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A I

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A U D I T

R E P O R T

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Licup, Patricia Mae Calalang, Meriam

Canlas, Trisha Castro, April Rose

Contreras, Mike Angelo David, Joyce

Introduction
Audit reports are vital as they communicate the
auditor’s findings and conclusions, serving as the
primary product of the audit service for financial
statement users. The standards for issuing these
reports are outlined in PSA 700, PSA 705, and
PSA 706.

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The auditor's objectives are to:

1. Form an opinion on 2. Clearly express that

the financial statements opinion in a report,
based on audit including the basis for
evidence. the conclusion.

These standards also require auditors to define the

audit's scope and clarify the extent of their
responsibility. The report must be transparent,
explaining the auditor's work and any limitations of the
audit.
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Applicable Financial Reporting Framework
The auditor's judgment about whether the financial statements are fairly
presented depends on the applicable financial reporting framework. The
auditor must assess if the framework chosen by management is acceptable.
The financial reporting framework being discussed here is a general-
purpose framework, which is designed to meet the needs of a broad range
of users.
A fair presentation framework requires that financial statements comply
with the framework but also allows for additional disclosures or departures
from the framework's requirements when necessary to fairly present the
financial statements. These departures should only happen in rare
situations.
A compliance framework, on the other hand, strictly requires adherence to
the framework's rules without allowing for such departures or additional
disclosures.
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Forming an Opinion on the Financial Statements
To form an opinion on the financial statements, the auditor must determine whether they have
obtained reasonable assurance that the financial statements are free from material
misstatements, whether due to fraud or error. This includes:

Sufficient Appropriate Audit Evidence (PSA 330): The auditor must ensure enough audit
evidence has been collected.
Uncorrected Misstatements (PSA 450): The auditor must evaluate whether uncorrected
misstatements are material.
Evaluations (PSA 700 Revised): The auditor must assess the overall preparation of the
financial statements, including their compliance with the applicable financial reporting
framework.

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The evaluation includes assessing the quality of the entity ’s
accounting practices, such as:

• - Proper disclosure of significant accounting policies.

• - Consistency of accounting policies with the framework.
• - Reasonableness of accounting estimates.
• - Relevance, reliability, comparability, and understandability of the
information presented.
• - Adequacy of disclosures to help users understand the impact of material
transactions.
• - Appropriateness of terminology used in the financial statements.

When financial statements follow a fair presentation framework, the auditor

must also assess whether the statements present a fair view. This involves
evaluating the overall presentation, structure, content, and whether they
represent the underlying transactions fairly.
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Basic Sections of the Auditor's Standard Report

1. Title.
~ " Independent Auditor's Report"
2. Addressee.
3. Auditor's Opinion. The first section of the auditor's report shall include the
auditor's opinion, and shall have the heading "Opinion" and shall also:
a. Identify the entity whose financial statements have been audited;
b. State that the financial statements have been audited;
c. Identify the title of each statement comprising the financial statements;
d. Refer to the notes, including the summary of significant accounting policies;
and
e. Specify the date of, or period covered by, each financial statement
comprising the financial statements.
Example:
In our opinion, the accompanying financial statements present fairly, in all
material respects, [...] in accordance with [the applicable financial reporting
framework].
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Basic Sections of the Auditor's Standard Report
4. Basis for Opinion.
a. State that the audit was conducted in accordance with Philippine Standards on
Auditing;
b. Refer to the section of the auditor's report that describes the auditor's
responsibilities under the PSAs;
c. Include a statement that the auditor is independent of the entity in accordance
with the relevant ethical requirements relating to the audit, and has fulfilled the
auditor's other ethical responsibilities in accordance with these requirements.
d. State whether the auditor believes that the audit evidence the auditor has
obtained is sufficient and appropriate to provide a basis for the auditor's opinion.

5. Going Concern. In accordance with PSA 570 (Revised).

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Basic Sections of the Auditor's Standard Report

6. Key Audit Matters (KAM).

1. Areas which were considered to be susceptible to higher risks of material

misstatement or which were deemed to be 'significant risks' in accordance with PSA
315 (Revised), Identifying and Assessing the Risks of Material Misstatement
through Understanding the Entity and Its Environment.
2. Significant auditor judgments in relation to areas of the financial statements that
involved significant management judgment. This might include accounting
estimates which have been identified by the auditor as having a high degree of
estimation uncertainty.
3. The effect on the audit of significant events or transactions that have taken place
during the period.

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Basic Sections of the Auditor's Standard Report
7. Responsibilities of Management and Those Charge with Governance for the
Financial Statements.

(a) Preparing the financial statements in accordance with the applicable financial
reporting framework,
(b) Assessing the entity's ability to continue as a going concern and whether the
use of the going concern basis of accounting is appropriate as well as disclosing, if
applicable, matters relating to going concern.

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

●This section shall state that the objectives of the auditor

●The Auditor's shall further state their responsibilities
●The Auditor's Responsibilities for the Audit of Financial Statements section of the
auditor's report
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Basic Sections of the Auditor's Standard Report

9. Other Reporting Responsibilities.

10. Name of the Engagement Partner

11. Signature of the Auditor.

12. Date of the Auditor's Report.

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

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Forms of Audit Report

The audit report contains a clear-cut indication

of the character of the auditor's work and the
degree of responsibility the auditor is taking for
the financial statements.

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Forms of Audit Report
Unqualified Opinion
An unqualified opinion implies that the auditor is satisfied that the financial
statements present fairly, in all material respects, in accordance with the
applicable financial reporting framework.

Modified Opinions
Qualified Opinion - Expressed when the auditor concludes that an
unqualified opinion cannot be expressed but that the effect of any
misstatement, individually or in the aggregate, or due to inability of the
auditor to obtain sufficient appropriate audit evidence, are material, but
not pervasive, as to require an adverse opinion or a disclaimer of
opinion. A qualified opinion should be expressed as being * except for"
the effects of the matter to which the qualification relates

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Adverse Opinion - Expressed when the effect of a misstatement is both
material and pervasive to the financial statements that the auditor
concludes that a qualification of the report is not adequate to disclose the
misleading or incomplete nature of the financial statements.

Disclaimer of Opinion - Expressed when the possible effect of an

auditor's inability to obtain sufficient appropriate audit evidence is both
material and pervasive. Also, in extremely rare circumstances involving
multiple 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.

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Additional
Paragraphs to the
Auditor’s Report

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Emphasis of Matter paragraph

Ø 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 report’s
judgement, is of such importance that it is
fundamental to users’ understanding of the
financial statements.

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Emphasis of Matter Paragraph when used

Ø Financial Reporting framework prescribed by law or

regulation would unacceptable but for the fact that it
is prescribed by law
Ø When facts become known to the auditor after the
date of the auditors report and the auditor provides a
new or amended audit report
Other Matter paragraph

Ø 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.

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Uncertainties About the Entity’s ability to
Continue As a Going Concern

Ø The auditor’s responsibilities are to obtain sufficient

appropriate audit evidence regarding the appropriateness of
management’s use of the going concern basis of accounting
in the preparation of the financial statements, and to
conclude, based on the audit evidence obtained, whether a
material uncertainty exists about the entity’s ability to
continue as a going concern.
Relationship Between Emphasis of Matter
Paragraphs and Key Audit Matters in the Auditor’s
Report

Ø Key Audit Matters (KAM), as defined in PSA 701, are

issues that the auditor considers most significant in the
current audit. These include major findings and areas critical
to understanding the financial statements. Auditors highlight
KAMs to emphasize their importance, ensuring users focus on
key aspects of the audit.
Modified Opinions in Auditing

There are three types of modified opinions:

1.Qualified Opinion – The auditor finds material misstatements, but they
are not pervasive.
- The auditor cannot obtain sufficient evidence, but the possible
misstatements are material but not pervasive .
2. Adverse Opinion – The auditor finds material misstatements that are
pervasive, making the financial statements unreliable.
3. Disclaimer of Opinion –the auditor cannot obtain sufficient evidence, and
the possible misstatements are both material and pervasive.
- In rare cases of multiple uncertainties, where their combined effect
makes it impossible to form an opinion.
Inability to Obtain Sufficient
Appropriate Audit Evidence

• inability to obtain audit evidence shall be

termed as a “scope limitation” or “limitation
on scope.”
• A scope limitation occurs when the auditor
cannot obtain sufficient and appropriate audit
evidence.

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Causes:
1.Management-imposed restrictions (e.g., denying
access to necessary records)
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2. Uncontrollable circumstances (e.g., fire destroying
accounting records).

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Uncorrected Material Misstatements (PSA
450)
A material misstatement occurs when
financial statement items differ from
what is required by the applicable
financial reporting framework.

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These misstatements can arise in three key areas:

1️⃣ Appropriateness of Selected Accounting

Policies 2️⃣ Application of Selected Accounting Policies
• The chosen accounting policies do not comply • Inconsistent application of accounting
with the financial reporting framework. policies across periods or similar
• The financial statements fail to fairly present transactions.
transactions and events. • Errors in applying the selected accounting
• If accounting policies are changed, failure to policies, whether intentional or
properly disclose or apply them may lead to unintentional
misstatements

3️⃣ Appropriateness or Adequacy of Disclosures

• Missing required disclosures as per the
reporting framework.
• Disclosures not properly presented according
to standards.
• Lack of necessary disclosures to ensure fair
presentation of financial statements.
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Comparative Information

The auditor should determine whether the

comparatives comply in all material respects with
the financial reporting framework applicable to
the financial statements being audited.

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Corresponding Figures
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

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Comparative Financial Statements
● The comparative financial statements for the prior
period(s) are considered separate financial statements.
Accordingly, the level of information included in those
comparative financial statements (including all statement
amounts, disclosures, footnotes and other explanatory
statements to the extent that they continue to be of
significance) approximates that of the financial statements
of the current period

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Prior Period Financial Statements Audited by a
Predecessor Auditor
● 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 therefore; 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. If the auditor concludes that a
material misstatement exists

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Prior Period Financial
Statements Not Audited

If the prior period financial statements were not

audited, the auditor shall state in an Other
Matter paragraph that the comparative financial
statements are unaudited

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Audits of Group Financial Statements
The objectives of the auditor are:

(a) To determine whether to act as the auditor of the group financial

statements
(b)To communicate clearly with component auditors about the scope and
timing of their work on financial information related to components and their
findings; and
(c) To obtain sufficient appropriate audit evidence about the financial
information of the components and the consolidation process to express an
opinion whether the group financial statements are prepared, in all material
respects, in accordance with the applicable financial reporting framework.
Acceptance and Continuance and
the Effect on the Auditor's Report

● In applying PSA 220 (Revised), the group

engagement partner shall determine whether
sufficient appropriate audit evidence can
reasonably be expected to be obtained in
relation to the consolidation process and the
financial information of the components on which
to base the group audit opinion.

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If the group engagement partner concludes that:
(a) it will not be possible for the group engagement team to obtain sufficient
appropriate audit evidence due to restrictions imposed by group
management; and
(b) the possible effect of this inability will result in a disclaimer of opinion on
the group financial statements), the group engagement partner shall either:
Screening of Component Auditors
a) When the group engagement team plans to request a component auditor to
perform work on the financial information of a component, the group
engagement team shall obtain an understanding of the following:
(b) Whether the component auditor understands and will comply with the ethical
requirements that are relevant to the group audit and, in particular, is
independent;
(c) The component auditor's professional competence;
(d) Whether the group engagement team will be able to be involved in the work
of the component auditor to the extent necessary to obtain sufficient appropriate
audit evidence; and
● Whether the component auditor operates in a regulatory environment that
actively oversees auditors.
Additional Considerations

When significant risks of material misstatement of the

group financial statements have been identified in a
component on which a component auditor performs the
work, the group engagement team shall evaluate the
appropriateness of the further audit procedures to be
performed to respond to the identified significant risks
of material misstatement of the group financial
statements.

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Evaluating the Sufficiency and
Appropriateness of Audit Evidence Obtained

The group engagement team shall evaluate the

component auditor's communication. The group
engagement team shall:
(a) Discuss significant matters arising from that
evaluation with the component auditor, component
management or group management, as appropriate;
and
(b) Determine whether it is necessary to review other
relevant parts of the component auditor's audit
documentation.

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Sufficiency and Appropriateness of Audit
Evidence
The group engagement team shall evaluate whether
sufficient appropriate audit evidence has been obtained
from the audit procedures performed on the consolidation
process and the work performed by the group engagement
team and the component auditors on the financial
information of the components, on which to base the group
audit opinion.

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Using the Work of an
Auditor’s Expert

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Auditor’s Responsibility

-The auditor has sole responsibility for the audit opinion

expressed. This responsibility is not reduced by the use of the
work of an auditor’s expert.
Auditor’s Expert
-An auditor’s expert is an individual or organization with
expertise in a field other than accounting or auditing. Their
work assists the auditor in obtaining sufficient appropriate
audit evidence.
-The auditor must evaluate whether the auditor’s expert
has the necessary competence, capabilities, and objectivity.
Inconsistency in Expert’s Work

If the results of the expert’s work do not provide sufficient

appropriate audit evidence or if the results are not consistent with
other audit evidence, the auditor should resolve the matter. This
may involve discussions with the entity and the expert, applying
additional procedures, possibly engaging another expert, or
modifying the auditor’s report.

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Reference to the Work of an Auditor’s Expert
in the Auditor’s Report
The auditor shall not refer to the work of an auditor’s expert in an auditor’s
report containing an unmodified opinion unless required by law.
If the auditor makes reference to the work of an auditor’s expert in the
auditor’s report because such reference is relevant to an understanding of
a modification to the auditor’s opinion, the auditor must obtain the expert's
permission and clearly state the reference doesn’t reduce the auditor’s
responsibility.

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Initial Audit Engagements – Opening
balances
Opening balances means those
account balances which exist at the
beginning of the period.

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Situation Audit Report

Unable to obtain sufficient appropriate audit evidence concerning

Qualified opinion or Disclaimer of opinion
opening balances

Opening balances contain misstatement with material effect on

Qualified opinion or Adverse opinion
current financial statements

Inconsistent application of accounting policies Qualified opinion or Adverse opinion

Prior period auditor gave a modified report and modification

Modify the opinion as appropriate
remains relevant to current period
Subsequent EventsTypes of Subsequent Events

Type I subsequent event - Type II subsequent event -

Events that provide Events that provide
additional evidence with evidence with respect to
respect to conditions
conditions that existed at that arose subsequent to
the date of the balance the balance sheet date.
sheet.
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Dual Dated Audit Reports

Type-1 subsequent events lead to adjustments without

disclosure, while Type-2 events result in disclosure, with
or without adjustment. The auditor’s responsibility is
limited to the specific event referred to in the report. If a
material subsequent event requiring disclosure arises
after fieldwork but before issuance of the financial
statements, the auditor may dual date the report or
extend their procedures as required.

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Re-issued Financial Statements

When financial statements are reissued, events that occurred after the original
issuance that require disclosure to prevent them from being misleading do not
result in adjustment unless they meet the criteria for error correction.

Type-1 subsequent events require adjustment and disclosure if they meet the
error correction criteria. Type-2 subsequent events require disclosure and may
be disclosed in a separate note to the reissued financial statements.

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Other Reporting Considerations

Offering Securities to the Public- When a client offers securities to the public, the auditor
must consider the legal requirements in all jurisdictions where the securities are being
offered.
Other Information in Documents Containing - refers to financial and non-financial
details included in documents that contain audited financial statements and the auditor's
report.
The auditor should review this other information to check for material inconsistencies
with the audited financial statements, as inconsistencies may affect the audit opinion.
This other information is usually included in the annual report and can be required by
law or custom.

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Material Inconsistencies - If the auditor finds a material inconsistency between the
financial statements and other information, they must determine whether an
amendment is needed. If the entity refuses to amend the financial statements, the
auditor should issue a qualified or adverse opinion. If the inconsistency is in the other
information and the entity refuses to amend, the auditor may include an emphasis of
matter paragraph or take further actions, such as withdrawing from the engagement or
seeking legal advice.

Material Misstatement of Fact - If the auditor identifies a material misstatement of fact

in the other information, they should discuss it with management. If management
refuses to correct it, the auditor may need to take further steps, such as notifying those
in charge of governance and seeking legal advice.

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