ISA UPDATES

Training on Selected International Standards of Supreme Audit Institutions (ISSAIs)

February 22, 2018 (Batch 1) | February 23, 2018 (Batch 2)
Professional Development Center, COA
Agenda
1. ISA 560- Subsequent Events
2. ISA 700 (Revised)- Forming an Opinion and Reporting on
Financial Statements
3. ISA 701- Communicating Key Audit Matters in the
Independent Auditor’s Report
4. ISA 705 (Revised)- Modification to the Opinion in the
Independent Auditor’s Report
5. ISA 706 (Revised)- Emphasis of Matter Paragraphs and
Other Matter Paragraphs in the Independent Auditor’s
Report
6. ISA 570 – Going Concern
7. ISA 710 - Comparatives
Subsequent Events

ISA 560
Definition

• Events between the date of the

financial statements and the date
of the auditor’s report, and the
facts that become known to the
auditor after the date of the report
Two Types of Subsequent Events

1. Those that provide further evidence of

conditions that existed at period end; and
2. Those that are indicative of conditions that
arose subsequent to period end.
Auditor’s Responsibility-
Events before the date of the Report
• The auditor shall perform procedures
designed to obtain sufficient
appropriate audit evidence that all
events occurring between the date of
the financial statements and the date
of the auditor’s report that may
require adjustment of, or disclosure in
the financial statements have been
identified.
Procedures to identify Subsequent Events
1. Inquiring of management about the occurrence
of subsequent events
2. Obtaining understanding of the procedures
management has established to ensure that
subsequent events are identified
3. Reading the minutes of meetings of board of
directors and shareholders that have been held
after the date of the financial statements
4. Sending a letter of inquiry to the entity’s
lawyers concerning litigation and claims
5. Reading the latest available interim financial
statements
Written Representations

• The auditor shall request management to

provide a written representation in accordance
with PSA 580 that all subsequent events that
would require adjustment or disclosure in the
financial statements have been adjusted or
disclosed
Events after the Date of The Report but
before FS are issued
When, after the date of the report but before
the financial statements are issued, the
auditor becomes aware of a fact which may
affect the financial statements, the auditor
should
– Consider whether the financial statements need
amendment;
– Should discuss the matter with management; and
– Inquire how management intends to address the
matter
Events after the Date of The Report but
before FS are issued
If management amends the FS, the
auditor shall
1. Carry out the audit procedures
necessary to obtain satisfaction about
the amendment; and
2. Consider the effect of the
amendment on the auditor’s report
 Events after the issuance of the financial
statements
• When, after the financial statements have
been issued, the auditor becomes aware
of a fact which existed at the date of the
auditor’s report and which, if known at
that date, may have caused the auditor
to modify his report, the auditor shall
– Consider whether the financial statements need
amendment;
– Should discuss the matter with management; and
– Inquire how management intends to address the
matter
Events after the issuance of the financial statements
If management amends the FS, the auditor shall
1. Carry out the audit procedures necessary to
obtain satisfaction about the amendment; and
2. Review the steps taken by management to
ensure that anyone in receipt of the previously
issued FS is informed of the situation
3. Provide new audit report on the amended FS
with Emphasis of Matter paragraph that draws
the readers’ attention to the notes to FS that
discuss the amendment made.
Events after the issuance of the financial statements

• If management refuses to revise the FS in

circumstances where the auditor believe
they need to be amended; or if
management does not take the necessary
steps to ensure that users of the FS are
informed of the situation, the auditor shall
notify management and those charged
with governance that the auditor will seek
to prevent future reliance on the auditor’s
report
 ISA 700 (Revised)
Forming an Opinion and Reporting
on Financial Statements
 New Audit Report
INDEPENDENT AUDITOR’S REPORT
To the Shareholders of ABC Company [or Other Appropriate
Addressee]
Report on the Audit of the Financial Statements
Opinion
We have audited the financial statements of ABC Company (the
Company), which comprise the statement of financial position as at
December 31, 20X1, and the statement of comprehensive income,
statement of changes in equity and statement of cash flows for the
year 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, (or give a true and fair view of) the financial
position of the Company as at December 31, 20X1, and (of) its
financial performance and its cash flows for the year then ended in
accordance with International Financial Reporting Standards (IFRSs).
New Audit Report

Basis for Opinion

We conducted our audit in accordance with International
Standards on Auditing (ISAs). 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 International Ethics Standards Board for
Accountants’ Code of Ethics for Professional Accountants
(IESBA Code) together with the ethical requirements that are
relevant to our audit of the financial statements in
[jurisdiction], and we have fulfilled our other ethical
responsibilities in accordance with these requirements and the
IESBA Code. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our
opinion.
New Audit Report

Key Audit Matters

Key audit matters are those matters that, in our

professional judgment, 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.

[Description of each key audit matter in accordance

with ISA 701.]
 New Audit Report
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 IFRSs, 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 financial reporting process.
New Audit Report

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 ISAs will always
detect a material misstatement when it exists. Misstatements
can arise from 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.
 New Audit Report
Auditor’s Responsibilities- Cont.
As part of an audit in accordance with ISAs, we exercise professional
judgment 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, intentional omissions, misrepresentations, or the override of
internal control.
•Obtain an understanding of internal control relevant to the audit 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.
New Audit Report
Auditor’s Responsibilities- Cont.
•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 or
conditions may cause the Company 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.
New Audit Report
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.
We also provide those charged with governance with a statement that we
have complied with relevant ethical requirements regarding independence,
and to communicate with them all relationships and other matters that may
reasonably be thought to bear on our independence, and where applicable,
related safeguards.
From the matters communicated with those charged with governance, we
determine those matters that were of most significance in the audit of the
financial statements of the current period and are therefore the key audit
matters. We describe these matters in our auditor’s report unless law or
regulation precludes public disclosure about the matter or when, in
extremely rare circumstances, we determine that a matter should not be
communicated in our report because the adverse consequences of doing so
would reasonably be expected to outweigh the public interest benefits of
such communication.
New Audit Report

Report on Other Legal and Regulatory Requirements

[The form and content of this section of the auditor’s report
would vary]

The engagement partner on the audit resulting in this

independent auditor’s report is [name].

[Signature in the name of the audit firm, the personal name of

the auditor, or both, as appropriate for the particular
jurisdiction]

[Auditor Address]

[Date]
 ISA 705 (Revised)
Modification to Auditor’s Opinion
Modification to the Opinion

Material Scope Limitation

Misstatement
Material Material Material Material
but not And but not And
Pervasive Pervasive Pervasive Pervasive

Qualified Adverse Qualified Disclaimer of

Opinion Opinion Opinion Opinion
Material Misstatement

1. Material Misstatement of the financial

statements may arise in relation to
 Inappropriate accounting policies selected
 Misapplication of selected accounting policies
 Inadequacy of disclosure

2. Material misstatement of the financial

statement will result to expression of a
qualified or an adverse opinion.
Scope Limitation

1. Scope limitation may arise from

 Limitations imposed by management
 Limitations imposed by circumstances
 Beyond the control of the entity
 Relating to the nature and timing of the
audit

2. Scope limitations will result to expression

of a qualified or a disclaimer of opinion.
Materiality consideration

• Materiality and pervasiveness

(large-scale) of effect on financial
statements determine the opinion
to be expressed.
Communication with Those Charged with Governance

• When the auditor expects to modify

the opinion, the auditor shall
communicate with those charged with
governance
–Circumstances that led to the expected
modification; and
–The proposed wording of the
modification
 ISA 706 (Revised)
Emphasis of Matter
and
Other Matter Paragraphs
Objective of additional paragraph
• To draw the readers’ attention to
A matter included in the financial
statements that is essential to users’
understanding of the financial
statements; or
Other matter, not included in the
financial statements, that is relevant to
users’ understanding of the audit
conducted
 Circumstances that require Emphasis of Matter Paragraph

1. Uncertainty relating to the future outcome

of exceptional litigation or regulatory action
2. Early application of new accounting standard
3. A major catastrophe with significant effect
on the entity’s financial position.
4. When issuing a report on amended FS
5. Financial statements prepared using Special
Purpose Financial Reporting Frameworks
(ISA 800)
Emphasis of Matter Paragraph

Early application of
a new accounting
standard

Significant
Uncertainties Emphasis of
Major Catastrophes Adequately Matter
disclosed Paragraph
Amended FS

Special Purpose
Financial Reporting
Framework
Circumstances that require Other Matter Paragraph

1. Reporting on comparatives (ISA 710)

2. Material inconsistency exists between
other information and the audited financial
statements (ISA720)
3. Restriction on distribution or use of the
auditor’s report (ISA 800, 805 and 810)
4. Reporting on financial statements prepared
using more than one financial reporting
frameworks
Going Concern

PSA 570
Going Concern Basis of Accounting

• Fundamental principle in the

preparation of financial
statements
• The entity is viewed as
continuing in business for the
foreseeable future
Management’s Responsibility

• Philippine Accounting Standards (PAS) 1

requires management to make an
assessment of the entity’s ability to
continue as a going concern
• The management’s assessment of the
entity’s ability to continue as a going
concern shall cover at least 12 months
from the date of the financial statements
Auditor’s Responsibility

• The auditor’s responsibility is to

1. Obtain sufficient appropriate evidence
about the appropriateness of the
management’s use of going concern basis
of accounting in the preparation and
presentation of FS
2. Conclude whether material uncertainties
exist
3. Determine the implications for the
auditor’s report
 Audit Procedures
1. Perform Risk Assessment Procedures
Consider whether there are events and conditions that
may cast significant doubt on the entity’s ability to
continue as a going concern
2. Evaluate Management’s Assessment
Consider whether management’s assessment includes
all relevant information of which the auditor is aware of
3. Obtain sufficient appropriate evidence to determine
whether or not a material uncertainty exist
 Evaluate management’s plans for future actions, the
feasibility of such plans and other mitigating factors
 Examples of those Conditions and Events
• Non-compliance with the terms of loan
agreements or other statutory requirements
• Pending major legal or regulatory proceedings
• Changes in legislation or government policy
expected to adversely affect the entity
• Net liability or net current liability
• Substantial operating losses
• Inability to pay creditors on due dates
• Loss of major market, franchise, license or
principal supplier.
 Implication on the Auditor’s Report

• Use of Going Concern Assumption

is Appropriate
If based on evidence obtained, the
auditor concludes that the use of
going concern assumption is
appropriate, the auditor may issue
an Unmodified Report
Consider the adequacy of disclosure
 Implication on the Auditor’s Report

• Use of Going Concern Assumption is Inappropriate

If based on evidence obtained, the auditor
concludes that the use of going concern
assumption is inappropriate, the financial
statements should be prepared on an
alternative basis.
If the financial statements are prepared on a
going concern basis, but the auditor believes
that the going concern assumption is
inappropriate, the auditor shall express an
adverse opinion
 Implication on the Auditor’s Report

• Use of Going Concern Assumption is Appropriate but

Material Uncertainty Exists
 If based on evidence obtained, the auditor concludes that the
use of going concern assumption is appropriate, but material
uncertainty still exists, the auditor shall consider the adequacy
of disclosure.
 If disclosure is not adequate, the auditor shall express either
qualified or adverse opinion because of material misstatement
of financial statements
• If disclosure is adequate, the auditor shall express an
unmodified opinion and shall include a separate section
under the heading “Material Uncertainty Related to
Going Concern”
Implication on the Auditor’s Report

• Management Unwilling to make or

extend its Assessment
If management is unwilling to make or
extend its assessment when requested
by the auditor to do so, the auditor shall
express either qualified or disclaimer of
opinion due to inability to obtain
sufficient appropriate evidence
regarding the use of going concern
assumption
 ISA 701
Communicating Key Audit Matters
in the Independent Auditor’s
Report
What are KAM?

KAM are defined as those matters

that, in the auditor’s professional
judgment, were of most
significance in the audit of the
financial statements of the current
period.
Which Auditor’s Reports Will Include a KAM
Section?
• KAM is required to be communicated in
the auditor’s report for audits of financial
statements of listed entities in accordance
with new ISA 701

• Law or regulation may require KAM for

audits of other entities

• Auditors may voluntarily, or at the the

request of management, communicate
KAM in the auditor’s report for other entities
Are KAM Always Communicated in the
Auditor’s Report?
• Auditor is required to include each KAM unless
 Law or regulation precludes disclosure
 In extremely rare circumstances, the auditor
determines that the matter should not be
communicated
• Adverse consequences of communicating the KAM would
reasonably be expected to outweigh the public interest benefits of
such communication

• KAM is prohibited for a disclaimer of opinion, but

required for a qualified or adverse opinion

• In certain, limited circumstances, there may be

no KAM to be communicated
The Decision-Making Framework for KAM

Matters that were

communicated with those
charged with governance
Matters that
required significant
auditor attention
Matters of most
significance in the
audit = Key Audit
Matters
KAM – What is included in the Description?

The description always includes

- Why the matter was considered to
be a KAM
- How the matter was addressed in
the audit
- Reference to the related
disclosure(s), if any
 Key Audit Matters- Example

Goodwill

Under IFRSs, the Group is required to annually test the

amount of goodwill for impairment. This annual
impairment test was significant to our audit because the
balance of XX as of December 31, 20X1 is material to the
financial statements. In addition, management’s
assessment process is complex and highly judgmental and
is based on assumptions, specifically [describe certain
assumptions], which are affected by expected future market
or economic conditions, particularly those in [name of
country or geographic area].
Key Audit Matters- Example
Valuation of Financial Instruments
The Company’s investments in structured
financial instruments represent [x%] of the
total amount of its financial instruments. Due
to their unique structure and terms, the
valuation of these instruments are based on
entity-developed internal models and not on
quoted prices in active markets. Therefore,
there is significant measurement uncertainty
involved in this valuation. As a result, the
valuation of these instruments was significant
to our audit.
Key Audit Matters- Example
Effects of New Accounting Standards

As of January 1, 2013, IFRS 10 (Consolidated Financial

Statements), 11 (Joint Arrangements) and 12 (Disclosure of
Interests in Other Entities) became effective. IFRS 10
requires the Group to assess for all entities whether it has:
power over the investee; exposure, or rights, to variable
returns from its involvement with the investee; and the
ability to use its power over the investee to affect the
amount of the investor's returns. The complex structure,
servicing and ownership of each vessel, requires the Group
to assess and interpret the substance of a significant
number of contractual agreements.
 Key Audit Matters- Example

Valuation of Defined Benefit Pension Assets and Liabilities

The Group has recognized a pension surplus of [monetary value]

as of December 31, 20X1. The assumptions that underpin the
valuation of the defined benefit pension assets and liabilities are
important, and also subjective, judgments as the surplus/deficit
balance is volatile and affects the Group’s distributable reserves.
Management has obtained advice from actuarial specialists in
order to calculate this surplus, and uncertainty arises as a result of
estimates made based on the Group’s expectations about long-
term trends and market conditions. As a result, the actual surplus
or deficit realized by the Group may be significantly different to
that recognized on the balance sheet since small changes to the
assumptions used in the calculation materially affect the valuation.
 Key Audit Matters- Example

Revenue Recognition
The amount of revenue and profit recognized in the year on the sale
of [name of product] and aftermarket services is dependent on the
appropriate assessment of whether or not each long-term
aftermarket contract for services is linked to or separate from the
contract for sale of [name of product]. As the commercial
arrangements can be complex, significant judgment is applied in
selecting the accounting basis in each case. In our view, revenue
recognition is significant to our audit as the Group might
inappropriately account for sales of [name of product] and long-term
service agreements as a single arrangement 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 [name of product] sale
agreement.
IFRS UPDATES
New IFRS

• IFRS 15- Revenue from Contracts with

Customers

• IFRS- 16- Leases

• IFRS- 17- Insurance Contracts

• IFRS 9- Financial Instruments

Initial Adoption

• IFRS 15- Revenue from Contracts with Customers

• IFRS- 16- Leases

• IFRS- 17- Insurance Contracts

• IFRS 9- Financial Instruments

 IFRS 15
Revenue from Contracts with Customers
Overview

Steps to apply the core principle:

• Identify the contract with the
1 customer

2
• Identify the separate performance

3
• Determine the transaction price

4
• Allocate the transaction price

• Recognize revenue when a

5 performance obligation is satisfied
IFRS 16
Leases
Right-of-use model

A lease contract conveys the right to use an asset (the underlying

asset) for a period of time in exchange for consideration

Right-of-use asset

Lessor Lessee
Lease payments

62
Lessee accounting model

Balance Income Cash flow

sheet statement statement

Right-of-use Amortisation Cash paid for

Most leases asset principal and
Interest interest
Lease liability expense payments

63
 IFRS 17
Insurance Contracts
IFRS 17 Balance Sheet
IFRS 17 Income Statement
Measuring insurance liabilities
 IFRS 9
Financial Instruments
Classification and Measurement

Is the financial asset a DEBT instrument or an EQUITY investment?

Meets the ‘CF Characteristic’ NO

YES Held for trading?
test?
YES NO

Held to NO Held to NO
Fair value through OCI option
collect CCF collect CCF used?
only? and sell? NO
YES YES
YES YES
Fair Value Option (FVO) used?
NO NO
Amortized FVOCI Fair value through
cost profit or loss
 Impairment- Expected Loss Model
• Objective:
– To provide users of financial statements with
more useful information about an entity’s
expected credit losses on financial instruments.
• Requirement:
– Recognize expected credit losses at all times
and
– Update the amount of expected credit losses
recognized at each reporting date to reflect
changes in the credit risk of financial
instruments.
END OF PRESENTATION