statements and should evaluate whether there are material
uncertainties about the entity’s ability to continue as a going concern that need to be
disclosed in the financial statements.

 Going Concern Assumption is Appropriate and No Material Uncertainty Exists

When events or conditions have been identified that may cast significant doubt on the
entity’s ability to continue as a going concern but, based on the audit evidence obtained,
the auditor concludes that no material uncertainty exists, the auditor should evaluate
whether the financial statements contain adequate disclosures about the:

 Principal events or conditions identified;

 Management’s evaluation of the significance of those events or conditions in the
relation to the entity’s ability to meet its obligations;
 Management’s plans that mitigate the effect of these events or conditions; or
 Significant judgements made by the managements as part of its assessment of the
entity’s ability to continue as a going concern.
If adequate disclosures are made by the entity and there are no other issues involved, the
auditor may issue a report that contains an unmodified opinion on the financial
statements. In addition, the auditor’s report should have a separate section with a heading
“Going Concern” stating specifically that no material uncertainties exist.

 Going Concern Appropriate- Material Uncertainty Exists

Based on the audit evidence obtained, the auditor should evaluate 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.

A material uncertainty exists when the impact of the going concern problem is significant
such that, in the auditor’s judgement, clear disclosure of the nature and implications of
the uncertainties is necessary for the fair presentation of the financial statements.

When the auditor believes that the use of the going concern basis of accounting is
appropriate but material going concern uncertainty exists, the nature of the opinion and
the audit report to be issued will depend on whether the financial statements adequately
disclose the material uncertainty in the notes to the financial statements. The auditor
should evaluate whether the financial statements:

The auditor should evaluate whether the financial statements:

 Adequately describe the principal conditions and events that give rise to the
significant doubt including management plans to deal with these events or conditions.
  State clearly that there is a material uncertainty about the entity may not be able to
realize its assets or discharge its liabilities in the normal course of business.

Implication on the Auditor’s Report

If the auditor concludes that adequate disclosure about the material uncertainty is made
in the financial statements, the auditor should issue a report that contains an unmodified
opinion with a separate section “Material Uncertainty Related to Going Concern” that:

1. Draw’s the readers’ attention to the note in the financial statements that discloses
the matter; and
2. States that these events or conditions indicate the existence of material uncertainty
that may cast significant doubt about the entity’s ability to continue as a going
concern and that the auditor’s opinion is not modified in respect of this matter.

If the auditor concludes, however, that material going concern uncertainty is not
adequately disclosed, the auditor should express either qualified or adverse opinion
and state the reason for the modification in the Basis for Qualified or Adverse Opinion
section of the audit report.

 Going Concern Assumption Inappropriate

If the auditor believes that the entity will not be able to continue as a going concern, the
financial statements should not be prepared on a going concern, the financial statements
should not be prepared on a going concern basis. Instead, an alternative basis must be
used in presenting the financial statements. For this purpose, the Philippine
Interpretations Committee of the FRSC requires that assets and liabilities of an entity be
measured in accordance with the applicable accounting standards. For example, financial
statements and investments properties will be accounted for the under PFRS 9 and PAS
40 respectively while the other assets and liabilities may be accounted for using PFRS 5.

If the entity insists on using the going concern basis of accounting in presenting its
financial statements despite the fact that the entity will not be able to continue as a going
concern anymore, the financial statements will be misleading. Consequently, the
auditor’s report on the financial statements must contain an adverse opinion.

Multiple uncertainties affecting the financial statements

Ordinarily, the audition of going concern section or emphasis of matter paragraph that
describes going concern problem or significant uncertainties affecting the financial
statements is adequate to meet the auditor’s reporting responsibilities regarding such
matters. However, in extreme cases, such as situations involving multiple uncertainties
that are significant to the financial statements, the auditor may consider it appropriate to
issue a disclaimer of opinion instead of adding an emphasis of the matter paragraph.
 Key Audit Matters
Traditionally, the format of auditor’s report on the financial statements has always been
standardized. The auditor’s report would only contain an expression of opinion as to
whether or not the financial statements are fairly presented in accordance with the
applicable financial reporting framework. Although standardizing the format of the report
has some benefits, there is an increasing demand from the public and investors for
auditors to issue a report that is tailor-made for each engagement.

The clamor of the public and investors for an enhanced and transparent audit report has
prompted the profession to communicate those matters that significantly influenced the
auditor’s judgement in deciding on the type of opinion to express on the financial
statements.

PSA 701 requires auditor to communicate key audit matters in the auditor’s report
whether the audit financial statements of listed entities. Communicating key audit
matters is intended to assist the readers in understanding those matters that were of
most significance in the audit of the financial statements of the current period. It also
assists the readers in understanding areas in the financial statements that required
significant management judgement or areas of focus in performing the audit.

o Identifying Key Audit Matters

Key audit matters are those matters that, in the auditor’s professional judgement,
were of most significance in the audit of the financial statements of the current
period.

The auditor’s determination of key audit matters involves three steps:

Step 1 Categorize the matters that were communicated with those charged
governance.
Step 2 Determine which of these matters required significant auditor’s attention
Step 3 Which of these matters that required significant attention are the most
significance to the audit of the current period.

Key Audit Matters

Matters that were communicated with those
charged with governance

Matters that required significant

auditor attention

Matters of most
The auditor should significance determine which of the matters
 communicated with those charged with governance are the key audit matters. In
making this determination, the auditor should take into account areas of
significant auditor attention in performing the audit, like:

 Areas identified as significant risks or those that involved significant auditor

judgement;
 Areas in which the auditor encountered significant difficulty with respect to
obtaining audit evidence; and
 Circumstances that required significant modification of the auditor’s planned
approach to the audit.

The number of key audit matters to be included in the auditor’s report may be
affected by the size and complexity of the entity, the nature of its business and
environment, and the facts and circumstances of the audit engagement, and the
facts and circumstances of the audit engagement. The auditor’s objective is to
select a smaller number of matters, from the matters communicated with those
charged with governance, that were of most significance in the audit. In general,
the greater the number of key audit matters, the less useful the auditor’s
communication of key audit matters will be.

The auditor’s determination of key audit matters is limited to those matters of

most significance in the audit of the financial statements of the current period
only. This are true even when comparative financial statements are presented.

o Manner of Communicating and Documenting Key Audit Matters

The auditor must use his professional judgement in determining the level of detail
and the order of presenting the key audit matters. As a minimum, the auditor’s
report should clearly identify each of the key audit matters, with reference to the
notes in the financial statements, and explain:

1. Why the matter was considered to be most significant; and

2. How the matter was addressed in the audit.

The auditor should document the matters that will be communicated as key audit
matters, and the significant professional judgements made in reaching this
determination. In addition, PSA 701 also requires auditors to communicate the
key audit matters t be included in the report with those charged with governance.

An issue that causes the auditor to modify an opinion of an entity’s financial

statement as well as going concern uncertainties are by their nature considered
key audit matters. These matters, however, should not be included in the Key
Audit Matters section of the auditor’s report but rather these should be described
in the Basis for (Qualified or Adverse) Opinion or Going Concern sections of the
report as appropriate.
 It is to be emphasized that the communication of key audit matters is not a
substitute for expressing a modified opinion on the client’s financial statements.
Furthermore, the auditor’s report should not include key audit matters when
the auditor disclaims an opinion on the financial statement.

Although the communication of key audit matters is required only for audits of
the financial statements of listed entities, auditors of non-listed entities may
include such communication in the audit report if the auditor desires it or the
client requests for it.

In very rare instances, the auditor may conclude that there are no key audit
matters to communicate in the auditor’s report. When this happens, the auditor
should communicate this matter with those charged with governance and state this
fact in the auditor’s report. The auditor should also document the rationale for the
auditor’s conclusion that there are no key audit matters to communicate in the
auditor’s report.

 Emphasis of Matter and Other Matter Paragraphs

In some instances, it may be appropriate for the auditor to include additional paragraphs in
the report to emphasize important matters affecting the financial statement or affecting
the auditor’s report. The addition of these paragraphs does not negate the auditor’s
unmodified opinion and is not to be construed as a modification to the opinion or a substitute
for the modified opinion. These paragraphs are presented in order to promote reader’s
understanding of the financial statements or the auditor’s reporting responsibility.

 Emphasis of Matter

An emphasis of matter paragraph is included in the audit report to draw the reader’s
attention to a matter presented or disclosed in the financial statements that, in the
auditor’s judgement, is of such importance that it is fundamental to the readers’
understanding of the financial statements.

Below are examples of circumstances where the auditor may consider it necessary to
include an Emphasis of Matter paragraph:
1. Significant uncertainty
2. Early application of new accounting standard in advance of its effective date
3. A major catastrophe that has a significant effect on the entity’s financial position
4. A subsequent discovery of facts affecting the previously issued opinion
5. Financial statements prepared using a special purpose framework
 Emphasis of Matter
Significant
Uncertainties

Significant
Uncertainties

Adequate Unmodified
Significant
Disclosures opinion with
Uncertainties emphasis of
matter
Significant paragraphs
Uncertainties

Significant
Uncertainties

 Significant Uncertainty

An uncertainty is a matter whose outcome depends on future actions or events not under
the direct control of the entity that may affect financial statements. When there are
significant uncertainties which are adequately accounted for and disclosed in the
notes to the financial statements, the auditor should consider modifying the report by
adding an emphasis of matter paragraphs to highlight the material uncertainty.

 Early application of new accounting standard

The accounting setters sometimes allow or even encourage entities to apply new
accounting standards prior to their mandatory effective date. If the application of this new
accounting standard has a pervasive effect on the financial statements of the entity, the
auditor should include an Emphasis of Matter paragraph to draw the reader’s attention to
the note of the financial statements that discuss the matter.

 Major catastrophe

Recent disasters brought about by calamities have brought major catastrophe to many
companies. A major catastrophe that has had, or continues to have, a significant effect on
the entity’s financial position will have to be disclosed in the notes to the financial
statements. Besides the disclosure required by accounting standards, the auditor’s report
should include an Emphasis of Matter paragraph to give emphasis on the note that
discusses this event.

 Subsequent discovery of facts that affect the auditor’s opinion

 As discussed in the preceding chapter, an entity may need to amend the previously issued
financial statements because of significant facts that come to light after the financial
statements are issued. When this happens, a new audit report on the amended financial
statements is required. The new audit report shall include an Emphasis of Matter
paragraph to put emphasis on the note that discusses the reason for such amendments and
for readers to understand the auditor’s responsibility and the auditor’s report.

 Financial statements prepared using a special purpose framework

Auditors often report on financial statements prepared using general purpose frameworks
such as PFRS. There are also instances, however, where the CPA will be required to issue
a report on financial statements prepared using cash basis of accounting, modified cash
basis or other basis of accounting. These financial statements are referred to in PSA 800
as special purpose financial statements. When reporting on special purpose financial
statements, the auditor’s report must include a separate paragraph in order to emphasize
the fact that the financial statements are prepared using a special purpose framework.

A widespread use of emphasis of matter paragraphs diminishes the effectiveness of the auditor’s
communication of such matters. Additionally, to include more information in an Emphasis of
Matter Paragraph rather that presenting them in the financial statements may imply that the
matter has not been appropriately presented or disclosed. Accordingly, the use of Emphasis of
Matter Paragraph should be limited only to matters presented or disclosed in the financial
statements.

Relationship between Emphasis of Matter and Key Audit Matters

Auditors may wish to emphasize key audit matters because the auditor believes that these matters
only essential to readers’ understanding of the financial statements. The auditor may do so by:

1. Presenting the matter more prominently than other matters like presenting it as the first
matter in the Key Audit Matters Section; or
2. By including additional description that indicates the importance of the matter to readers’
understanding of the financial statements.

 Other Matter Paragraphs

There are instances when the auditor considers it necessary to communicate a matter that is
not presented or disclosed in the financial statements but, in the auditor’s judgement, is
relevant to users’ understanding of audit, the auditor’s responsibilities or the auditor’s report.
The auditor may do s by including an additional paragraph to an unmodified opinion with the
heading “Other Matter”

Circumstances which require Other Matter paragraph include:

1. Reporting on comparative information
2. Financial statements prepared using more than one financial framework.
3. Limiting the use of the auditor’s report
4. Subsequent discovery of facts

1. Reporting on Comparative Information

Comparative information covering one or more preceding periods provides the users of
the financial statements with information necessary to identify trends and changes
affecting an entity over a period of time. PSA 710 has identified two or more financial
reporting frameworks for comparatives, namely:

a. Comparative Financial Statements where amounts and other disclosures for

the preceding period are included for comparison with the financial statements
of the current period, but do not form part of the current period financial
statements.

b. Corresponding Figures where amounts and other disclosures for the

preceding period are included as part of the current period financial statements,
and are intended to be read in relation to the amounts and other disclosures
relating to the current period. These corresponding figures are not presented as
complete financial statements capable of standing alone, but are an integral
part of the current period financial statements intended to be read only in
relationship to the current period figures.

 Reporting on Comparative Financial Statements

When reporting on comparative financial statements, the auditor should issue

a report in which the comparative financial statements are specially
identified. The auditor’s opinion should be expressed individually on the
financial statements of each period presented. Reports on comparative
financial statements can be illustrated under the following scenarios.

1. Prior period financial statements were audited by a continuing auditor

2. Prior period financial statements were audited by another auditor

3. Prior period financial statements were not audited

 Prior Period Financial Statements audited by a continuing auditor

When comparative financial statements are presented, the continuing auditor’s

report should cover the current year’s financial statements as well as those for
the prior periods that were audited by the firm. In addition, auditor should not
simply reissue his prior year’s report but he should update his report on the
financial statements of the prior period to determine if the report is still
appropriate.
 Updating the report involves either
 Re-expressing the opinion originally issued; or
 Expressing an opinion different from the one originally issued.

A different opinion on the prior period financial statements may be warranted

because new information may have come to light that causes the auditor to
change the original opinion expressed on the prior year’s financial statements.

For example:

 A material misstatement in the financial statements that caused the auditor

to issue a qualified or adverse opinion on the prior period financial
statements was corrected by the client when these financial statements are
presented in the current period. Since the reason for modification of
opinion no longer exists, the auditor’s report on the comparative financial
statements should include an unmodified opinion.

 A major uncertainty that caused the auditor to disclaim an opinion on the

prior period financial statements was resolved during the current year.
Because the uncertainty does not exist anymore, an unmodified opinion
can now be expressed on the prior period financial statements.

When a continuing auditor’s updated report on the prior year’s financial

statements is different from the report previously issued, the auditor’s report
should include an “Other Matter” paragraph stating:

1. The fact that the updated report is different from the previous opinion;
2. The date of the prior year’s report;
3. The type of opinion previously issued; and
4. The reasons for changing the auditor’s opinion.

 Prior Period Financial Statements audited by another auditor

When the financial statements of the prior period were audited by another
auditor, there are tow reporting alternatives. The predecessor may either
reissue his report on the prior period financial statements or the incoming
auditor will make reference to the predecessor auditor’s report.

 The predecessor auditor reissues the audit report on the prior period
financial statements.
 Before a predecessor auditor reissues his report on the prior period
financial statements, he must take steps to determine whether his report is
still appropriate. This may include

o Comparing the current period financial statements with the financial

statements audited.
o A discussion with the successor auditor about any circumstances or
events that may affect the financial statements of the prior period.
o Obtaining a letter of representation from the successor auditor.

If, after completing the above steps, the auditor decides to reissue his
report on the prior period financial statements; the predecessor’s report
will be reissued bearing the original date and original wording of such
report.
 The predecessor auditor does not want to reissue on the prior period
financial statements.

In some instances, the predecessor auditor may find it more appropriate

not to reissue his report on the prior period financial statements. In this
occasion, the successor auditor’s report on the current year’s financial
statements should include Other Matter paragraph stating:
1. The fact that the prior period financial statements were audited by
another auditor
2. The date of the predecessor auditor’s report
3. The type of opinion issued by the predecessor auditor and if the
opinion is modified, the reasons therefore.

 Prior Period Financial Statements not audited

When the prior period financial statements are not audited, the auditor should
state in the report on the current year’s financial statements that the
comparative financial statements are not unaudited. In addition, the auditor
should perform appropriate procedures to provide reasonable assurance that
the prior period financial statements do not contain material misstatements
that could affect the financial statements of the current period.

In situations where the successor auditor identifies that the prior period
financial statements are materially misstated, the auditor should request the
management to revise the prior year’s figures. Refusal of the management to
do so may cause the auditor to express either qualified or adverse opinion
depending on its impact on the current period’s financial statements.
  Reporting on Corresponding Figures

When the comparatives are presented as corresponding figures, the auditor

should issue a report that refers only to the financial statements of the current
period. The comparatives are not specifically identified because the
auditor’s opinion is on the current period’s financial statements as a whole
(including the corresponding figures).

In certain conditions, such as when the report on the prior period’s financial
statements included a qualified, adverse or disclaimer of opinion and the
matter that gave rise to the modification has not yet been resolved, it may be
necessary for the auditor to modify the report on the current period financial
statements to make specific reference to the corresponding figures.

2. Financial statements prepared using more than one financial framework

An entity may prepare on set of financial statements in accordance with the general-
purpose framework (e.g., PFRS) and another set financial statements in accordance with
another financial reporting framework (e.g., US GAAP), and engage the auditor to report
on the financial statements. This is usually the case when an entity’s shares are listed in
the stock market of several jurisdictions. If the auditor has determined that the
frameworks are acceptable in the respective circumstances, the auditor may include an
“Other Matter” paragraph in the auditor’s report, referring to the fact that another set of
financial statements have been prepared by the same entity in accordance with another
general-purpose framework and that the auditor has issued a report on those financial
statements.

3. Limiting the use of the Auditor’s report

Financial statements prepared for a specific purpose may be prepared in accordance with
a general-purpose framework because the intended users have determined that the
general-purpose financial statements meet their financial information needs. Since the
auditor’s report is intended for specific users, the auditor may consider it necessary in the
circumstances to include “Other Matter” paragraph, stating that the auditor’s report is
intended solely for specific group of users, and should not be distributed to or used by
other parties.
 Other Information accompanying Audited Financial Statements

An entity may publish documents that contain audited financial statements. For example,
listed companies often publish annual reports to shareholders that include financial
statements and auditor’s report. All information included in the annual report, other than the
financial statements and the auditor’s report thereon, are referred to as “other information”
in PSA 720.

 Auditor’s responsibility regarding other information

The auditor’s overall responsibility is to express an opinion about the fair presentation of
the financial statements. This responsibility does not extend beyond the financial
statements identified in the auditor’s report. It is not the auditor’s responsibility to
express an opinion or any form of assurance about the reliability of the other information
included in the annual report. Accordingly, auditors are not required to perform any audit
procedures to corroborate other information included in the annual report to shareholders.

PSA 720, however, required the auditor to read the other information to consider:
 Whether material inconsistencies exist between the other information and the
financial statements; and
 Whether material inconsistency exists between the other information and the other
auditor’s knowledge of the entity obtained in the audit.

In determining whether material inconsistencies exist, the auditor would normally

compare selected items in the other information with the similar items in the financial
statements. The auditor would also consider whether the other information is consistent
with the audit evidence obtained and the conclusion reached in the audit.

 Material Inconsistency

If, on reading the other information, the auditor identifies a material inconsistency, the
auditor should discuss the matter with the management and determine whether:
1. The audited financial statements need to be amended;
2. The other information needs to be amended; or
3. The auditor’s understanding of the entity needs to be updated.
If an amendment is necessary in the financial statements and the entity refuses to make
the amendments, the auditor should express a qualified or an adverse opinion due to
material misstatement in the financial statements.
On the other hand, if an amendment is necessary in the other information and the entity
refuses to amend the other information to eliminate the material inconsistency, the
auditor should consider
1. Whether the rationale given by the management and those charged with governance
for not making the amendment raises doubt about the integrity of management or
those charged with the governance, such as when the auditor suspects that there is an
intention to mislead;
 2. Issuing a report that contains a disclaimer of opinion on the financial statements
because such as refusal casts doubt on the integrity of management and those charged
with the governance as to call into question the reliability of audit evidence in general;
or
3. Withdrawing from the engagement.
After reading the other information, the auditor may conclude that the information is not
consistent with his understanding of the entity and its environment. When this occurs, the
auditor should update his understanding of the entity and, if necessary, revise the risk
assessment and perform additional audit procedures that are responsive to the revised
assessment of risk of material misstatements.
 Material misstatement of fact

While reading the other information for the purpose of identifying material
inconsistencies, the auditor should remain alert for indications that the other information,
not related to the financial statements, is incorrectly stated or presented. This is called
material misstatement of fact. Remaining alert for these items helps the auditor to comply
with ethical principle of integrity, which requires that CPAs should not be associated with
misleading information. In addition, this will also help in identifying inconsistencies that
may lead to conclusion that the other information is materially misstated.

If the auditor becomes aware that a material misstatement of fact exists, the auditor
should discuss the matter with the entity’s management and request management to
consult a qualified third party to resolve the matter.

If the auditor concludes that there is a material misstatement of fact in the other
information and the management refuses to correct the other information, the auditor
should notify the audit committee of the auditor’s concern regarding the other
information, if necessary, obtain legal advice.

 Other Information section in the Auditor’s Report

The auditor’s report should include a separate section for “Other Information” when at
the date of the auditor’s report, the auditor has obtained or, for audit of listed entities, the
auditor has obtained or expects to obtain the other information. This section should
identify the other information and clearly describe the responsibilities of the management
and the auditor with respect to other information included in the annual report. Also, if
the auditor believes that the other information is materially misstated, the audit must state
the nature of misstatement in the “Other Information” section of the auditor’s report
Obtaining the other information prior to the date of the auditor’s report enables the auditor to
resolve possible material inconsistencies and apparent material misstatement of fact with
management on a timely basis. An agreement with the management should be reached as to
when the other information will be made available to the auditor
 Audit of Group Financial Statements

When one or more audit firms participate in an audit engagement, one firm has to act as the
group auditor. A group auditor is the auditor with responsibility for reporting on the financial
statements of an entity when those financial statements include financial information of one
or more components audited by another auditor

The auditor should consider whether his own participation is sufficient to be able to act as the
group auditor who will express an opinion on group financial statements. This consideration
involves assessments of
 the materiality of the portion of the financial statement audited;
 the auditor’s knowledge of the overall financial statements; and
 the importance of the component(s) audited by another auditor.

 Understanding the Component Auditor

After concluding that it is appropriate to serve as the group auditor, judgement as to

whether to rely on the work of other auditors or not should be made. For this purpose, the
auditor should consider:
 Whether the component auditor understands and will comply with the ethical
requirements particularly the independence requirement;
 The component auditor’s professional competence; and
 Whether sufficient appropriate evidence about the work of the component
auditor can be obtained.
If the group editor has not become satisfied about the professional competence and the
independence of the component auditor or has concerns about other matters affecting
component’s financial statements, the group auditor should obtain sufficient appropriate
audit evidence relating to the financial information of the component by auditing the
financial statements of the components

 Reporting Responsibility

The group auditor is responsible for the direction, supervision and performance of the
group audit engagement in compliance with professional standards and regulatory and
legal requirements, and whether the auditor’s report that is issued is appropriate in the
circumstances as a result, the auditor’s report on the group financial statements shall not
refer to a component auditor.
 In this regard, the group auditor will have to obtain sufficient appropriate audit evidence
regarding the component financial statements and the consolidation process, on which to
base the group audit opinion. This will involve reviewing the work conducted by
component auditor or even auditing the financial information of the component that is
significant to the group financial statements. For components that are not significant, the
group auditor should apply evidence that there are no significant risks of material
misstatements at the aggregated financial information of the components that could affect
the group financial statements taken as a whole.

 Reports on Special Purpose financial Statements

Financial statement audit is ordinarily conducted by an independent CPA to serve as a basis

for the expression of opinion regarding the fairness of the financial statements, for the
consumption of the general public. These are called general purpose financial statements and
are prepared using general purpose framework such as PFRS or PFRS for SMEs.

Some entities may be required by their contractual commitments or government regulators to

present financial statements that comply with a financial reporting framework designed to
meet the needs of specific users. Such framework is referred to in PSA 800 as special
purpose framework.

Example of special purpose framework include:

1. Other comprehensive basis of accounting such as cash basis, modified cash basis, or
other basis of accounting that has authoritative support.
2. Financial reporting provisions established by government regulators such as SEC, IC or
BSP.
3. Financial reporting provisions of a contract, such as bond indenture, a loan agreement or
a project grant.

Every time then auditor conducts an audit for the purpose of expressing an opinion on the
financial statements, the auditor should always comply with ethical requirements and PSAs
observed when auditing general purpose financial statements also apply to special purpose
financial statements. As required by PSA 800, the auditor’s report on special purpose
framework should include an Emphasis of Matter paragraph to alert the readers 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 other purposes.
In addition, the auditor may consider it appropriate to indicate that the auditor’s report is
intended solely for the specific users. This may be achieved by restricting the distribution or
use of the auditor’s report by including this other matter in the Emphasis of Matter paragraph
and heading modified accordingly.
 Audit of Single FS or Specific Element of a Financial Statement

Auditors are often engaged to audit and express opinion on financial statements taken as
a whole. In some instances, however, auditors may also be requested to express an
opinion on a single financial statement. This is usually the case for the franchise
agreements which require payment of royalty based on the revenue of the franchise. A
report on revenue account is therefore necessary to have a reliable basis for computing
the amount of royalty payments.

Since this type of engagement does not result to an expression of an opinion on financial
statements, taken as a whole, the auditor’s opinion should be confined only to the specific
account or element of a financial statement identified in the report

When accepting this type of engagement

1. The auditor may need to examine other related accounts to be able to express opinion
on a specific component of a financial statement
2. Materiality should be related to the specific account rather than to the financial
statements and accordingly, the auditor’s examination will ordinarily be more
extensive than if the same component were to be audited in connection with a report
on the entire financial statements.
3. The auditor’s report on a component of financial statements should not accompany
the financial statements of the entity to avoid giving the user the impression that the
report relates to the entire financial statements.

PSA requires an auditor to comply with the ethical requirements and all PSAs relevant to
the audit. In the case of an audit of single financial statement or of a specific element
financial statement, this requirement applies irrespective of whether the auditor is also
engaged to audit the entity’s complete set of financial statements. However, it may not be
practicable for the auditor to comply with these requirements of PSAs when the auditor is
not also engaged to audit the entity’s complete set of financial statements. For example,
the auditor often may not have the same level of understanding of the entity and its
environment, including its internal control as an auditor who also audits the entity’s
complete set of financial statements. Consequently, this engagement will most likely be
accepted only if the auditor is also engaged to audit the complete set of financial
statements.

Reporting Responsibility
When the auditor undertakes an engagement to report on a single financial statement in
conjunction with an engagement to audit entity’s complete set of financial statements, the
auditor should express a separate opinion for each engagement.
 If the opinion the auditor’s report on an entity\s complete set of financial statements is
modified, the auditor shall determine whether it is also necessary to modify the opinion
or include an emphasis of matter or other matter paragraph on the report on specific
element of a financial statement
If the auditor who has issued an adverse opinion or disclaimer of opinion on the entity’s
complete set of financial statements as a whole, PSA 705 does not permit the auditor to
include in the same auditor’s report an unmodified opinion on a single financial statement
as this would contradict the adverse or disclaimer of opinion on the entity’s complete set
of financial statement.
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 taken as a whole but the
auditor considers it appropriate to express an unmodified opinion on the element, the
auditor shall only do so provided:
1. The auditor is not prohibited by law or regulation from doing so;
2. The report on specific element is not published together with the auditor’s
report on the complete set of financial statement; and
3. The specific element does not constitute a major portion of the entity’s
complete set of financial statement.

 Reporting on Summary Financial Statements

The auditor may be requested to report on summary financial statements which highlight
the entity’s financial position and result of operations. This type of engagements may be
accepted only if the auditor has also has been engaged to express an audit opinion on the
financial statements were derived. The audit of financial statements is derived provides
the auditor with the necessary knowledge to discharge his responsibilities in relation to
the summary financial statements in accordance with PSA.

Since the summary financial statements are derived only form the complete set of
financial statements, the auditor’s report on summary financial statements should express
an opinion about whether the summary financial statements are consistent with the
audited financial statements or whether the summary financial statements are a fair
summary of the audited financial statements.

When the auditor’s report on the audited financial statements contains qualified opinion,
emphasis of matter paragraph but the auditor is satisfied that the summary financial
statements are consistent, in all material respects, with the audited financial statements,
the auditor shall state this fact on the report on summary financial statements.
 When the auditor’s report on the audited financial statements contains an adverse on the
summary financial statements should state the fact that an adverse or disclaimer of
opinion was issued on the audited financial statements, and as a result, it is inappropriate
for the auditor to express an opinion on the summary financial statements.

Illustration 1: Qualified Opinion due to Material Misstatement

INDEPENDENT AUDITOR’S REPORT

To The Shareholders of CRC-ACE Company

Report on the Audit of the Financial Statements

Qualified Opinion

We have audited the financial statements……… (remaining words are the same as the
Unmodified Report)

In our opinion, except for the effects of the matter described in the basis for Qualified Opinion
section, the accompanying financial statements present fairly, in all material respects, …
(remaining words are the same as the Unmodified Report)

Basis for Qualified Opinion

The company’s investment in ABC Company, an associate acquired during the year and
accounted for using equity method, is carried at PXXX on the statement financial position as at
December 31, 20x2, and the CRC-ACE’s share of ABC’s net income of PXXX included on
CRC-ACE’s net income for the year ended. We were unable to obtain sufficient appropriate
evidence about carrying amount of CRC-ACE’s investment in ABC as at December 31, 20X2
and CRC-ACE’s share of ABC’s net income for the year because we were denied access to the
financial information of the ABC Company. Consequently, we were unable to determine whether
any adjustments to these amounts were necessary.

We conducted our audit in accordance with ………. (Remaining words are the same as the
Unmodified Report). We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our qualified opinion.
Responsibilities of Management and Those Charged with governance for the financial
Statements

Management is responsible for……. (Remaining words are the same as the Unmodified Report)

Auditor’s Responsibilities for the Audit of the financial Statements

Our objectives are to obtain reasonable assurance about …... (remaining words are the same as
Unmodified Report)

Report on Other Legal and Regulatory Requirements

Our audits were conducted for the purpose…… (remaining words are the same as te Unmodified
Report)

Signature

Auditor’s Address

Date
 Illustration 2: Qualified Opinion due to Scope Limitation

INDEPENDENT AUDITOR’S REPORT

To The Shareholders of CRC-ACE Company

Report on the Audit of the Financial Statements

Qualified Opinion

We have audited the financial statements……… (remaining words are the same as the
Unmodified Report)

In our opinion, except for the effects of the matter described in the basis for Qualified Opinion
section, the accompanying financial statements present fairly, in all material respects, …
(remaining words are the same as the Unmodified Report)

Basis for Qualified Opinion

The company’s inventories are carried in the statement of financial position at PXXX.
Management has not started the inventories at the lower of cost and net realizable value has
stated them solely at cost, which constitutes a departure from PFRS. Had the management stated
the inventories at the lower cost and net realizable value, an amount of PXXX would have been
required to write inventories down to their net realizable value. Accordingly, cost of sales would
have been increased by PXXX, and income tax, net income, and shareholders’ equity would
have been reduced by PXXX, PXXX, AND PXXX respectively.

We conducted our audit in accordance with ………. (Remaining words are the same as the
Unmodified Report). We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our qualified opinion.
Responsibilities of Management and Those Charged with governance for the financial
Statements

Management is responsible for……. (Remaining words are the same as the Unmodified Report)

Auditor’s Responsibilities for the Audit of the financial Statements

Our objectives are to obtain reasonable assurance about …... (remaining words are the same as
Unmodified Report)

Report on Other Legal and Regulatory Requirements

Our audits were conducted for the purpose…… (remaining words are the same as te Unmodified
Report)

Signature

Auditor’s Address

Date
 Illustration 3: Adverse Opinion

INDEPENDENT AUDITOR’S REPORT

To The Shareholders of CRC-ACE Company

Report on the Audit of the Financial Statements

Adverse Opinion

We have audited the financial statements……… (remaining words are the same as the
Unmodified Report)

In our opinion, because of the significance of the matter described in the Basis for Adverse
Opinion section of our report, the accompanying financial statements do not present fairly the
financial position of the Company as at December, 31 20X2 and its financial performance and
cash flows for the year ended in accordance with the Philippine Financial Reporting Standards.

Basis for Adverse Opinion

On January 15, 20X2, the Company issued debentures in the amount of PXXX for the purpose of
financing plant expansion. The debenture agreement restricts the payment of future cash
dividends to earnings after December 31, 20X1. In our opinion, disclosure of this information is
required by PFRS 9.

We conducted our audit in accordance with ………. (Remaining words are the same as the
Unmodified Report). We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our qualified opinion.

Responsibilities of Management and Those Charged with governance for the financial
Statements
Management is responsible for……. (Remaining words are the same as the Unmodified Report)

Auditor’s Responsibilities for the Audit of the financial Statements

Our objectives are to obtain reasonable assurance about …... (remaining words are the same as
Unmodified Report)

Report on Other Legal and Regulatory Requirements

Our audits were conducted for the purpose…… (remaining words are the same as te Unmodified
Report)

Signature

Auditor’s Address

Date
 Illustration 4: Disclaimer of Opinion

INDEPENDENT AUDITOR’S REPORT

To The Shareholders of CRC-ACE Company

Report on the Audit of the Financial Statements

Disclaimer of Opinion

We were engaged to audit the financial statements……… (remaining words are the same as the
Unmodified Report)

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 evidence to provide basis for
an audit opinion on these financial statements.

Basis for Disclaimer of Opinion

The company’s investment in its joint venture XYZ Company is carried at PXXX on the
company’s statement of financial position, which represents over 90% of the company’s net
assets as at December 31, 20X2. We were not allowed to access to the management and the
auditors of XYZ Company, including XYZ auditor’s working papers. As a result, we were
unable to determine whether any adjustments were necessary in respect of the carrying amount
of its investment in joint venture and company’s share of XYZ Company’s net income for the
year.,

We conducted our audit in accordance with ………. (Remaining words are the same as the
Unmodified Report). We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our qualified opinion.
Responsibilities of Management and Those Charged with governance for the financial
Statements

Management is responsible for……. (Remaining words are the same as the Unmodified Report)

Auditor’s Responsibilities for the Audit of the financial Statements

Our responsibility is to conduct an audit of the company’s financial statements in accordance

with the Philippine Standards on Auditing and to issue an auditor’s report. However, because of
the matter described in the Basis for Disclaimer of Opinion section of our report, we were unable
to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the
financial statements.

We are independent of the Company in accordance with the ethical requirements that are
relevant to our audit of the financial statements in the Philippines, and we have fulfilled our
ethical responsibilities in accordance with these requirements.

Report on Other Legal and Regulatory Requirements

Our audits were conducted for the purpose…… (remaining words are the same as the
Unmodified Report)

Signature

Auditor’s Address

Date
 Illustration 5: Emphasis of Matter Paragraph

INDEPENDENT AUDITOR’S REPORT

To The Shareholders of CRC-ACE Company

Report on the Audit of the Financial Statements

Opinion

We have audited the financial statements……… (remaining words are the same as the
Unmodified Report)

Basis for Opinion

We conducted our audit in accordance with ………. (Remaining words are the same as the
Unmodified Report).

Emphasis of Matter

We drew attention to Note 10 to the financial statements which describes the effects of a fire in
the Company’s production facilities. Our opinion is not modified in respect of this matter.

Responsibilities of Management and Those Charged with governance for the financial
Statements

Management is responsible for……. (Remaining words are the same as the Unmodified Report)
Auditor’s Responsibilities for the Audit of the financial Statements

Our objectives are to obtain reasonable assurance about …... (remaining words are the same as
Unmodified Report)

Report on Other Legal and Regulatory Requirements

Our audits were conducted for the purpose…… (remaining words are the same as the
Unmodified Report)

Signature

Auditor’s Address

Date
 Illustration 6: Other Matter Paragraph

INDEPENDENT AUDITOR’S REPORT

To The Shareholders of CRC-ACE Company

Report on the Audit of the Financial Statements

Opinion

We have audited the financial statements……… (remaining words are the same as the
Unmodified Report)

Basis for Opinion

We conducted our audit in accordance with ………. (Remaining words are the same as the
Unmodified Report).

Other Matter

The financial statement of CRC-ACE for the year ended December 31, 20X1, were audited by
another auditor who expressed an unmodified opinion on those statements on March 31, 20X2.

Responsibilities of Management and Those Charged with governance for the financial
Statements

Management is responsible for……. (Remaining words are the same as the Unmodified Report)
Auditor’s Responsibilities for the Audit of the financial Statements

Our objectives are to obtain reasonable assurance about …... (remaining words are the same as
Unmodified Report)

Report on Other Legal and Regulatory Requirements

Our audits were conducted for the purpose…… (remaining words are the same as the
Unmodified Report)

Signature

Auditor’s Address

Date
 Illustration 7: Key Audit Matter

INDEPENDENT AUDITOR’S REPORT

To The Shareholders of CRC-ACE Company

Report on the Audit of the Financial Statements

Opinion

We have audited the financial statements……… (remaining words are the same as the
Unmodified Report)

Basis for Opinion

We conducted our audit in accordance with ………. (Remaining words are the same as the
Unmodified Report).

Key Audit Matters

Key audit matters are those matters that, in our professional judgement, 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 our
opinion thereon, and we do not provide a separate opinion on these matters.

(a) Revenue Recognition

Description of the Matter

The amount of revenue and profit recognized in the year on the sale of Product X and
aftermarket services is dependent on the appropriate assessment of whether or not each long-
term aftermarket contract for services is linked to our separate from the contract for the sale of
Product X. as the commercial arrangements can be complex, significant judgement is applied in
selecting the accounting basis in each case. In our view, revenue recognition is significant to our
audit as the company might inappropriately account for sales of Product X and long-term service
agreements as a single agreement for accounting purposes and this would usually lead to revenue
and profit being recognized too early because the margin in the long-term service agreement is
usually higher than the margin in the Product X sale agreement.

The company’s disclosure about is revenue and the related revenue recognition policies, are
included in Note 2 to the financial statements.

How the matter was Addressed in the Audit

Our audit procedures to address the risk of material misstatement relating to revenue
recognitions, which was considered to be a significant risk, included.

 Testing of controls, assisted by our own IT specialists, including, among others, those over:
input of individual advertising campaigns’ terms and pricing; comparison of those terms and
pricing data against the related overarching contracts with advertising agencies; and linkage
to viewer data; and,

 Detailed analysis of revenue and the timing of its recognition based on expectations derived
from our industry knowledge and external market data, following up variances from our
expectations.

(b) Next key audit matter

Responsibilities of Management and Those Charged with governance for the financial
Statements

Management is responsible for……. (Remaining words are the same as the Unmodified Report)

Auditor’s Responsibilities for the Audit of the financial Statements

Our objectives are to obtain reasonable assurance about …... (remaining words are the same as
Unmodified Report)

Report on Other Legal and Regulatory Requirements

Our audits were conducted for the purpose…… (remaining words are the same as the
Unmodified Report)

Signature

Auditor’s Address

Date
 Illustration 8: Going Concern

INDEPENDENT AUDITOR’S REPORT

To The Shareholders of CRC-ACE Company

Report on the Audit of the Financial Statements

Opinion

We have audited the financial statements……… (remaining words are the same as the
Unmodified Report)

Basis for Opinion

We conducted our audit in accordance with ………. (Remaining words are the same as the
Unmodified Report).

Going Concern

The company’s financial statements have been prepared using the going concern basis for
accounting. The use of this basis of accounting is appropriate unless managements either intends
to liquidate the company or to cease operations, or has no realistic alternative but to do so. As
part of our audit of the financial statements, we have concluded that management’s use of the
going concern basis of accounting in the preparations of the company’s financial statements is
appropriate.

Management has not identified a material uncertainty that may cast significant doubt on the
entity’s ability to continue as a going concern, and accordingly none is disclosed in the financial
statements. Based on our audit of the financial statements, we also have not identified such a
material uncertainty. However, neither management nor the auditor can guarantee the company’s
ability to continue as a going concern.

Responsibilities of Management and Those Charged with governance for the financial
Statements

Management is responsible for……. (Remaining words are the same as the Unmodified Report)

Auditor’s Responsibilities for the Audit of the financial Statements

Our objectives are to obtain reasonable assurance about …... (remaining words are the same as
Unmodified Report)

Report on Other Legal and Regulatory Requirements

Our audits were conducted for the purpose…… (remaining words are the same as the
Unmodified Report)

Signature

Auditor’s Address

Date
 Illustration 9: Material Going Concern Uncertainty

INDEPENDENT AUDITOR’S REPORT

To The Shareholders of CRC-ACE Company

Report on the Audit of the Financial Statements

Opinion

We have audited the financial statements……… (remaining words are the same as the
Unmodified Report)

Basis for Opinion

We conducted our audit in accordance with ………. (Remaining words are the same as the
Unmodified Report).

Material Going Concern Uncertainty

We draw attention to the Note x of the financial statements, which indicates that the Company
incurred a net loss of PXXX during the year ended December 31, 20X2 and, as of the date, the
company’s current liabilities exceeded its total assets by PXXX. As stated in the Note X, these
events or conditions, along with other matters as set forth in the Note X, indicates that a material
uncertainty exists that may cast significant doubt on the company’s ability to continue as a going
concern. In response to this matter, the parent company has expressed its commitment to provide
continuing financial support to the company for tis operations until such time that the company is
in good financial condition. In addition, the company’s management is continuously considering
various business models to recover from its current situation such as looking for affordable
sources of raw materials and handling and freight costs to effectively position its product in the
current highly competitive market environment. In connection with our audit, we have performed
audit procedures to evaluate management’s plans and actions as to likelihood of improving the
situation and as to feasibility under the prepared assuming that the company will continue as a
going concern entity which contemplates the realization of assets and the settlement of liabilities
in the normal course of business. Our opinion is not modified in respect of this matter.

Responsibilities of Management and Those Charged with governance for the financial
Statements

Management is responsible for……. (Remaining words are the same as the Unmodified Report)

Auditor’s Responsibilities for the Audit of the financial Statements

Our objectives are to obtain reasonable assurance about …... (remaining words are the same as
Unmodified Report)

Report on Other Legal and Regulatory Requirements

Our audits were conducted for the purpose…… (remaining words are the same as the
Unmodified Report)

Signature

Auditor’s Address

Date
 Illustration 10: Report on Group Financial Statements

INDEPENDENT AUDITOR’S REPORT

To The Shareholders of CRC-ACE Company

Report on the Audit of the Financial Statements

Opinion

We have audited the consolidated financial statements of CRC-ACE and subsidiaries (the group),
which comprise the consolidated statements of financial position as at December 31, 20X2 and
20X1, and the consolidated statements of comprehensive income, consolidated statements of
changes in equity and consolidated statements of cash flows for each of the years then ended,
and notes to the consolidated financial statements, including a summary of significant accounting
policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material
respects, the consolidated financial position of the Group as at December 31, 20X2 and 20X1,
and its consolidated financial performance and its consolidated cash flows for each of the years
then ended in accordance with the Philippine Financial Reporting Standards (PFRS).

Basis for Opinion

We conducted our audit in accordance with Philippine Standard 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 Group in
accordance with the Code of Ethics for Professional Accountants in the Philippines together with
the ethical requirements that are relevant to our audit of the financial statements in the
Philippines, and we have fulfilled our ethical responsibilities in accordance with these
requirements and the codes of ethics. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
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 Groups’
ability to continue as a going concern and using the going concern basis of accounting unless
management either intends to liquidate the Group or to cease operations, or has realistic
alternative but to do so.

Those charged with governance are responsible for overseeing the Groups’ financial reporting
process.

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 form 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 judgement and maintain
professional skepticism throughout the audit. We also:
 Identify and assess the risk 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 form fraud is higher that for
one resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misinterpretations, or the override of internal control.
 Obtain an understanding of internal control relevant to the audit and 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 Group’s internal control.
 Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by management.
  Conclude on the appropriateness of management’s use of the going concern and, based
on the audit evidence obtained, whether a material uncertainty exists related to the events
or conditions that may cast significant doubt on the Group’s ability to continue going
concern. If we conclude that 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
disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit
evidence obtained p to the date of our auditor’s report. However, future events or
conditions may cause the Group to cease to continue as a going concern.
 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.

Signature

Auditor’s Address

Date