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PHILIPPINE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS 61 st ANNUAL NATIONAL CONVENTION THE NEW AND REVISED STANDARDS FOR AUDIT REPORTING Iloilo City May 23 – 26, 2007 2 THE NEW AND REVISED STANDARDS FOR AUDIT REPORTING PSA 700 (Revised) – Independent Auditor’s Report on a Complete Set of General Purpose Financial Statement PSA 701, Amended as a Result of PSA 700 (Revised) – Modifications to the Independent Auditor’s Report PSA 800, Amended as a Result of PSA 700 (Revised) – The Independent Auditor’s Report on Special Purpose Audit Engagements

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PHILIPPINE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

61st ANNUAL NATIONAL CONVENTION

THE NEW AND REVISED STANDARDS FOR AUDIT REPORTING

Iloilo CityMay 23 – 26, 2007

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THE NEW AND REVISED STANDARDSFOR AUDIT REPORTING

• PSA 700 (Revised) – Independent Auditor’s Report on a Complete Set of General Purpose Financial Statement

• PSA 701, Amended as a Result of PSA 700 (Revised) – Modifications to the Independent Auditor’s Report

• PSA 800, Amended as a Result of PSA 700 (Revised) – The Independent Auditor’s Report on Special Purpose Audit Engagements

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Coverage of these Standards

PSA 700 – addresses circumstances when the auditor is able to express an unqualified opinion and no modification to the auditors report is necessary

PSA 701 – provides guidance on the modifications to the unqualified auditor’s report for an emphasis of matter, a qualified opinion, a disclaimer of opinion or anadverse opinion.

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Differences of these Standards (continued)

PSA 800 – establishes standards on the form and content of the auditor’s report issued as a result of an audit of:

• a complete set of financial statements prepared in accordance with another comprehensive basis of accounting;

• A component of a complete set of general purpose or special purpose financial statements, such as single financial statements, specified accounts, elements of accounts, or items in a financial statement;

• Compliance with contractual agreements; and• Summarized financial statements.

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Auditor’s Report in General

PSA 200 – the objective of an audit of financial statements is to enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

Hence:An auditor’s report should contain a clear expression of the auditor’s opinion on the financial statements

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PSA 700 (Revised)

• Establishes standards & provides 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 a fair presentation.

• Provides guidance on the matters the auditor considers in forming an opinion on those financial statements

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PSA 700 (Revised)

New Wording for the Independent Auditor’s Report- Required for auditor’s reports dated on or after .. …..December 31, 2006

- Includes five paragraphs

- Paragraphs are clearly identified

- Clearer distinction between management’s responsibilities and auditor’s responsibilities

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Auditor’s Report – Old WordingsFirst Paragraph

We have audited the accompanying balance sheets of ABC Company as of December 31, 20CY and 20LY, and the related statements of income, changes in equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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Auditor’s Report – Old WordingsSecond Paragraph

We conducted our audits in accordance with generally accepted auditing standards in the Philippines. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

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Auditor’s Report – Old WordingsThird Paragraph (Opinion Paragraph)

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 20CY and 20LY, and the results of its operations and its cash flows for the years then ended in accordance with Philippine Financial Reporting Standards (generally accepted accounting principles in the Philippines).

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Elements of the New Auditor’s Report

- Title

- Addressee

- Introductory paragraph

- Management’s responsibility for the financial statements

- Auditor’s responsibility

- Auditor’s Opinion

- Other reporting responsibilities

- Auditor’s signature

- Date of auditor’s report

- Auditor’s address

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Elements of the New Auditor’s Report

Title –• should clearly indicate that it is the report of an

independent auditor• Affirms that the auditor has met all the ethical

requirements regarding independence• Distinguishes the independent auditor’s report

from reports issued by othersExample: Independent Auditor’s Report

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Elements of the New Auditor’s Report

Addressee• should be as required by the circumstances of the

engagement• For general purpose FS, to those for whom the report is

prepared – shareholders or to those charged with governance of the entity whose financial statements are being audited.

Example: The Board of Directors and StockholdersABC Company

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We have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as at December 31, 20CY, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Introductory Paragraph

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Management’s Responsibility for the Financial Statements

Management Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

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Auditor’s Responsibility

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

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Auditor’s ResponsibilityContinued..

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an

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Auditor’s ResponsibilityContinued..

opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

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Opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position of ABC Company as of December 31, 2006, and of its financial performance and its cash flows for the year then ended in accordance with Philippine Financial Reporting Standards (or International Financial Reporting Standards or International Public Sector Accounting Standards or accounting principles generally accepted in Country X).

Opinion

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Elements of the New Auditor’s Report

Other Reporting Responsibilities• Additional responsibilities to report on matter

that are supplementary to the auditor’s responsibility to express an opinion on the FS

• Should be addressed in a separate section following the opinion paragraph.

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Report on Other Legal and Regulatory Requirements

Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The applicable supplementary Schedules A to I (see table of contents) of the Company as at December 31, 2006 and for the year then ended, required by the Securities and Exchange Commission, are presented for purposes of additional analysis and are not a required part of the basic financial statements. The information in such supplementary schedules 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 materialrespects in relation to the basic financial statements taken as a whole.

Sample of a Report on Other Legal andRegulatory Requirements

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Auditor’s Signature

PUNONGBAYAN & ARAULLO

By: Lilian S. LinsanganPartnerCPA Reg. No. 0046660TIN 109-228-234PTR No. 0267683, January 2, 2007, Makati CitySEC Accreditation No. 0008-AR-1BIR AN 08-002511-3-2005 (Dec. 27, 2005 to 2008)

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Elements of the New Auditor’s Report

Date of the Auditor’s Report• No earlier that the date on which the auditor has

obtained sufficient appropriate audit evidence on which to base the opinion on the FS

• Sufficient appropriate audit evidence should include evidence that the entity’s complete set of FS has been prepared and that those with the recognized authority have asserted that they have taken responsibility for the FS.

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Elements of the New Auditor’s Report

Auditor’s Address

• The auditor’s report should include the name of the location in the country where the auditor practices.

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PSA 701 - Modifications to the Independent Auditor’s Report

Situations that Require Modification:• Matters that DO NOT Affect the Auditor’s Opinion:

Emphasis of matter

• Matters that DO affect the Auditor’s Opinion:

Qualified opinion

Disclaimer of opinion

Adverse opinion

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Emphasis of matter

• To highlight a matter affecting the FS which is included in a note to the FS that more extensively discusses the matter

• Does not affect the auditor’s opinion, should clearly indicate that the auditor’s opinion is not qualified in this respect.

• Preferably be included after the paragraph containing the opinion but before the section on any other reporting responsibilities, if any.

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Emphasis of matter

• Of fundamental importance to the user’s understanding of the FS

• The matter is unusual (infrequent; not in the ordinary course of business)

Example:• Going concern problem• Significant uncertainty (other than going concern

problem), the resolution of which is dependent upon future events and which may affect the financial statements

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Emphasis of matter - Example

Emphasis of a MatterWithout qualifying our opinion, we draw attention to Note x to the financial statements. The Company is the defendant in a lawsuit alleging infringement of certain patent rights and claiming royalties and punitive damages. The Company has filed a counter action, and preliminary hearings and discovery proceedings on both actions are in progress. The ultimate outcome of the matter cannot presently be determined, and no provision for any liability that may result has been made in the financial statements.

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Modifications in the Auditor’s Report

Circumstances when an Auditor may not be able to Express an Unqualified Opinion (if in the auditor’s judgment, the effect of the matter is or may be material to the FS):

• There is a limitation on the scope of the auditor’s work (qualified or disclaimer);

• There is a disagreement with management regarding the acceptability of the accounting policies selected, the method of their application or the adequacy of financial statement disclosures (qualified or adverse)

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Modifications in the Auditor’s Report

• A clear description of all the substantive reasons should be included in the report

• A quantification of the possible effect(s) on the FS, unless impracticable

• Set out in a separate paragraph (captioned as ‘Basis for Qualified [or Adverse or Disclaimer of] Opinion’ ) preceding the opinion or disclaimer of opinion on the FS and may include a reference to a more extensive discussion, if any, in a note to the FS

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Qualified opinion

• Unqualified opinion can not be expressed but the effect of any disagreement with management or limitation in scope is not so material and pervasive to require an adverse opinion or a disclaimer of opinion

• Expressed as being “except for” the effects of the matter to which the qualification relates

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Adverse Opinion

• Expressed when the effect of a disagreement is so material and pervasive to the FS that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the FS.

• Expressed as “do not present fairly, in all material respects . . . .”

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Disclaimer of Opinion

• Expressed when the possible effect of a limitation in scope is so 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 FS.

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Limitation in Scope

• May be imposed by an entityThe terms of the engagement specify that the auditor will not carry out an audit procedure that the auditor believes is necessary (i.e., confirmation of receivables)

• May be imposed by circumstanceThe timing of the auditor’s appointment is such that he is unable to observe the conduct of the physical count of inventoriesThe entity’s accounting records are inadequate or when the auditor is unable to carry out an audit procedure believed to be desirable

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Limitation in Scope - Qualified opinion

Basis of Qualified OpinionWe did not observe the counting of the physical inventories as of December 31, 2006, since that date was prior to the time we wereinitially engaged as auditors for the Company. Owing to the nature of the Company’s records, we were unable to satisfy ourselves as to inventory quantities by other audit procedures.Qualified OpinionIn our opinion, except for the effects of such adjustments, if ay, as might have been determined to be necessary had we been able to satisfy ourselves as to physical inventory quantities, the financial statements present fairly, in material respects. . . . .

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Limitation in Scope – Disclaimer of Opinion

Basis for Disclaimer of OpinionThe Company’s management restricted us from observing the counting of inventories and sending out requests for confirmation of receivables to customers. The Company’s records did not permit the application of alternative auditing procedures regarding inventories and accounts receivables. Consequently, we were unable top obtain audit evidences we considered necessary to satisfy ourselves as to the existence ofinventories and accounts receivables.Disclaimer of OpinionBecause of the significance of the matters described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide as basis for an opinion. Accordingly we do not express an opinion on the financial statements.

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Disagreement with Management –Qualified Opinion

Basis for Qualified OpinionThe company’s inventories are recognized in the balance sheet atP16 million. Based on the audit evidence obtained, we believe that an adjustment to inventories of P5 million is required to recognize slow-moving items at their net realizable value. The tax effect of this adjustment is P1.5 million. Accordingly, we believe that shareholders’ equity and profit for the year are both overstated by P3.5 million.

Qualified OpinionIn our opinion, except for the effects of the matters described in the Basis for Qualified Opinion paragraph, the financial statements present fairly, in all material respects . . . .

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Disagreement with Management –Adverse Opinion

Basis for Adverse of OpinionAs discussed in Note x to the financial statements, ABC Company’s financing arrangements expired and the amount outstanding was payable on December 31, 20x1. The Company has been unable to re-negotiate or obtain replacement financing and is considering filing for bankruptcy. Based on the audit evidence obtained, webelieve that the Company will not be able to meet its obligations in the ordinary course of business. Accordingly, we do not agree with managements presentation of the financial statements on a going concern basis. Had the financial statements been prepared on a liquidation basis of accounting, we believe that it would have had a significant negative effect on the Company’s financial statements position and financial performance.

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Disagreement with Management –Adverse Opinion

Adverse Opinion

In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion paragraph, the financial statements do not present fairly, in all material respects the financial position of ABC Company as of December 31, 20X1, and of its financial performance and its cash flows for the year then ended in accordance with Philippine Financial Reporting Standards.

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PSA 800 – The Independent Auditor’s Report onSpecial Purpose Audit Engagement

Special Purpose Audit Engagements:• A complete set of FS prepared in accordance with

another comprehensive basis of accounting• A component of a complete set of general purpose or

special purpose FSSingle FSSpecified accountsElements of accountsItems in a financial statements

• Compliance with contractual agreement• Summarized FS

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PSA 800 – General Considerations

• 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.

• The auditor may wish to indicate the purpose for which the report is being prepared and any restriction on its distribution and use, to avoid the possibility of it being used for purposes for which it is not intended.

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Basic Elements Layout (except for a report on summarized FS)

• Title• Addressee• Opening or Introductory paragraph

Identification of the financial information auditedA statement of the responsibility of the entity’s management ad the responsibility of the auditor

• A scope paragraph (describing the nature of the audit)The reference to the PSA applicable to special purpose audit engagements or relevant national standards or practicesA description of the work the auditor performed

• Opinion paragraph containing an expression of opinion on the financial information

• Date of the report• Auditor’s address• Auditor’s signature

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Basic Elements Layout (except for a report on summarized FS)

• When the information is based on the provisions of an agreement, the auditor needs to consider whether any significant interpretations of the agreement have bee made by management in preparing the information.

It may be appropriate to use the term “Independent Auditor” in the titleThe auditor should consider whether any significant interpretations of an agreement on which the financial information is based are clearly disclosed in the financial information.

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Reports on Financial Information Prepared in Accordance with an Other Comprehensive Basis of Accounting

Examples:

• The tax basis of accounting for a set of financial statements that accompany an entity’s 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,

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Reports on Financial Information Prepared in Accordance with an Other Comprehensive Basis of Accounting

• Should include a statement that indicates the basis of accounting used or refer to a note to the FS that indicates such information

• The opinion should indicate whether the FS are prepared, in all material respects, in accordance with the identified basis for accounting

• The auditor should consider whether the title of, or a note to the FS makes it clear that such statements are not prepared in accordance with PFRS or generally accepted accounting principles

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Report on a Component of FS

• May be undertaken as a separate engagement or in conjunction with an audit of the entity’s FS..

• The auditor should consider those FS items that are interrelated and which could materially affect the information on which the audit opinion is to be expressed.

• The auditor should consider the concept of materiality in relation to the component of FS being reported upon.

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Report on a Component of FS

• Report should include a statement that indicates the basis of accounting used and whether the component is prepared, in all material respects, in accordance with the applicable financial reporting framework or basis of accounting.

• When an adverse opinion or disclaimer of opinion on the entire FS has been expressed, the auditor should report on component of the FS only if those components are not so extensive as to constitute a major portion of the FS. To do otherwise, may overshadow the report on the entire FS.

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Report on Compliance with Contractual Agreements

• Should be undertaken only when the overall aspects of the compliance relate to accounting and financial matters within the scope of the auditor’s professional competence or consider the use of an expert.

• Report should state whether, in the auditor’s opinion, the entity has complied with the particular provisions of the agreement.

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Reports on Summarized FS

• Prepared for the purpose of informing user groups interested in the highlights only of the entity’s financial position and results of operations

• Unless the auditor has expressed an opinion on the FS from which the summarized FS was derived, the auditor should not report on the summarized FS.

• Should clearly indicate the summarized nature of the information and caution the reader that, for better understanding of the entity’s financial position and results of operations, summarized information should be read in conjunction with the entity’s most recent audited FS

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Reports on Summarized FS

• Should be appropriately titled to identify the audited FS from which they have been derivedExample: “Summarized Financial Information Prepared from the Audited Financial Statements for the Year Ended December 31, 20CY”

• Do not contain all the information required by the financial reporting framework used for audited FS, hence, wording such as “present fairly, in all material respects” is not used.

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Reports on Summarized FS – Basic Elements

• Title• Addressee• An identification of the audited FS from which the

summarized FS is prepared• A reference to the date of the audit report on the

unabridged FS and the type of opinion given in that report

• An opinion as to whether the information in the summarized FS is consistent with the audited FS from which it is derived

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Reports on Summarized FS – Basic Elements (continued)

• A statement or reference to the note within the summarized FS which indicates that for a better understanding of the entity’s financial performance and position and the scope of the audit performed, the summarized FS should be read in conjunction with the unabridged FS and the auditor’s report thereon

• Date of the report• Auditor’s address• Auditor’s signature

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** End **