Psa 705 - Modification to the Opinion in the Independent Auditor's Report

PSA 705 - Modification to the Opinion in the Independent Auditor’s Report

• Deals with the auditor’s responsibility to issue an appropriate report in circumstances when in forming an opinion in accordance with PSA 700 “Forming an Opinion and Reporting on Financial Statements”

Modified Reports

• Matters That Do Not Affect The Auditor's Opinion

a) Emphasis of matter

• Matters That Do Affect the Auditor's Opinion

a) Qualified opinion,

b) Disclaimer of opinion, or

c) Adverse opinion.

Factors to consider in determining which modified opinion is appropriate:

1. The nature of the matter gives rise to modification whether financial statements are materially misstated or in case of inability to obtain sufficient appropriate audit evidence, may be materially misstated.

2. Auditor’s judgment about the pervasiveness of the effects or possible effects of the matter on financial statements.

Circumstances when Modification is Required

1. Based on audit evidence, financial statements are not free from material misstatements.

2. Auditor is unable to obtain sufficient appropriate audit evidence.

A qualified opinion:

a) Either obtained sufficient appropriate evidence or not, but misstatements are Material but not pervasive.

Expressed as being ''Except for'' the effects of the matter to which the qualification relates.

An adverse opinion:

a) Have obtained sufficient appropriate audit evidence where misstatements are Both material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements.

A disclaimer of opinion:

Both material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and accordingly is unable to express an opinion on the financial statements.

Consequences of Inability to Obtain S&A audit evidence due to Limit by Mgmt. after Auditor accepted the Engagement

• Auditor shall request the management to remove that limitation

• If management refuses, the auditor shall communicate to those charge with governance.

• If the possible effects are both pervasive and material;

a) Resign from the audit

b) If resignation is not practicable, disclaim the opinion.

Form and Content of Auditor’s Report When the Opinion is Modified

• Specific Elements

• Modification Paragraph

• Opinion Paragraph

• Emphasis of Matter Paragraph

• Other Matter Paragraph

Basis of Modification Paragraph

• Description on the matter giving rise to modification.

• If material misstatements relates to amounts, auditor shall include in the basis of modification paragraph a description and quantification of financial effects unless impracticable.

• If it relates to narrative disclosures, auditor shall include in the basis of mod. Par. An explanation of how disclosures are misstated.

• If it relates to non-disclosure of information, auditor shall:

a) Discuss with those charged with governance

b) Describae nature of omitted disclosure

c) Include omitted disclosure, unless prohibited by law

Opinion Paragraph

• Identifies the applicable financing reporting framework on which the financial statements are based.

• Expresses an opinion on the financial statements

Fair Presentation Framework

• Used to refer to a financial reporting framework that requires compliance with the requirements of the framework and;

a) 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:

b) 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.

Compliance Framework

• -financial framework that requires compliance with the requirements of the framework but does not contain the 2 acknowledgements of fair presentation framework.

In Qualified Opinion:

• “Except for the effects of the matter(s) described in the Basis for Qualified Opinion paragraph:

a) A. FS present fairly, in accordance with a fair presentation framework.

b) B. FS have been prepared, in accordance with a compliance framework.

In Adverse Opinion:

• Because of the significance of the matter(s) described in Basis for Adverse Opinion paragraph:

a) FS do not present fairly, in accordance with a fair presentation framework.

b) FS have not been prepared, in accordance with a compliance framework.

In Disclaimer of Opinion:

• Because of the significance of the matter(s) described in Basis for Disclaimer of Opinion paragraph:

a. Auditor has not been able to obtain sufficient appropriate audit evidence.

b. Auditor does not express an opinion on the financial statements.

Emphasis of Matter Paragraph

Matters That Do Not Affect The Auditor's Opinion

a) Adding an emphasis of matter paragraph after the opinion paragraph;

b) Instances include

1. Draw user’s attention to a matter presented or disclosed in fs that are fundamental to user’s understanding.

2. Draw user’s attention to a matter other than those presented or disclosed in fs but are relevant to user’s understanding.

Instances include:

a. Uncertainty relating to future outcome of exceptional litigation or regulatory actions.

b. Early application or new acctg. Standards that has a pervasive effect on financial statements.

c. A major catastrophe

In Unqualified Opinion:

-when there is a substantial doubt about the entity‘s ability to continue as a going concern.

Substantial Doubt About Going Concern

• 1. Significant recurring operating losses or working capital deficiencies.

• 2. Inability of the company to pay its obligations as they come due.

• 3. Loss of major customers, the occurrence of uninsured catastrophes.

• 4. Legal proceedings, legislation that might jeopardize the entity’s ability to operate.

Comparative Information—Corresponding Figures & Comparative FS

• PSA 710- deals with auditor’s responsibilities regarding comparative information in an audit of financial statements.

• -applies with PSA 510 when the financial statements of the prior period have been audited by a predecessor auditor or were not audited.

Essential Audit Differences of two approaches:

1. Corresponding Figures, current period only

2. Comparative FS, each period for which financial statements are presented.

Corresponding Figures

• Auditors opinion does not refer to corresponding figures.

• If auditor’s report on prior period included a modified opinion and the matter which gave rise to the modification is:

A. Unresolved – auditor shall modify the auditor’s opinion on current period’s fs.

B. Resolved and properly accounted for or disclosed – auditor’s opinion on current period need not refer to previous modification.

• If material misstatements exist in prior period financial statements on which Unmodified Opinion has issued, and corresponding figures have not been properly restated or appropriate disclosures have not been made, auditor shall express Qualified or Adverse opinion.

• When prior period fs are misstated an auditor’s report has not been reissued, , and corresponding figures have been properly restated or appropriate disclosures have been made, auditor’s report may include Emphasis of Matter.

• If fs of prior period was audited by a predecessor auditor, and it is permitted by law to refer on his report, auditor shall include it in Other Matter Paragraph:

A. that the fs were audited by a predecessor auditor.

B. the type of opinion expressed by predecessor auditor, and if it is modified, reasons thereof.

C. the date of that report.

• If fs of prior period was not audited, auditor shall state in Other Matter paragraph that the corresponding figures were not audited.

Comparative Financial Statements

• Other Matter Paragraph includes:

A. the substantive reasons if the auditor’s opinion on prior period differs from the opinion the auditor previously expressed.

B. If fs of prior period was audited by a predecessor auditor,

a) that the fs were audited by a predecessor auditor.

b) the type of opinion expressed by predecessor auditor, and if it is modified, reasons thereof.

c) the date of that report.

• If fs of prior period was not audited, auditor shall state in Other Matter paragraph that the comparative financial statements were not audited.

Material Inconsistencies

• If on reading the other information, auditor identifies a material inconsistency, auditor should determine whether financial statements or other information needs to be revised.

A. when revision of financial statements is necessary and management refuses, auditor shall modify the opinion.

B. when revision of other information is necessary and management refuses auditor shall communicate with those charged with governance; and

a) include an other matter paragraph

b) withhold the auditor’s report

c) withdraw from the engagement.

Material Misstatement of Facts

a) discuss the matter with the management.

b) auditor shall request the management to consult with a qualified third party

c) if management refuses to correct, the auditor shall notify with those charged with governance and take any further appropriate action.

REACTION PAPER

My report ‘Modifications to the Independent Auditor’s Report’ is a very interesting topic as it involves different opinions and some of its modification parts or paragraphs. As a student who wants to be an auditor, I am interested on how an auditor’s report looks like even though our professor, Ms. Catherine Aquino, said to us that auditing firms have already their format for these reports.

My report is, however, an extension of the report of Mr. Kevin Daan which is also about specific elements of auditor’s report. Modifications to the Independent Auditor’s Report involves different paragraphs included in the auditor’s report, just for instance, emphasis of matter paragraph, basis of modification paragraph and other matter paragraph. I’ve learned that when there is wrong in the financial statements or when there is insufficient audit evidence, an auditor have to make additional effort in doing tests and preparing a longer auditor’s report as more information is needed to be communicated to the users of the financial statements, management and those charged with governance.

I have also learned the things that an auditor should consider in making the auditor’s report and even after the auditor’s report but before financial statement has been issued. Also, I have able to clear my views regarding some misleading and unclear facts with the help of Mrs. Aquino discussing these things.

And so, this report helps me to be more familiar with the subject and gather additional knowledge for the preparation to the incoming Board Exam. I am also looking forward to see myself doing these reports after having my license.