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Chapter 11

THE AUDITOR'S REPORT ON FINANCIAL STATEMENTS

Auditor's Report on Financial Statements
 Unmodified Report
 Modification to the Opinion
 Emphasis of Matters & Other Matter Paragraph
 Key Audit Matters and Other Information
 Report on Group FS
 Special Purpose FS

The objective of an audit of financial statements is to enable the auditor to express an opinion about
whether the financial statement 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 to a financial reporting
framework that requires compliance with the requirements of the framework and:

i. Acknowledges 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. Acknowledges explicitly that it 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 that acknowledgements
in (1) 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

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4. The financial statements provide sufficient disclosures to enable understand the effects of material
transactions and its conveyed in the financial statements.

 The Unmodified Report

The end product of the financial statement audit is an audit is the 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 applicable 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 auditor. PSA 700 sets out the following requirements relating to the
elements of the unmodified report:

Basie 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

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

 to distinguish the auditor's report from the reports that might be issued by others; and
 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

filed 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 c. 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

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ethical responsibilities, and

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. Responsibilities for the Financial Statements

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 for the Financial Statements and Those Charged with Governance 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 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 to error, and either:
 Describe that they are considered material if, individually or in aggregate, they could
reasonably expected to influence the economic decisions taken on the basis of the
financial statements:
 Provide a definition or description of material: accordance with the applicable financial
rep framework.
d. State that, as part of the audit in accordance with PSAs, the auditor exercises professional
judgment and main professional skepticism throughout the audit; and
e. Describe an audit by stating that the auditor's responsibilities are:

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 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 a 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 audit findings
including 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 report on the financial statements under PSA. For example, to the 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 <Report 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 location in the jurisdiction where the auditor maintains his
office.

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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 provided 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. In fact, most auditors use the date of the approval
of the financial statements as the date of their audit reports.

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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, which comprise the financial statements of CRC-ACE
Company (the Company). rise the statements of financial position as at December 31, 20X2 and 20X1
and the statements of comprehensive income, statements of equity and statement of cash flows for the
years then ended, and the financial statements, including a summary of significant accounting policies

In our opinion, the accompanying financial statements present fairly, in all aspects, the financial position
of the Company as at December 31, 20X2 and 20X1, and its financial performance and its cash flows for
the ended in accordance with Philippine Financial Reporting Standards (PFRSs).

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 in the Philippines, and we have
fulfilled our ethical responsibilities in accordance with these requirements 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 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 assessing the Company's ability to
continue as a going concern, disclose as applicable, matters related to going concern and using the going
concern basis of accounting unless management either intends to liquidate 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.

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.

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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.

As part of an audit in accordance with PSAs, 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 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
material uncertainty exists, we are required to draw mention in our auditor's report to the related
disclosures in the such disclosures are inadequate, to financial statements of 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,

We communicate with charged with governance regarding, among other 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.

Report on Other Legal and Regulatory Requirements

Our audits were conducted for the purpose of forming an opinion on the Basic financial statements taken
as a whole. The supplementary information the year ended December 31, 20X2 required by the Bureau of
Internal Revenue is presented for purposes of additional analysis and is not a 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.

Jennalyn M. Vicencio, CPA

JMV & Company

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Makati City, Philippines

January 31, 20X3

 Modifications to the Opinion

When the auditor is satisfied that the unmodified opinion is issued only when the
1. The financial statements have been pr accordance with the applicable financial 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 auditor to modify his opinion on the
financial statements.

 Material Misstatement/ Departure from PFRS

Fair presentation of the financial statements is pres 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 misstatements.

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 uncovers 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 the misstatements, the auditor should express either a qualified or an adverse opinion
depending on the materiality 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 management or because of limitations
brought about 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 with 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:

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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 the engagement or
disclaim an opinion on the financial statements.

The practicality 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 encounter circumstances that may affect his
ability to obtain sufficient appropriate evidence. Circumstance 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 this financial statements of a client only after the client's fiscal year has ended; or
2. Due to circumstances that are beyond the control of the entity, like when the client's
accounting recorded are not adequate.

Circumstance 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 on 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 no 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 judgment. In
making this decision, both materiality and pervasiveness of effect on financial statements should be taken
into consideration.

If the magnitude of misstatements 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 in the financial
statements that are affected by the misstatement as to render the overall financial statements materially
misleading, the auditor would most likely express an adverse opinion. For example, an auditor may
conclude that a material error in inventory have a pervasive effect on the financial statements because
inventory errors affect a number of financial statement items such cost of sales, gross profit, income tax

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expense, net income, asset, liability and equity accounts.

Modification to the Opinion

 Material Misstatement
 Material but not pervasive – Qualified Opinion
 Material and pervasive – Adverse Opinion

 Scope of Limitation
 Material but not pervasive – Qualified Opinion
 Material and pervasive – Disclaimer of Opinion

Modification of the Auditor’s Report

As mentioned earlier, the consistency in the auditor's report helps promote users' understanding of the
report and it helps alert use unusual circumstances when they occur. Although uniformity in 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 auditor9s report is desirable even when issuing modified reports. 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 Disclaimer
Opinion
Modified Modified Modified Modified
Section
Basis for
Opinion Modified Modified Modified Modified
Section
Responsibility
for the FS No Modification No Modification No Modification No Modification
Section
Auditor's
Responsibility No Modification No Modification Modified Modified
Section

A. OPINION SECTION
The following summarizes the modifications that should be made to 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, except for the effects of the matter described in the Basis for
Qualified Opinion section, the financial statements present fairly, in a material respects, the
financial position and financial performance of the entity in accordance with the applicable

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financial reporting framework.

 Qualified Opinion Due to Scope Limitation

When the auditor expresses a qualified opinion due to a scope limitation, the auditor shall;
 use the heading <Qualified Opinion= in the opinion section of the report; and
 state that, in the auditor's opinion, except for the possible 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 an 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 appropriate heading such as <Basis for
Qualified Opinion,= <Basis for Adverse Opinion= of <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 notes to the financial
statements, the auditor should discuss the non-disclosure with those charged with governance. In

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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 sentence in the Basis for Opinion section to state that the audit evidence obtained is sufficient and
appropriate to provide a basis for the auditor's <qualified" or "adverse= opinion as appropriate.

 Scope of Limitation (Qualified or Disclaimer of Opinion)

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

When the auditor disclaims an opinion on the financial statements, 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 audit 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 Disclaimer of 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 o more components of the financial
statements while expressing adverse or disclaimer of opinion on the financial statements take as a whole.
PSA does not allow this reporting practice because piecemeal opinion tends to contradict or even
overshadow disclaimer or adverse opinion expressed on the financial statements the taken as a whole.

 Going Concern

Continuation of the entity as a going concern is assumed 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 the foreseeable future.

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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 relation to the
entity's ability to meet its obligations;
 Management's plans that mitigate the effect of these events or conditions; or
 Significant judgments made by management 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 judgment, 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:

 Adequately describe the principal conditions and events that give rise to the significant doubt
including management plans to deal with these events conditions.
 State clearly that there is a material uncertainty about the entity's ability to continue as a going
concern and that 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

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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 that: <Material Uncertainty Related to Going Concern=

1. Draws 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 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 instruments and investment properties will be
accounted for under PFRS 9 and PAS 40 respectively while 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 addition 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
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 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 judgment in

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deciding on the type of opinion to express on the financial statements.

PSA 701 requires auditors to communicate key audit matters in the auditor's report whenever they
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 judgment or areas of focus in performing the audit.

 Identifying Key Audit Matters

Key audit matters are those matters that, in the auditor's professional judgment, 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 with governance.
Step 2 Determine which of these matters required significant auditor's attention.
Step 3 Determine which of these matters required significant auditor's attention. 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 significance

The auditor should 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 the involved significant auditor judgment;
 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 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. 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 is true even when
comparative financial statements are presented.

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 Manner of Communicating and Documenting Key Audit Matters

The auditor must use his professional judgment 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 judgments made in reaching this determination. In addition, PSA 701 also
requires auditors to communicate the key audit matters to be included in the report with those
charged with governance.

An issue that causes the auditor to modify an opinion on an entity's financial statements 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 the 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 statements.

Although the communication of key audit matters are 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 readers 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 readers' attention
to a matter presented or disclosed in the financial statements that, in the auditor's
judgment, is of such importance that it is fundamental to the readers' understanding of the
financial statements.

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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.

 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 the 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 paragraph to highlight the material uncertainty.

 Early application of new accounting standard

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

 Major catastrophe
Recent disasters brought about by calamities have brought major catastrophes to many
companies. A major catastrophe that has had, or continues to have 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 (or Other
Matter) paragraph to put emphasis on the note that discusses the reason for such amendment
and for the 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 bases 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

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financial statements are prepared using a special purpose framework.

A widespread use of Emphasis of Matter paragraphs diminishes e effectiveness of the

auditor's communication of such matters. Additionally, to include more information in an
Emphasis of Matter Paragraph rather than 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 are also essential to readers' understanding of the financial statements. The auditor
may do so by:
1. Presenting the matter more prominently than other matters 1. 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.
3.
 Other Matter Paragraph
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 judgment, is relevant to
users' understanding of the audit, the auditor's responsibilities or the auditor's report. The auditor may
do so 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 financial frameworks.
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 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

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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 specifically 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 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.

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 Prior Period Financial Statements audited by another auditor

When the financial statements of the prior period were audited by another auditor, there are
two 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:
 Comparing the current period financial statements with the financial statements
audited.
 A discussion with the successor auditor about any circumstances or events that may
affect the financial statements of the prior period.
 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 his report 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 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
depending on its impact on the current period's opinion financial statements.

 Reporting on Corresponding Figures

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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 frameworks

An entity may prepare one set of financial statements in accordance with a general purpose
framework (e.g., PFRS) and another set of 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 an "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, requires the auditor to read the other information to consider:

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 Whether material inconsistencies exist between the other information and the financial
statements; and
 Whether material inconsistency exists between the other information and the 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 similar items in the financial statements. The auditor
would also consider whether the other information is consistent with the audit evidence obtained
and the conclusions 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 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
amendment, 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 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 refusal casts doubt on the integrity of management and those charged with 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.

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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 and 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 auditor 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 enables the auditor to resolve
possible material inconsistencies and apparent material misstatement of fact with management on
a timely basis. An agreement with 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
assessment 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, judgment 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

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 Whether sufficient appropriate evidence about the work of the component auditor can be
obtained.

If the group auditor has not become satisfied about the professional competence and
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 component.

 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 analytical
review procedures to be able to obtain audit 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.

Examples 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 the 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 applicable to the
engagement. Accordingly, 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 financial statements should include an Emphasis of Matter paragraph to alert the readers that

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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 to indicate
that the auditor9s 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 the 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 or one or more components of a financial statement. This is usually the case
for franchise agreements which require payment of royalty based on the revenue of the
franchisee. A report on revenue account is necessary to have a reliable basis for computing
therefore 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,
as a whole 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 of a 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 statement. 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 or on a

specific element of a financial statement in conjunction with an engagement to audit the entity's

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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 of 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 on 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 statement taken as a whole but the auditor considers it
appropriate to express an unmodified opinion on that 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 results of operations. This type of engagement may be accepted
only if the auditor has also been engaged to express an audit opinion on the financial
statements from which the summary financial statements were derived. The audit of financial
statements from which the summary financial statements are 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 from 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 or other 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 opinion or a
disclaimer of opinion, the auditor's report on the summary financial statements should state the

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