Philippine standards on auditing (PSA) PSA 700 (rev )(2)

Auditing and Assurance Standards Council Philippine Standard on Auditing (PSA) 700 (Revised) THE INDEPENDENT AUDITOR’S REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIAL STATEMENTS Conforming Amendments PSA 200, Objective and General Principles Governing an Audit of Financial Statements PSA 210, Terms of Audit Engagements PSA 560, Subsequent Events PSA 701, Modifications to the Independent Auditor’s Report PSA 800, The Independent Auditor’s Report on Special Purpose Audit Engagements PSA 700 (Revised) With Conforming Amendments THE INDEPENDENT AUDITOR’S REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIAL STATEMENTS CONTENTS Pages PSA 700 (Revised), “The Independent Auditor’s Report on a Complete Set of General Purpose Financial Statements” Conforming Amendments PSA 200, “Objective and General Principles Governing an Audit of Financial Statements” 25 PSA 210, “Terms of Audit Engagements” 44 PSA 701, “Modifications to the Independent Auditor’s Report” 56 PSA 560, “Subsequent Events” 66 PSA 800, “The Independent Auditor’s Report on Special Purpose Audit Engagements” 74 Approval by the Auditing and Assurance Standards Council (AASC)∗ ∗ Formerly Auditing Standards and Practices Council (ASPC) 84 -1PSA 700 (Revised) PHILIPPINE STANDARD ON AUDITING 700 (REVISED) THE INDEPENDENT AUDITOR’S REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIAL STATEMENTS1 (Effective for auditor’s reports dated on or after December 31, 2006)* CONTENTS Paragraphs Introduction 1-3 The Auditor’s Report on Financial Statements 4-15 Elements of the Auditor’s Report in an Audit Conducted in Accordance with PSAs 16-57 Auditor’s Report 58-60 Auditor’s Report for Audits Conducted in Accordance with Both ISAs andPSAs 61-66 Unaudited Supplementary Information Presented with Audited Financial Statements 67-71 Effective Date 72-73 Acknowledgment …………………………………………………………… 74-75 Philippine Standard on Auditing (PSA) 700 (Revised), “The Independent Auditor’s Report on a Complete Set of General Purpose Financial Statements” should be read in the context of the “Preface to the Philippine Standards on Quality Control, Auditing, Assurance and Related Services,” which sets out the application and authority of PSAs This PSA is applicable for auditor’s reports on financial statements described in paragraph of the PSA * PSA 700 (Revised) gave rise to conforming amendments to PSA 200, “Objective and General Principles Governing an Audit of Financial Statements,” PSA 210, “Terms of Audit Engagements,” PSA 560, Subsequent Events,” PSA 701, “Modifications to the Independent Auditor’s Report,” and PSA 800, “The Independent Auditor’s Report on Special Purpose Audit Engagements.” PSA 700, “The Auditor’s Reports on Financial Statements,” approved by the Auditing Standards and Practices Council in 2002 will be withdrawn in December 31, 2006 when PSA 700 (Revised) becomes effective -2PSA 700 (Revised) The Independent Auditor’s Report on a Complete Set of General Purpose Financial Statements Introduction The purpose of this Philippine Standard on Auditing (PSA) is to establish standards and provide guidance on the independent auditor’s report issued as a result of an audit of a complete set of general purpose financial statements prepared in accordance with a financial reporting framework that is designed to achieve fair presentation It also provides guidance on the matters the auditor considers in forming an opinion on those financial statements As described in PSA 200, “Objective and General Principles Governing an Audit of Financial Statements,” “general purpose financial statements” are financial statements prepared in accordance with a financial reporting framework that is designed to meet the common information needs of a wide range of users This PSA addresses circumstances when the auditor is able to express an unqualified opinion and no modification to the auditor’s report is necessary PSA 701, “Modifications to the Independent Auditor’s Report” establishes standards and provides guidance on the modifications to this report for an emphasis of matter, a qualified opinion, a disclaimer of opinion, or an adverse opinion PSA 800, “The Independent Auditor’s Report on Special Purpose Audit Engagements” establishes standards and provides guidance on the form and content of the auditor’s report issued as a result of an audit of: (a) A complete set of financial statements prepared in accordance with another comprehensive basis of accounting; (b) A component of a complete set of general purpose or special purpose financial statements, such as a single financial statement, specified accounts, elements of accounts, or items in a financial statement; (c) Compliance with contractual agreements; and (d) Summarized financial statements The Auditor’s Report on Financial Statements The auditor’s report should contain a clear expression of the auditor’s opinion on the financial statements -3PSA 700 (Revised) As stated in PSA 200, the objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework Unless required by law or regulation to use different wording, the auditor’s opinion on a complete set2 of general purpose financial statements prepared in accordance with a financial reporting framework that is designed to achieve fair presentation (for purposes of this PSA referred to as “financial statements”) states whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework In certain cases, law or regulation relating to the audit of financial statements may prescribe wording for the auditor’s opinion that is different from the phrases described in paragraph Although the auditor may be obliged to use the prescribed wording, the auditor’s responsibilities as described in this PSA for forming the opinion remain the same When wording prescribed by law or regulation differs significantly from the phrases in paragraph 6, the auditor carefully considers whether there may be a risk that users might misunderstand the assurance obtained in an audit of financial statements For example, the wording might convey to readers that the auditor is attesting to the accuracy of the financial statement amounts rather than expressing an opinion on whether the financial statements are presented fairly, in all material respects In such circumstances, the auditor considers whether the risk of misunderstanding can be mitigated through appropriate explanation in the auditor’s report (see PSA 701) As explained in paragraph 35 of PSA 200, “Objective and General Principles Governing an audit of Financial Statements,” the financial reporting framework determines what constitutes a complete set of financial statements A complete set of financial statements under Philippine Financial Reporting Standards (PFRSs) comprises a balance sheet, an income statement, a statement of changes in equity, a cash flow statement and a summary of significant accounting policies and other explanatory notes -4PSA 700 (Revised) Applicable Financial Reporting Framework The auditor’s judgment regarding whether the financial statements are presented fairly, in all material respects, is made in the context of the applicable financial reporting framework As discussed in PSA 210, “Terms of Audit Engagements,” without an acceptable financial reporting framework, the auditor does not have suitable criteria for evaluating the entity’s financial statements PSA 200 describes the auditor’s responsibility to determine whether the financial reporting framework adopted by management in preparing the financial statements is acceptable 10 In the case of financial statements that are within the scope of this PSA, application of a financial reporting framework determined to be acceptable for general purpose financial statements will, except in the extremely rare circumstances discussed in paragraph 15, result in financial statements that achieve fair presentation Although the financial reporting framework may not specify how to account for or disclose all transactions or events, it ordinarily embodies sufficient broad principles that can serve as a basis for developing and applying accounting policies that are consistent with the concepts underlying the requirements of the framework Thus, the financial reporting framework provides a context for the auditor’s evaluation of the fair presentation of the financial statements, including whether the financial statements have been prepared and presented in accordance with the specific requirements of the applicable financial reporting framework for particular classes of transactions, account balances and disclosures Forming an Opinion on the Financial Statements 11 The auditor should evaluate the conclusions drawn from the audit evidence obtained as the basis for forming an opinion on the financial statements 12 When forming an opinion on the financial statements, the auditor evaluates whether, based on the audit evidence obtained, there is reasonable assurance about whether the financial statements taken as a whole are free from material misstatement This involves concluding whether sufficient appropriate audit evidence has been obtained to reduce to an acceptably low level the risks of material misstatement of the financial statements3 and evaluating the effects of uncorrected misstatements identified.4 See PSA 330, “The Auditor’s Procedures in Response to Assessed Risks.” See PSA 320, “Audit Materiality.” -5PSA 700 (Revised) 13 Forming an opinion as to whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework involves evaluating whether the financial statements have been prepared and presented in accordance with the specific requirements of the applicable financial reporting framework for particular classes of transactions, account balances and disclosures This evaluation includes considering whether, in the context of the applicable financial reporting framework: (a) The accounting policies selected and applied are consistent with the financial reporting framework and are appropriate in the circumstances; (b) The accounting estimates made by management are reasonable in the circumstances; (c) The information presented in the financial statements, including accounting policies, is relevant, reliable, comparable and understandable; and (d) The financial statements provide sufficient disclosures to enable users to understand the effect of material transactions and events on the information conveyed in the financial statements, for example, in the case of financial statements prepared in accordance with Philippine Financial Reporting Standards (PFRSs), the entity’s financial position, financial performance and cash flows 14 Forming an opinion as to whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework also involves evaluating the fair presentation of the financial statements The auditor considers whether the financial statements, after any adjustments made by management as a result of the audit process, are consistent with the auditor’s understanding of the entity and its environment The auditor considers the overall presentation, structure and content of the financial statements The auditor also considers whether the financial statements, including the note disclosures, faithfully represent the underlying transactions and events in a manner that presents fairly, in all material respects, the information conveyed in the financial statements in the context of the financial reporting framework Analytical procedures performed at or near the end of the audit help to corroborate conclusions formed during the audit and assist in arriving at the overall conclusion as to the fair presentation of the financial statements -6PSA 700 (Revised) Extremely Rare Circumstances when Applying the Financial Reporting Framework Results in Misleading Financial Statements 15 As discussed in PSA 210, the auditor considers the acceptability of the financial reporting framework when considering accepting the engagement Application of a financial reporting framework determined to be acceptable for general purpose financial statements will ordinarily result in financial statements that achieve fair presentation In extremely rare circumstances, however, application of a specific requirement in a framework that has been determined to be acceptable for general purpose financial statements may result in financial statements that are misleading in the particular circumstances of the entity.5 If the auditor encounters circumstances that lead the auditor to conclude that compliance with a specific requirement results in financial statements that are misleading, the auditor considers the need to modify the auditor’s report The modifications, if any, that are appropriate to the auditor’s report will depend on how management addresses the matter in the financial statements and how the financial reporting framework deals with these rare circumstances (see PSA 701) Elements of the Auditor’s Report in an Audit Conducted in Accordance with Philippine Standards on Auditing6 16 Consistency in the auditor’s report, when the audit has been conducted in accordance with the PSAs, promotes credibility in the global marketplace by making more readily identifiable those audits that have been conducted in accordance with globally recognized standards It also helps to promote the reader’s understanding and to identify unusual circumstances when they occur Philippine Accounting Standard 1, “Presentation of Financial Statements,” acknowledges those extremely rare circumstances and provide guidance on the disclosures required Paragraphs 61-66 address the auditor’s report when the audit has been conducted in accordance with both ISAs and PSAs -7PSA 700 (Revised) 17 Paragraphs 18-60 set out the requirements relating to the following elements of the auditor’s report when the audit has been conducted in accordance with the PSAs: (a) Title; (b) Addressee; (c) Introductory paragraph; (d) Management’s responsibility for the financial statements; (e) Auditor’s responsibility; (f) Auditor’s opinion; (g) Other reporting responsibilities; (h) Auditor’s signature; (i) Date of the auditor’s report; and (j) Auditor’s address Title 18 The auditor’s report should have a title that clearly indicates that it is the report of an independent auditor 19 A title indicating the report is the report of an independent auditor, for example, “Independent Auditor’s Report,” affirms that the auditor has met all of the relevant ethical requirements regarding independence and, therefore, distinguishes the independent auditor’s report from reports issued by others Addressee 20 The auditor’s report should be addressed as required by the circumstances of the engagement -8PSA 700 (Revised) 21 Ordinarily, the auditor’s report on general purpose financial statements is addressed to those for whom the report is prepared, often either to the shareholders or to those charged with governance of the entity whose financial statements are being audited Introductory Paragraph 22 The introductory paragraph in the auditor’s report should identify the entity whose financial statements have been audited and should state that the financial statements have been audited The introductory paragraph should also: (a) Identify the title of each of the financial statements that comprise the complete set of financial statements; (b) Refer to the summary of significant accounting policies and other explanatory notes; and (c) Specify the date and period covered by the financial statements 23 This requirement is ordinarily met by stating that the auditor has audited the accompanying financial statements of the entity, which comprise [state the titles of the complete set of financial statements required by the applicable financial reporting framework, specifying the date and period covered by those financial statements] and referring to the summary of significant accounting policies and other explanatory notes In addition, when the auditor is aware that the financial statements will be included in a document that contains other information, such as an annual report, the auditor may consider, if the form of presentation allows, identifying the page numbers on which the financial statements are presented This helps readers to identify the financial statements to which the auditor’s report relates 24 The auditor’s opinion covers the complete set of financial statements as defined by the applicable financial reporting framework In the case of financial statements prepared in accordance with IFRS, as well as financial statements prepared in accordance with PFRS, this includes: a balance sheet, an income statement, a statement of changes in equity, a cash flow statement, and a summary of significant accounting policies and other explanatory notes - 70 PSA 560 [Amended as a Result of PSA 700 (Revised)] ◦ Whether sales of assets have occurred or are planned ◦ Whether the issue of new shares or debentures or an agreement to merge or liquidate has been made or is planned ◦ Whether any assets have been appropriated by government or destroyed, for example, by fire or flood ◦ Whether there have been any developments regarding risk areas and contingencies ◦ Whether any unusual accounting adjustments have been made or are contemplated ◦ Whether any events have occurred or are likely to occur which will bring into question the appropriateness of accounting policies used in the financial statements as would be the case, for example, if such events call into question the validity of the going concern assumption When a component, such as a division, branch or subsidiary, is audited by another auditor, the auditor would consider the other auditor’s procedures regarding events after the date of the financial statements and the need to inform the other auditor of the planned date of the auditor’s report When the auditor becomes aware of events which materially affect the financial statements, the auditor should consider whether such events are properly accounted for and adequately disclosed in the financial statements Facts Discovered After the Date of the Auditor’s Report but Before the Date the Financial Statements are Issued The auditor does not have any responsibility to perform procedures or make any inquiry regarding the financial statements after the date of the auditor’s report During the period from the date of the auditor’s report to the date the financial statements are issued, the responsibility to inform the auditor of facts which may affect the financial statements rests with management 10 When, after the date of the auditor’s report but before the date the financial statements are issued, the auditor becomes aware of a fact which may materially affect the financial statements, the auditor should consider whether the financial statements need amendment, should discuss the matter with management, and should take the action appropriate in the circumstances - 71 PSA 560 [Amended as a Result of PSA 700 (Revised)] 11 When management amends the financial statements, the auditor would carry out the procedures necessary in the circumstances and would provide management with a new report on the amended financial statements The new auditor’s report would be dated not earlier than the date of approval of the amended financial statements and, accordingly, the procedures referred to in paragraphs and would be extended to the date of the new auditor’s report 12 When management does not amend the financial statements in circumstances where the auditor believes they need to be amended and the auditor’s report has not been released to the entity, the auditor should express a qualified opinion or an adverse opinion, as described in PSA 701, “Modifications to the Independent Auditor’s Report.” 13 When the auditor’s report has been released to the entity, the auditor would notify those persons ultimately responsible for the overall direction of the entity not to issue the financial statements and the auditor’s report thereon to third parties If the financial statements are subsequently released, the auditor needs to take action to prevent reliance on the auditor’s report The action taken will depend on the auditor’s legal rights and obligations and the recommendations of the auditor’s lawyer Facts Discovered After the Financial Statements have been Issued 14 After the financial statements have been issued, the auditor has no obligation to make any inquiry regarding such financial statements 15 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 the auditor’s report, the auditor should consider whether the financial statements need revision, should discuss the matter with management, and should take the action appropriate in the circumstances 16 When management revises the financial statements, the auditor would carry out the audit procedures necessary in the circumstances, would review the steps taken by management to ensure that anyone in receipt of the previously issued financial statements together with the auditor’s report thereon is informed of the situation, and would issue a new report on the revised financial statements - 72 PSA 560 [Amended as a Result of PSA 700 (Revised)] 17 The new auditor’s report should include an emphasis of a matter paragraph referring to a note to the financial statements that more extensively discusses the reason for the revision of the previously issued financial statements and to the earlier report issued by the auditor The new auditor’s report would be dated not earlier than the date of approval of the revised financial statements and, accordingly, the procedures referred to in paragraph would ordinarily be extended to the date of the new auditor’s report The auditor is permitted to restrict the audit procedures regarding the revised financial statements to the effects of the subsequent event that necessitated the revision In such cases, the new auditor’s report would contain a statement to that effect 18 When management does not take the necessary steps to ensure that anyone in receipt of the previously issued financial statements together with the auditor’s report thereon is informed of the situation and does not revise the financial statements in circumstances where the auditor believes they need to be revised, the auditor would notify those persons ultimately responsible for the overall direction of the entity that action will be taken by the auditor to prevent future reliance on the auditor’s report The action taken will depend on the auditor’s legal rights and obligations and the recommendations of the auditor’s lawyers 19 It may not be necessary to revise the financial statements and issue a new auditor’s report when issue of the financial statements for the following period is imminent, provided appropriate disclosures are to be made in such statements Offering of Securities to the Public 20 In cases involving the offering of securities to the public, the auditor should consider any legal and related requirements applicable to the auditor in all jurisdictions in which the securities are being offered For example, the auditor may be required to carry out additional audit procedures to the date of the final offering document These procedures would ordinarily include carrying out the procedures referred to in paragraphs and up to a date at or near the effective date of the final offering document and reading the offering document to assess whether the other information in the offering document is consistent with the financial information with which the auditor is associated Effective Date 21 This PSA is effective for auditor’s reports dated on or after December 31, 2006 - 73 PSA 560 [Amended as a Result of PSA 700 (Revised)] 22 The current PSA 560 approved by the Auditing Standards and Practices Council in 2002 will be withdrawn in December 2006 when this amended PSA 560 becomes effective Acknowledgment 23 This PSA is based on International Standard on Auditing (ISA) 560, “Subsequent Events,” amended as a result of PSA 700 (Revised), issued by the International Auditing and Assurance Standards Board 24 There are no significant differences between this PSA 560 and ISA 560 - 74 - CONFORMING AMENDMENT∗ PHILIPPINE STANDARD ON AUDITING 800 THE INDEPENDENT AUDITOR’S REPORT ON SPECIAL PURPOSE AUDIT ENGAGEMENTS (Effective for auditor’s reports dated on or after December 31, 2006) CONTENTS1 Paragraphs Introduction 1-2 General Considerations Reports on Financial Statements Prepared in Accordance with an Other Comprehensive Basis of Accounting 3-8 9-11 Reports on a Component of Financial Statements 12-16 Reports on Compliance with Contractual Agreements 17-19 Reports on Summarized Financial Statements 20-24 Effective Date 25-26 Acknowledgment …………………………………………………………… 27-28 Philippine Standard on Auditing (PSA) 800, “The Independent Auditor’s Report on Special Purpose Audit Engagements” should be read in the context of the “Preface to the Philippine Standards on Quality Control, Auditing, Assurance and Related Services,” which sets out the application and authority of PSAs ∗ PSA 700 (Revised), “The Independent Auditor’s Report on a Complete Set of General Purpose Financial Statements,” gave rise to conforming amendments to this PSA The conforming amendments are not highlighted The amended PSA is effective for auditor’s reports dated on or after December 31, 2006 This PSA is currently under revision The current PSA 800 approved by the Auditing Standards and Practices Council in 2002 will be withdrawn in December 2006 when this amended PSA 800 becomes effective Appendices 1-4 of the original PSA 800 are not reproduced in this publication - 75 PSA 800 [Amended as a Result of PSA 700 (Revised)] The Independent Auditor’s Report on Special Purpose Audit Engagements Introduction The purpose of this Philippine Standard on Auditing (PSA) is to establish standards and provide guidance in connection with special purpose audit engagements including: • A complete set of financial statements prepared in accordance with an other comprehensive basis of accounting; • A component of a complete set of general purpose or special purpose financial statements, such as a single financial statement, specified accounts, elements of accounts, or items in a financial statement; • Compliance with contractual agreements; and • Summarized financial statements This PSA does not apply to review, agreed-upon procedures or compilation engagements The auditor should review and assess the conclusions drawn from the audit evidence obtained during the special purpose audit engagement as the basis for an expression of opinion The report should contain a clear written expression of opinion General Considerations The nature, timing and extent of work to be performed in a special purpose audit engagement will vary with the circumstances Before undertaking a special purpose audit engagement, the auditor should ensure there is agreement with the client as to the exact nature of the engagement and the form and content of the report to be issued In planning the audit work, the auditor will need a clear understanding of the purpose for which the information being reported on is to be used, and who is likely to use it To avoid the possibility of the auditor’s report being used for purposes for which it was not intended, the auditor may wish to indicate in the report the purpose for which the report is prepared and any restrictions on its distribution and use - 76 PSA 800 [Amended as a Result of PSA 700 (Revised)] The auditor’s report on a special purpose audit engagement, except for a report on summarized financial statements, should include the following basic elements, ordinarily in the following layout: (a) Title;2 (b) Addressee; (c) Opening or introductory paragraph (d) (i) Identification of the financial information audited; and (ii) A statement of the responsibility of the entity’s management and the responsibility of the auditor; A scope paragraph (describing the nature of an audit) (i) The reference to the PSAs applicable to special purpose audit engagements or relevant national standards or practices; and (ii) A description of the work the auditor performed; (e) Opinion paragraph containing an expression of opinion on the financial information; (f) Date of the report; (g) Auditor’s address; and (h) Auditor’s signature A measure of uniformity in the form and content of the auditor’s report is desirable because it helps to promote the reader’s understanding It may be appropriate to use the term “Independent Auditor” in the title to distinguish the auditor’s report from reports that might be issued by others, such as officers of the entity, or from the reports of other auditors who may not have to abide by the same ethical requirements as the independent auditor - 77 PSA 800 [Amended as a Result of PSA 700 (Revised)] In the case of financial information to be supplied by an entity to government authorities, trustees, insurers and other entities there may be a prescribed format for the auditor’s report Such prescribed reports may not conform to the requirements of this PSA For example, the prescribed report may require a certification of fact when an expression of opinion is appropriate, may require an opinion on matters outside the scope of the audit or may omit essential wording When requested to report in a prescribed format, the auditor should consider the substance and wording of the prescribed report and, when necessary, should make appropriate changes to conform to the requirements of this PSA, either by rewording the form or by attaching a separate report When the information on which the auditor has been requested to report is based on the provisions of an agreement, the auditor needs to consider whether any significant interpretations of the agreement have been made by management in preparing the information An interpretation is significant It may be appropriate to use the term “Independent Auditor” in the title to distinguish the auditor’s report from reports that might be issued by others, such as officers of the entity, or from the reports of other auditors who may not have to abide by the same ethical requirements as the independent auditor when adoption of another reasonable interpretation would have produced a material difference in the financial information The auditor should consider whether any significant interpretations of an agreement on which the financial information is based are clearly disclosed in the financial information The auditor may wish to make reference in the auditor’s report on the special purpose audit engagement to the note within the financial information that describes such interpretations Reports on Financial Statements Prepared in Accordance with an Other Comprehensive Basis of Accounting A comprehensive basis of accounting comprises a set of criteria used in preparing financial statements which applies to all material items and which has substantial support As discussed in PSA 200, “Objective and General Principles Governing an Audit of Financial Statements,” financial statements that are not prepared to meet the common information needs of a wide range of users may be prepared to meet the financial information needs of specific users The information needs of such users will determine the applicable financial reporting framework in such circumstances (which is referred to in this PSA as “an other comprehensive basis of accounting”) Financial statements prepared in accordance with such financial reporting frameworks may be the only financial statements - 78 PSA 800 [Amended as a Result of PSA 700 (Revised)] prepared by an entity and, in such circumstances, are often used by users in addition to those for whom the financial reporting framework is designed Despite the broad distribution of the financial statements in those circumstances, the financial statements are still considered to be designed to meet the financial information needs of specific users for purposes of the PSAs In addition, although specific users may not be identified, financial statements that are prepared in accordance with a framework that is not designed to achieve fair presentation are also considered to be prepared in accordance with an other comprehensive basis of accounting Examples of financial reporting frameworks that are designed to address the needs of specific users include the following: • The tax basis of accounting for a set of financial statements that accompany an entity’s tax return • The cash receipts and disbursements basis of accounting for cash flow information that a business enterprise may be requested to prepare by creditors • The financial reporting provisions of a government regulatory agency for a set of financial statements prepared for regulatory purposes 10 The auditor’s report on financial statements prepared in accordance with an other comprehensive basis of accounting should include a statement that indicates the basis of accounting used or should refer to the note to the financial statements giving that information The opinion should state whether the financial statements are prepared, in all material respects, in accordance with the identified basis of accounting The term used to express the auditor’s opinion is “present fairly, in all material respects.” Appendix 13 to this PSA gives examples of auditor’s reports on financial statements prepared in accordance with an other comprehensive basis of accounting 11 The auditor would consider whether the title of, or a note to, the financial statements makes it clear to the reader that such statements are not prepared in accordance with Philippine Financial Reporting Standards or generally accepted accounting principles promulgated by a recognized standards setting organization For example, a tax basis financial statement might be entitled “Statement of Income and Expenses—Income Tax Basis.” If the financial statements prepared on an other comprehensive basis of accounting are not suitably titled or the basis of accounting is not adequately disclosed, the auditor should issue an appropriately modified report See footnote - 79 PSA 800 [Amended as a Result of PSA 700 (Revised)] Reports on a Component of Financial Statements 12 The auditor may be requested to express an opinion on one or more components of financial statements, for example, a single financial statement such as a balance sheet, accounts receivable, inventory, an employee’s bonus calculation or a provision for income taxes The component might be prepared to meet the financial information needs of specific users and have limited distribution, or may be intended to meet the information needs of a wide range of users and, therefore, prepared in accordance with the relevant requirements of an applicable financial reporting framework This type of engagement may be undertaken as a separate engagement or in conjunction with an audit of the entity’s financial statements (see Other Reporting Responsibilities in PSA 700 (Revised), “The Independent Auditor’s Report on a Complete Set of General Purpose Financial Statements”) However, this type of engagement does not result in a report on the financial statements taken as a whole and, accordingly, the auditor would express an opinion only as to whether the component audited is prepared, in all material respects, in accordance with the identified basis of accounting 13 Many financial statement items are interrelated, for example, sales and receivables, and inventory and payables Accordingly, when reporting on a component of financial statements, the auditor will sometimes be unable to consider the subject of the audit in isolation and will need to examine certain other financial information In determining the scope of the engagement, the auditor should consider those financial statement items that are interrelated and which could materially affect the information on which the audit opinion is to be expressed 14 The auditor should consider the concept of materiality in relation to the component of financial statements being reported upon For example, a particular account balance provides a smaller base against which to measure materiality compared with the financial statements taken as a whole Consequently, 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 - 80 PSA 800 [Amended as a Result of PSA 700 (Revised)] 15 The auditor’s report on a component of financial statements should include a statement that indicates the basis of accounting applicable financial reporting framework in accordance with which the component is presented or refers to an agreement that specifies the basis of accounting used The opinion should state whether the component is prepared, in all material respects, in accordance with the applicable financial reporting framework or identified basis of accounting Appendix 24 to this PSA gives examples of auditor’s reports on components of financial statements 16 When an adverse opinion or disclaimer of opinion on the entire financial statements has been expressed, the auditor should report on components of the financial statements only if those components are not so extensive as to constitute a major portion of the financial statements To otherwise may overshadow the report on the entire financial statements Reports on Compliance with Contractual Agreements 17 The auditor may be requested to report on an entity’s compliance with certain aspects of contractual agreements, such as bond indentures or loan agreements Such agreements ordinarily require the entity to comply with a variety of covenants involving such matters as payments of interest, maintenance of predetermined financial ratios, restriction of dividend payments and the use of the proceeds of sales of property 18 Engagements to express an opinion as to an entity’s compliance with contractual agreements should be undertaken only when the overall aspects of compliance relate to accounting and financial matters within the scope of the auditor’s professional competence However, when there are particular matters forming part of the engagement that are outside the auditor’s expertise, the auditor would consider using the work of an expert 19 The report should state whether, in the auditor’s opinion, the entity has complied with the particular provisions of the agreement Appendix 35 to this PSA gives examples of auditor’s reports on compliance given in a separate report and in a report accompanying financial statements See footnote See footnote - 81 PSA 800 [Amended as a Result of PSA 700 (Revised)] Reports on Summarized Financial Statements 20 An entity may prepare financial statements summarizing its annual audited financial statements for the purpose of informing user groups interested in the highlights only of the entity’s financial position and the results of its operations Unless the auditor has expressed an audit opinion on the financial statements from which the summarized financial statements were derived, the auditor should not report on summarized financial statements 21 Summarized financial statements are presented in considerably less detail than annual audited financial statements Therefore, such financial statements need to clearly indicate the summarized nature of the information and caution the reader that, for a better understanding of an entity’s financial position and the results of its operations, summarized financial statements are to be read in conjunction with the entity’s most recent audited financial statements which include all disclosures required by the relevant financial reporting framework 22 Summarized financial statements need to be appropriately titled to identify the audited financial statements from which they have been derived, for example, “Summarized Financial Information Prepared From the Audited Financial Statements for the Year Ended December 31, 19X1.” 23 Summarized financial statements not contain all the information required by the financial reporting framework used for the annual audited financial statements Consequently, wording such as “present fairly, in all material respects,” is not used by the auditor when expressing an opinion on summarized financial statements 24 The auditor’s report on summarized financial statements should include the following basic elements ordinarily in the following layout: (a) Title;6 (b) Addressee; (c) An identification of the audited financial statements from which the summarized financial statements were derived; (d) A reference to the date of the audit report on the unabridged financial statements and the type of opinion given in that report; See footnote - 82 PSA 800 [Amended as a Result of PSA 700 (Revised)] (e) An opinion as to whether the information in the summarized financial statements is consistent with the audited financial statements from which it was derived When the auditor has issued a modified opinion on the unabridged financial statements yet is satisfied with the presentation of the summarized financial statements, the auditor’s report should state that, although consistent with the unabridged financial statements, the summarized financial statements were derived from financial statements on which a modified auditor’s report was issued; (f) A statement, or reference to the note within the summarized financial statements, which indicates that for a better understanding of an entity’s financial performance and position and of the scope of the audit performed, the summarized financial statements should be read in conjunction with the unabridged financial statements and the auditor’s report thereon; (g) Date of the report; (h) Auditor’s address; and (i) Auditor’s signature Appendix 47 to this PSA gives examples of auditor’s reports on summarized financial statements Effective Date8 25 This PSA is effective for auditor’s reports dated on or after December 31, 2006 26 The current PSA 800 approved by the Auditing Standards and Practices Council in 2002 will be withdrawn in December 2006 when this amended PSA 800 becomes effective See footnote The original PSA did not have an effective date - 83 PSA 800 [Amended as a Result of PSA 700 (Revised)] Acknowledgment 27 This PSA is based on International Standard on Auditing (ISA) 800, “The Independent Auditor’s Report on Special Purpose Financial Engagements,” amended as a result of PSA 700 (Revised), issued by the International Auditing and Assurance Standards Board 28 There are no significant differences between this PSA 800 and ISA 800 - 84 - This PSA 700 (Revised) and the conforming amendments to PSA 200, PSA 210, PSA 701, PSA 560 and PSA 800 were unanimously approved for adoption in the Philippines on March 27, 2006 by the members of the Auditing and Assurance Standards Council: Benjamin R Punongbayan, Chairman Antonio P Acyatan, Vice Chairman Felicidad A Abad David L Balangue Eliseo A Fernandez Nestorio C Roraldo Joaquin P Tolentino Editha O Tuason Erwin Vincent G Alcala Manuel O Faustino Froilan G Ampil Juanito G Espino, Jr Roberto G Manabat ... based on our audit We conducted our audit in accordance with both the Philippine Standards on Auditing and the International Standards on Auditing, which standards on auditing are the same Those standards. .. Approval by the Auditing and Assurance Standards Council (AASC)∗ ∗ Formerly Auditing Standards and Practices Council (ASPC) 84 - 1PSA 700 (Revised) PHILIPPINE STANDARD ON AUDITING 700 (REVISED)... audit having been conducted in accordance with the International Standards on Auditing only when the auditor has complied fully with all of the International Standards on Auditing relevant to