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AUDIT REPORTS ON FINANCIAL STATEMENTS

Forming an Opinion (PSA 700)

The objective of the auditor in the audit engagement is to:
a. Form an opinion on the financial statements based on an evaluation of the conclusions drawn from the
audit evidence obtained; and
b. Clearly express that opinion through a written report (Philippine Standard on Auditing 700 (Revised),
par. 6).
In this regard, the auditor shall form an opinion on whether the financial statements are prepared, in all material
respects, and in accordance with the applicable financial reporting framework (PSA 700, par. 10). In forming
the opinion on the financial statements, the auditor evaluates 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
4. The financial statements provide sufficient disclosures to enable users to understand the effects of
material transactions and events conveyed in the financial statements.
The auditor shall express an unmodified opinion when the auditor concludes that the financial statements are
prepared, in all material respects, in accordance with the applicable financial reporting framework.

General-purpose framework – This is a financial reporting framework designed to meet the common financial
information needs of a wide range of users. The financial reporting framework may be a fair presentation
framework or a compliance framework.
a. Fair presentation framework – It refers to a financial reporting framework that requires compliance with
the requirements of the framework and:
i. Explicitly or implicitly acknowledges that it may be necessary for management to provide
disclosures beyond those specifically required by the framework to achieve fair presentation of the
financial statements; or
ii. Explicitly acknowledges that it may be necessary for management to depart from a requirement of
the framework to achieve fair presentation of the financial statements. Such departures are
expected to be necessary only in extremely rare circumstances.
b. Compliance framework – It refers to a financial reporting framework that requires compliance with the
requirements of the framework but does not contain the acknowledgments in (i) or (ii) above.
If the auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not
free from material misstatement or are unable to obtain sufficient appropriate audit evidence to conclude that
the financial statements as a whole are free from material misstatement, the auditor shall modify the opinion in
the auditor’s report in accordance with PSA 705 (Revised and Redrafted) (PSA 700, par. 16–17).

The auditor’s report shall be in writing and must contain the following elements:
1. Title
2. Addressee
3. Auditor’s opinion
4. Basis for opinion
5. Key Audit Matters
6. Responsibilities of management and those charged with governance for the financial statements
7. Auditor’s responsibilities for the audit of the financial statements
8. Other reporting responsibilities
9. Name of the engagement partner
10. Signature of the auditor
11. Date of auditor’s report
12. Auditor’s address
Note that it encompasses reports issued in hard copy and electronic medium.

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

Key Audit Matters – These are matters that, in the auditor’s professional judgment, are of most significance in
the audit of the financial statements of the current period. These are selected from matters communicated with
those charged with governance (PSA 701, par. 8).

The key audit matters focus on areas of higher risk and matters, which are material to the picture presented by
the financial statements and which are open to subjectivity.

The auditor shall determine, from the matters communicated with those charged with governance, those matters
that required significant auditor attention in performing the audit. In making this determination, the auditor shall
take into account the following:
a. Areas of higher assessed risk of material misstatement, or significant risks identified in accordance with
PSA 315 (Revised).
b. Significant auditor judgments relating to areas in the financial statements that involved significant
management judgment, including accounting estimates that have been identified as having high
estimation uncertainty.
c. The effect on the audit of significant events or transactions that occurred during the period.
The auditor shall not communicate a matter in the Key Audit Matters section of the auditor’s report when the
auditor would be required to modify the opinion in accordance with PSA 705 (Revised) as a result of the matter
(PSA 701, par. 12).

Emphasis of Matter Paragraph in the Auditor’s Report (PSA 706)

Emphasis of Matter paragraph – It is a paragraph included in the auditor’s report that refers to a matter
appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such
importance that it is fundamental to users’ understanding of the financial statements.
If the auditor considers it necessary to draw users’ attention to a matter presented or disclosed in the financial
statements that, in the auditor’s judgment, is of such importance and is fundamental to users’ understanding of
the financial statements, the auditor shall include an Emphasis of Matter paragraph in the auditor’s report,
provided:
a. The auditor would not be required to modify the opinion in accordance with PSA 705 (Revised) as a
result of the matter; and
b. When PSA 701 (Communicating Key Audit Matters in the Independent Auditor’s Report) applies, the
matter has not been determined to be a key audit matter to be communicated in the auditor’s report
(PSA 706, par. 8).
When the auditor includes an Emphasis of Matter paragraph in the auditor’s report, the auditor shall:
a. Include the paragraph within a separate section of the auditor’s report with an appropriate heading
that includes the term “Emphasis of Matter”;
b. Include in the paragraph a clear reference to the matter being emphasized and to where relevant
disclosures that fully describe the matter can be found in the financial statements. The paragraph shall
refer only to information presented or disclosed in the financial statements; and
c. Indicate that the auditor’s opinion is not modified in respect of the matter emphasized (PSA 706 par. 9).

Examples of circumstances where the auditor may consider it necessary to include an Emphasis of Matter
paragraph are as follows (PSA 706, par. A5):
• An uncertainty relating to the future outcome of exceptional litigation or regulatory action
• A significant subsequent event that occurs between the date of the financial statements and the date of
the auditor’s report
• Early application (where permitted) of a new accounting standard that has a material effect on the
financial statements
• A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial
position.

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Other Matter Paragraphs in the Auditor’s Report

Other Matter paragraph – It is a paragraph included in the auditor’s report that refers to a matter other than
those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’
understanding of the audit, the auditor’s responsibilities or the auditor’s report.
If the auditor considers it necessary to communicate a matter other than those that are presented or disclosed
in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the
auditor’s responsibilities or the auditor’s report, the auditor shall include an Other Matter paragraph in the
auditor’s report, provided:
a. This is not prohibited by law or regulation; and
b. When PSA 701 applies, the matter has not been determined to be a key audit matter to be
communicated in the auditor’s report (PSA 706, par. 10)
When the auditor includes Other Matter paragraph in the auditor’s report, the auditor shall include the paragraph
within a separate section with the heading “Other Matter,” or other appropriate heading (PSA 706, par.11).

Modification of Report (PSA 705)

The auditor shall modify the opinion in the auditor’s report when:
a. The auditor concludes that, based on the audit evidence obtained, the financial statements as a whole
are not free from material misstatement; or
b. The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement.

Scope restrictions may be client-imposed, or they may result from other circumstances, e.g., appointment of the
auditor after the client’s physical inventory has been taken. A scope restriction need not result in a modification
of the auditor’s opinion, provided the auditor can obtain satisfaction by alternate means.

Types of Modified Opinion

1. Qualified Opinion
The auditor shall express a qualified opinion when (PSA 705, par. 7):
a. The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements,
individually or in the aggregate, are material, but not pervasive, to the financial statements; or
b. The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but
the auditor concludes that the possible effects on the financial statements of undetected misstatements,
if any, could be material but not pervasive.

2. Adverse Opinion
The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit
evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive
to the financial statements.

3. Disclaimer of Opinion
The auditor shall disclaim an opinion when (PSA 705 par. 9–10):
a. The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and
the auditor concludes that the possible effects on the financial statements of undetected misstatements,
if any, could be both material and pervasive.
b. In extremely rare circumstances involving multiple uncertainties, the auditor concludes that,
notwithstanding having obtained sufficient appropriate audit evidence regarding each of the individual
uncertainties, it is not possible to form an opinion on the financial statements due to the potential
interaction of the uncertainties and their possible cumulative effect on the financial statements.
The auditor may also decide to disclaim an opinion if his/her name is associated with financial statements
for which an audit was not intended (i.e., compilation and reviews), or if the auditor is independent.

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The table below illustrates how the auditor’s judgment about the nature of the matter giving rise to the
modification, and the pervasiveness of its effects or possible effects on the financial statements, affects the type
of opinion to be expressed.

Auditor’s Judgment about the Pervasiveness of the Effects or

Nature of Matter Giving
Possible Effects on the Financial Statements
Rise to the Modification
Material but not pervasive Material and pervasive
Financial statements are Qualified opinion Adverse opinion
materially misstated
Inability to obtain Qualified opinion Disclaimer of opinion
sufficient appropriate
audit evidence

Pervasive – A term used, in the context of misstatements, to describe the effects on the financial statements
of misstatements or the possible effects on the financial statements of misstatements, if any, that are undetected
due to an inability to obtain sufficient appropriate audit evidence. Pervasive effects on the financial statements
are those that, in the auditor’s judgment:
a. Are not confined to specific elements, accounts or items of the financial statements;
b. If so confined, represent or could represent a substantial proportion of the financial statements; or
c. In relation to disclosures, are fundamental to users’ understanding of the financial statements (PSA
705, par. 5).

Notes:
1) An opinion (unmodified, modified, or adverse) is an explicit statement of the auditor’s conclusion, while
a disclaimer is an assertion of “no conclusion.”
2) An unmodified opinion is the highest level of assurance, while a disclaimer is the lowest level of
assurance (no assurance).
3) An opinion requires evidence as a basis, while a disclaimer results from a lack of evidence.

Comparative Information (PSA 710)

The nature of the comparative information that is presented in an entity’s financial statements depends on the
requirements of the applicable financial reporting framework. There are two (2) different broad approaches to
the auditor’s reporting responsibilities in respect of such comparative information: corresponding figures and
comparative financial statements. The approach to be adopted is often specified by law or regulation but may
also be specified in the terms of engagement (PSA 710, par. 2).

Audit reporting differences

1. Corresponding figures – current period only
2. Comparative financial statements – each period for which financial statements are presented (PSA 710,
par. 3).

Corresponding figures
These are comparative information where amounts and other disclosures for the prior period are included as
an integral part of the current period financial statements, and are intended to be read only in relation to the
amounts and other disclosures relating to the current period (referred to as “current period figures”). The level
of detail presented in the corresponding amounts and disclosures is dictated primarily by its relevance to the
current period figures (PSA 710, par. 6).

If the auditor’s report on the prior period, as previously issued, included a qualified opinion, a disclaimer of
opinion, or an adverse opinion and the matter which gave rise to the modification is:
• UNRESOLVED, the auditor shall modify the auditor’s opinion on the current period’s financial
statements (PSA 710, par. 11).
• RESOLVED and properly accounted for or disclosed in the financial statements in accordance with the
applicable financial reporting framework, the auditor’s opinion on the current period need not refer to
the previous modification (PSA 710, par. A3).

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If the auditor obtains audit evidence that a material misstatement exists in the prior period financial statements
on which an unmodified opinion has been previously issued, and the corresponding figures have not been
properly restated or appropriate disclosures have not been made, the auditor shall express a qualified
opinion or an adverse opinion in the auditor’s report on the current period financial statements, modified with
respect to the corresponding figures included therein (PSA 710, par. 12).

When the prior period financial statements that are misstated have not been amended and an auditor’s report
has not been reissued, but the corresponding figures have been properly restated or appropriate
disclosures have been made in the current period financial statements, the auditor’s report may include an
Emphasis of Matter paragraph describing the circumstances and referring to, where relevant, disclosures that
fully describe the matter that can be found in the financial statements (PSA 710, par. A6).

If the financial statements of the prior period were audited by a predecessor auditor and the auditor is permitted
by law or regulation to refer to the predecessor auditor’s report on the corresponding figures and decides to do
so, the auditor shall state in an Other Matter paragraph in the auditor’s report:
a. That the financial statements of the prior period were audited by the predecessor auditor;
b. The type of opinion expressed by the predecessor auditor and, if the opinion was modified, the reasons
therefor; and
c. The date of that report (PSA 710, par. 13).
If the prior period financial statements are not audited, the auditor shall state in an Other Matter paragraph in
the auditor’s report that the corresponding figures are unaudited (PSA 710, par. 14).

Comparative financial statements

These are comparative information where amounts and other disclosures for the prior period are included for
comparison with the financial statements of the current period but, if audited, are referred to in the auditor’s
opinion. The level of information included in those comparative financial statements is comparable with that of
the financial statements of the current period (PSA 710, par. 6).

When comparative financial statements are presented, the auditor’s opinion shall refer to each period for which
financial statements are presented and on which an audit opinion is expressed (PSA 710, par. 15)

When reporting on prior period financial statements in connection with the current period’s audit, if the auditor’s
opinion on such prior period financial statements differs from the opinion the auditor previously expressed, the
auditor shall disclose the substantive reasons for the different opinion in an Other Matter paragraph in
accordance with PSA 706 (PSA 710, par. 16).

If the financial statements of the prior period were audited by a predecessor auditor, in addition to expressing
an opinion on the current period’s financial statements, the auditor shall state in an Other Matter paragraph:
a. That the financial statements of the prior period were audited by a predecessor auditor;
b. The type of opinion expressed by the predecessor auditor and, if the opinion was modified, the reasons
therefor; and
c. The date of that report, unless the predecessor auditor’s report on the prior period’s financial statements
is reissued with the financial statements (PSA 710, par. 17).

If the prior period financial statements are not audited, the auditor shall state in an Other Matter paragraph that
the comparative financial statements are unaudited (PSA 710, par. 19).

The Auditor’s Responsibilities Relating to Other Information (PSA 720)

Other information – These are financial and non-financial information (other than the financial statements and
the auditor’s report thereon) which is included, either by law, regulation or custom, in a document containing
audited financial statements and the auditor’s report thereon (PSA 720, par. 12).
The auditor shall read the other information and, in doing so shall:
a. Consider whether there is a material inconsistency between the other information and the financial
statements.

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b. Consider whether there is a material inconsistency between the other information and the auditor’s
knowledge obtained in the audit, in the context of audit evidence obtained and conclusions reached in
the audit (PSA 720, par. 14).
The auditor’s report shall include a separate section with a heading “Other Information”, or other appropriate
heading, when, at the date of the auditor’s report:
a. For an audit of financial statements of a listed entity, the auditor has obtained, or expects to obtain, the
other information; or
b. For an audit of financial statements of an entity other than a listed entity, the auditor has obtained some
or all of the other information (PSA 720, par. 21).
When the auditor’s report is required to include an Other Information section in accordance with paragraph
21, this section shall include: (Ref: Para. A53)
a. A statement that management is responsible for the other information;
b. An identification of:
i. Other information, if any, obtained by the auditor prior to the date of the auditor’s report; and
ii. For an audit of financial statements of a listed entity, other information, if any, expected to be
obtained after the date of the auditor’s report;
c. A statement that the auditor’s opinion does not cover the other information and, accordingly, that the
auditor does not express (or will not express) an audit opinion or any form of assurance conclusion
thereon;
d. A description of the auditor’s responsibilities relating to reading, considering, and reporting on other
information as required by the PSA; and
e. When other information has been obtained prior to the date of the auditor’s report, either:
i. A statement that the auditor has nothing to report; or
ii. If the auditor has concluded that there is an uncorrected material misstatement of the other
information, a statement that describes the uncorrected material misstatement of the other
information.

References:
Auditing Standards and Practices Council. (2016). Philippine Standard on Auditing 700: Forming an Opinion
and Reporting on Financial Statements. Retrieved from Auditing and Assurance Standards Council:
https://www.aasc.org.ph/new_std_sept2016/PSA%20700%20(Revised)%20-%20clean.pdf
Auditing Standards and Practices Council. (2016). Philippine Standard on Auditing 701: Communicating Key
Audit Matters in the Auditor’s Report. Retrieved from Auditing and Assurance Standards Council:
https://www.aasc.org.ph/new_std_sept2016/PSA%20701%20-%20clean.pdf
Auditing Standards and Practices Council. (2016). Philippine Standard on Auditing 705: Modifications to the
Opinion in the Independent Auditor’s Report. Retrieved from Auditing and Assurance Standards
Council: https://www.aasc.org.ph/new_std_sept2016/PSA%20705%20(Revised)%20-%20clean.pdf
Auditing Standards and Practices Council. (2016). Philippine Standard on Auditing 706: Emphasis of Matter
Paragraphs and Other Matther Paragraphs in the Independent Auditor’s Report. Retrieved from
Auditing and Assurance Standards Council: https://www.aasc.org.ph/new_std_sept2016/PSA-
706%20(Revised)%20-%20clean.pdf
Auditing Standards and Practices Council. (2016). Philippine Standard on Auditing 720: The Auditor’s
Responsibilities Relating to Other Information. Retrieved from Auditing and Assurance Standards
Council: https://www.aasc.org.ph/new_std_sept2016/PSA-720-
(Revised)%20with%20track%20changes.pdf
Auditing Standards and Practices Council. (n.d.). Philippine Standard on Auditing 710: Comparative Information
- Corresponding Figures and Comparative Financial Statements. Retrieved from Auditing and
Assurance Standards Council: http://www.aasc.org.ph/downloads/PSA/publications/PDFs/PSA-710-
Redrafted.pdf

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