The Auditor’s Report on Financial Statements

 The objective of an audit of FS is to enable the auditor to express an opinion about whether the
FS are prepared, in all material respects, in accordance with applicable financial reporting
framework.
 Financial reporting framework could be a general purpose framework (PFRS) or special purpose
framework (cash basis of accounting and income tax basis of accounting).
 PSA 700 requires the auditor’s report to contain a clear expression of the auditor’s opinion on
the FS.
 The auditor must form a judgement 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 FS; including accounting polices, is relevant, reliable,
compatible, and understandable
4. The FS provide sufficient disclosures to enable users to understand the effects of material
transactions and events conveyed in the FS.

The Unmodified Report

 The end product of the FS audit is an audit report that contains the auditor’s opinion about the
fair presentation of the FS.
 The most common type of audit report contains a clean opinion or an unmodified opinion.
 This type of opinion is issued when the auditor concludes, based on audit evidence obtained,
that the FS are presented fairly, in all material respects in accordance with the applicable
financial reporting framework.
 When the audit is conducted in accordance with PSA, uniformity in the wording of the auditor’s
report is required.
 The profession has deemed it essential to standardize the content of the auditor’s report in
order to enhance the credibility of the report in international perspective and to promote
reader’s understanding of the report.

Basic Elements of the Unmodified Report

1. Title – it indicates that it is the report of an independent auditor. This is done in order to:
 Emphasize the independence of the auditor with respect to the client being audited.
 Distinguish the auditor’s report from the reports that might be issued by others.
2. Addressee – the report should be addressed to those parties for whom the report is prepared.
Ex. Shareholders, BOD, third party requesting audit.
 It would not be appropriate to address the report to the president, chief executive
officer, chief financial officer because these are members of management who are
responsible for the FS audited.
 If the report is to be filed with the regulatory agencies, SEC requires the report to
indicate the complete mailing address of the client.
3. Introductory Paragraph it should:
  Identify the name of the entity
 State that the FS have been audited
 Identify the title of each of the FS audited including the date and period covered by the
FS.
 Refer to the summary of significant accounting policies and explanatory notes.
4. Management’s responsibility for the Financial Statements – this section should describe the
management’s responsibility:
 For the preparation and fair presentation of the FS
 For the design, implementation and maintenance of such internal control relevant to
the preparation of FS.
5. Auditor’s responsibility – this section should include:
 State that the responsibility of the auditor is to express an opinion
 State that the audit was conducted in accordance with PSA, to inform that the auditor
has complied with the standard of performance
 Give a general description of an audit.
 State that the auditor believes that the audit evidence obtained is sufficient and
appropriate to provide a basis for the auditor’s opinion.
6. Auditor’s opinion – this section should state that the FS are presented fairly in all material
respects in accordance with the applicable financial reporting framework.
7. Other Reporting Responsibilities – the auditor may have additional responsibilities to report on
other matters that are supplementary to the auditor’s responsibility under PSA to report on the
FS.
 If the auditor’s report contains a separate section on other reporting responsibilities, the
auditor’s report on the FS should have a sub-title “Report on the FS”
 As a minimum, the auditor should inquire from the management how the
supplementary information was prepared
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.
 If to be submitted to a regulatory, SEC requires that it is to be signed in the personal
name of the partner.
9. Date of the report
 The report should be dated as of the completion of all essential audit procedures, last
day of fieldwork (theoretically)
 Or the audit report should not be dated earlier than the date of approval of the FS.
10. Auditor’s address
 The auditor’s report should name the location in the jurisdiction where the auditor
maintains his office.

Modification to the Opinion

Unmodified opinion will be issued only if the auditor is satisfied that:

1. The audit was conducted in accordance with PSA

2. The FS have been prepared in accordance with the applicable financial reporting framework.

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

Material Misstatements

 Any departure from the specific requirements of the standards will cause the financial
statements to contain material misstatements.
 A material misstatement of the FS may arise from:
1. Inappropriate accounting policy selected
2. Misapplication of selected accounting policy
3. Inappropriate or inadequate disclosure

When the auditor uncovers material misstatements, the auditor should inform the client of such
misstatements and insist that the client revise the FS.

If the management refuses, the auditor should issue either a qualified or an adverse opinion depending
on the materiality and pervasiveness of effect on the FS.

Scope Limitation
  Scope limitation arises when the auditor is:
1. Unable to perform necessary audit procedures or
2. Unable to obtain sufficient appropriate evidence about an assertion.
 A limitation on the scope of the auditor’s work may be imposed by the client or imposed by
the circumstances:
1. Circumstances beyond the control of the entity such as inadequacy of accounting records.
2. Circumstances relating to the nature or timing of the auditor’s work (when the auditor is
engaged only after the client’s fiscal year ends)
3. Limitations imposed by management (Management prevents the auditor from requesting
external confirmation of specific accounts)

Circumstance Imposed Scope Limitation

 Either beyond the control of the entity or due to the nature or timing of the audit may make
certain procedures impossible to perform.
 An inability to perform specific procedures does not constitute a limitation on the scope of the
audit if the auditor is able to obtain sufficient appropriate audit evidence by performing
alternative procedures.
 If the auditor fails to perform alternative procedures or the procedures performed do not
enable the auditor to obtain the necessary evidence to support the opinion, qualified or
disclaimer of opinion is given.

Management Imposed Scope Limitation

 First step is to request the management to remove the limitation.

 If the management refuses, the auditor should communicate the matter to those charged with
governance to determine whether it is possible to perform alternative procedures to obtain
sufficient appropriate evidence.
 Failure to obtain sufficient appropriate audit evidence will cause the auditor to:
1. Express a qualified opinion, if the effect is material but not pervasive.
2. Resign from the engagement or express disclaimer of opinion if the effect is both material
and pervasive.

Materiality and Pervasiveness Consideration

 An error in inventory affects cost of sales, gross profit, provision for income tax, net income thus
it is pervasive.

Basis for Modification Paragraph

 When the auditor modifies the opinion on the FS, the auditor should include a separate
paragraph in the auditor’s report that provides a description of the matter giving rise to the
modification.
 This paragraph should be placed before the opinion paragraph.
 With heading ”Basis for Qualified Opinion” “Basis for Adverse Opinion” or “Basis for
Disclaimer of Opinion”
Material Misstatement – the auditor should include in the basis for modification paragraph:

1. A description of the nature of misstatements or an explanation of how the disclosure is

misstated
2. A quantification of the financial effects of the misstatement or a disclosure of omitted
information, if practicable.

Scope Limitation – if the modification results from an inability to obtain sufficient appropriate audit
evidence, the basis for modification paragraph shall only explain the reason for that inability.

Piecemeal Opinion –

 an unmodified opinion expressed on one or more components of the FS while expressing an

adverse or disclaimer on the FS taken as a whole.
 PSA 705 does not allow this reporting practice because it tends to contradict or even
overshadow the disclaimer or adverse opinion expressed on the FS taken as a whole.