25.2 The Auditor's Report: Opinions, KAM, EOM, and Comparatives

The Auditor's Report: Opinions, KAM, EOM, and Comparatives

The auditor's report communicates the result of the audit to shareholders, creditors, regulators, and the public. This section covers the structure of the unmodified report under PSA 700 (Revised), key audit matters under PSA 701, modified opinions under PSA 705 (Revised), emphasis of matter and other matter paragraphs under PSA 706 (Revised), and comparative and other information under PSA 710 and PSA 720.

---

1. Structure of the Standard Unmodified Auditor's Report (PSA 700 Revised)

Under PSA 700 (Revised), the independent auditor's report follows a strict sequential architecture designed to place the most critical information—the audit opinion—directly at the beginning of the report.

                     Standard Unmodified Auditor's Report Architecture
                                             │
                                     ┌───────┴───────┐
                                     │     Title     │  Must state "Independent Auditor's Report"
                                     └───────┬───────┘
                                             ▼
                                     ┌───────────────┐
                                     │   Addressee   │  Shareholders and/or Board of Directors
                                     └───────┬───────┘
                                             ▼
                                     ┌───────────────┐
                                     │Audit Opinion  │  PLACED FIRST: Identifies entity, statements,
                                     │  (PSA 700)    │  period; states "present fairly, in all material respects"
                                     └───────┬───────┘
                                             ▼
                                     ┌───────────────┐
                                     │   Basis for   │  States audit conducted under PSAs; refers to
                                     │    Opinion    │  auditor responsibilities; INDEPENDENCE statement
                                     └───────┬───────┘
                                             ▼
                                     ┌───────────────┐
                                     │ Going Concern │  Mandatory if material uncertainty exists (PSA 570)
                                     └───────┬───────┘
                                             ▼
                                     ┌───────────────┐
                                     │Key Audit Mat. │  MANDATORY FOR LISTED ENTITIES (PSA 701);
                                     │     (KAM)     │  matters of most significance communicated with TCWG
                                     └───────┬───────┘
                                             ▼
                                     ┌───────────────┐
                                     │Other Inform.  │  Auditor's responsibilities for annual report (PSA 720)
                                     └───────┬───────┘
                                             ▼
                                     ┌───────────────┐
                                     │Management Resp│  Responsibility for statements, controls, going concern
                                     └───────┬───────┘
                                             ▼
                                     ┌───────────────┐
                                     │Auditor's Resp │  Reasonable assurance, RMM, skepticism, group audits
                                     └───────┬───────┘
                                             ▼
                                     ┌───────────────┐
                                     │Other Reporting│  BIR RR 15-2010 supplementary taxes, SEC filings
                                     └───────┬───────┘
                                             ▼
                                     ┌───────────────┐
                                     │ Signatures &  │  Partner signature, CPA Lic., BOA, PTR, TIN, date
                                     │   Date/City   │  Date = date sufficient appropriate evidence obtained
                                     └───────────────┘

Mandatory Elements of the Unmodified Report

1. Title: Must clearly state "Independent Auditor's Report", distinguishing it from reports issued by internal auditors or non-CPAs.
2. Addressee: Addressed as required by the circumstances of the engagement (ordinarily to the Shareholders and/or the Board of Directors; it is never addressed to management).
3. Auditor's Opinion (Placed First):
   • Identifies the entity whose financial statements have been audited.
   • States that the financial statements have been audited, identifying the title of each statement (e.g., Statement of Financial Position, Statement of Comprehensive Income, Statement of Changes in Equity, Statement of Cash Flows, and Notes).
   • Specifies the date of, or period covered by, each financial statement.
   • Expresses the opinion: "In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of ABC Company as of December 31, 2026, and its financial performance and its cash flows for the year then ended in accordance with Philippine Financial Reporting Standards (PFRS)."
4. Basis for Opinion (Immediately Follows Opinion):
   • States that the audit was conducted in accordance with Philippine Standards on Auditing (PSAs).
   • Refers to the section of the report describing the auditor's responsibilities under PSAs.
   • Includes an explicit Independence Statement: confirms that the auditor is independent of the entity in accordance with the Code of Ethics for Professional Accountants in the Philippines together with the ethical requirements relevant to the audit.
   • States whether the auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the opinion.
5. Material Uncertainty Related to Going Concern: Included when required by PSA 570 (Revised) when an adequately disclosed material uncertainty exists.
6. Key Audit Matters (KAM): Communicated in accordance with PSA 701 (mandatory for listed entities).
7. Responsibilities of Management and Those Charged with Governance (TCWG):
   • Prepares and fairly presents financial statements in accordance with PFRS.
   • Designs, implements, and maintains internal control free from material misstatement.
   • Assesses the entity's ability to continue as a going concern.
   • Explicitly notes that Those Charged with Governance are responsible for overseeing the entity's financial reporting process.
8. Auditor's Responsibilities for the Audit of the Financial Statements:
   • States that objectives are to obtain reasonable assurance about whether financial statements are free from material misstatement, and to issue a report containing an opinion.
   • Explains that reasonable assurance is a high level of assurance, but not a guarantee that a material misstatement will always be detected.
   • Defines materiality.
   • Outlines that the auditor exercises professional judgment and maintains professional skepticism throughout the audit.
9. Other Reporting Responsibilities: If the auditor addresses other statutory reporting duties (such as reporting on supplementary tax information required under Bureau of Internal Revenue Revenue Regulations No. 15-2010), this is placed in a separate section subtitled "Report on Other Legal and Regulatory Requirements".
10. Auditor Signature and Accreditation Credentials: Under Philippine regulatory standards (BOA, PRC, and SEC Rule 68), the report must be signed with the CPA firm name and the individual engagement partner's name, accompanied by:
    • PRC CPA Certificate Number and License Validity.
    • Board of Accountancy (BOA) Accreditation Number and Expiration.
    • Tax Identification Number (TIN).
    • Professional Tax Receipt (PTR) Number, Date, and Issuing City.
    • SEC Accreditation Number (for public and secondary-licensed entities).
11. Auditor's Address & Date of the Report: Identifies the city/location of the audit office. The date of the auditor's report shall be no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the opinion, including evidence that all the statements and notes have been prepared and approved by authorized corporate officers.

---

2. Key Audit Matters (PSA 701)

Key Audit Matters (KAM) 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. KAM are selected from matters communicated with Those Charged with Governance (TCWG).

                           Key Audit Matters Selection Funnel
                                           │
                   Matters Communicated with Those Charged with Governance
                                           │
                                           ▼
                  Matters that Required Significant Auditor Attention
                  ├─ Areas of high assessed RMM or significant risks (PSA 315)
                  ├─ Significant auditor judgments on estimates with high uncertainty
                  └─ Effect of significant transactions or events during the period
                                           │
                                           ▼
                           KEY AUDIT MATTERS (PSA 701)
                    Matters of MOST SIGNIFICANCE in the Current Audit

Mandatory Applicability and Exclusions

• Where Mandatory: PSA 701 is mandatory for audits of complete sets of general purpose financial statements of listed entities (entities whose shares, stock, or debt are quoted or listed on a recognized stock exchange, such as the Philippine Stock Exchange [PSE]). It is also required when mandated by law/regulation or when the auditor decides to communicate KAM voluntarily.
• What KAM Communicates for Each Matter:
  1. Why the matter was considered to be one of most significance in the audit (the rationale).
  2. How the matter was addressed in the audit (a description of the substantive procedures performed).
  3. Reference to the related disclosures in the financial statements.
• Crucial Board Rules on KAM:
  • Not an Opinion Modification: Communicating KAM is not a substitute for modifying the opinion under PSA 705.
  • Not Separate Opinions: Communicating KAM does not provide a separate opinion on individual elements or accounts.
  • Not a Substitute for Going Concern: A matter giving rise to a material uncertainty regarding going concern is reported under the dedicated Going Concern section (PSA 570), not as a KAM.
  • PROHIBITION: The auditor shall not communicate Key Audit Matters when expressing a Disclaimer of Opinion on the financial statements, unless required by law.

---

3. Modifications to the Auditor's Opinion (PSA 705 Revised)

Under PSA 705 (Revised), the auditor modifies the audit opinion when:

1. The auditor concludes, based on the audit evidence obtained, that the financial statements as a whole are materially misstated (PFRS Departure); or
2. The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement (Scope Limitation).

The Concept of "Pervasive"

Pervasive effects on the financial statements are those that, in the auditor's professional judgment:

1. Are not confined to specific elements, accounts, or items of the financial statements;
2. If so confined, represent or could represent a substantial proportion of the financial statements; or
3. In relation to disclosures, are fundamental to users' understanding of the financial statements.

The Definitive Audit Opinion Decision Matrix (PSA 705)

                               Audit Opinion Decision Tree
                                            │
                        Are Misstatements / Scope Limitations Material?
                                            │
                     ┌──────────────────────┴──────────────────────┐
                     ▼                                             ▼
                    NO                                            YES
                     │                                             │
             UNMODIFIED OPINION                        Are the Effects Pervasive?
             (Standard Clean Report)                               │
                                                 ┌─────────────────┴─────────────────┐
                                                 ▼                                   ▼
                                                NO                                  YES
                                                 │                                   │
                                         QUALIFIED OPINION                   Determine Cause:
                                         ("Except for...")                  ┌───────┴───────┐
                                                                             ▼               ▼
                                                                        Misstatement   Scope Limitation
                                                                             │               │
                                                                      ADVERSE OPINION   DISCLAIMER OF
                                                                       ("Do not present    OPINION
                                                                           fairly")     ("No opinion")

Anatomy of Modified Audit Reports

• Opinion Heading: Changes to "Qualified Opinion", "Adverse Opinion", or "Disclaimer of Opinion".
• Basis Section: Changes to "Basis for Qualified Opinion", "Basis for Adverse Opinion", or "Basis for Disclaimer of Opinion", placed immediately following the opinion paragraph.
• Description of Matter: The basis section must quantify the financial effects of the misstatement on assets, liabilities, equity, and net income (if practicable). If not practicable, the auditor must explicitly state so.
• Disclaimer Modifications: When disclaiming an opinion, the auditor modifies the opening statement to "We were engaged to audit..." (rather than "We have audited..."), omits the description of the auditor's responsibilities, and omits the Key Audit Matters section.

---

4. Emphasis of Matter and Other Matter Paragraphs (PSA 706 Revised)

PSA 706 (Revised) provides mechanisms for the auditor to draw users' attention to critical financial information without modifying the audit opinion.

                          Emphasis of Matter vs Other Matter Paragraphs
                                                │
                       ┌────────────────────────┴────────────────────────┐
                       ▼                                                 ▼
           Emphasis of Matter (EOM)                            Other Matter (OM)
  ├─ Refers to matter PRESENTED OR DISCLOSED          ├─ Refers to matter OTHER THAN those
     IN THE FINANCIAL STATEMENTS.                        presented or disclosed in financial statements.
  ├─ Fundamental to users' understanding of           ├─ Relevant to users' understanding of the audit,
     the financial statements.                           auditor responsibilities, or audit report.
  ├─ Auditor obtained sufficient evidence that        ├─ Examples: Predecessor auditor audited prior year;
     matter is NOT materially misstated.                 unaudited comparative statements; restriction
  ├─ Opinion is NOT MODIFIED in respect of matter.       on distribution / special purpose reports.
  └─ Examples: Exceptional litigation uncertainty;    └─ Placed after Basis for Opinion or after KAM.
     early adoption of new PFRS; major catastrophe.

Emphasis of Matter (EOM) Paragraph

• Definition: A paragraph included in the auditor's report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's judgment, is of such importance that it is fundamental to users' understanding of the financial statements.
• Mandatory Requirements for Using an EOM:
  1. The auditor is not required to modify the opinion under PSA 705 as a result of the matter.
  2. The matter has not been determined to be a Key Audit Matter (KAM) under PSA 701.
• Placement and Phrasing: Placed immediately following the Basis for Opinion section (or after KAM). The paragraph must use the heading "Emphasis of Matter", refer directly to the specific note disclosure, and state explicitly: "Our opinion is not modified in respect of this matter."

Other Matter (OM) Paragraph

• Definition: A paragraph included in the auditor's report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor's judgment, is relevant to users' understanding of the audit, the auditor's responsibilities, or the auditor's report.
• Common Uses:
  • Reporting on comparative figures when prior period financial statements were audited by a predecessor auditor.
  • Indicating that prior period financial statements were un-audited.
  • Restricting the distribution or use of the auditor's report (e.g., reports prepared for a specific regulatory agency or lending bank).

---

5. Comparative Information (PSA 710)

Financial statements present information for prior periods in one of two ways, and the reporting differs:

Corresponding figures: key situations

• Prior-period opinion was modified and the matter is unresolved: the current opinion is also modified, and the Basis for Opinion paragraph refers to both the current figures and the corresponding figures (or only to the corresponding figures if the matter no longer affects the current figures).
• Material misstatement in prior-period statements that were unmodified: if the corresponding figures have not been properly restated or disclosed, the auditor expresses a qualified or adverse opinion on the current statements for the corresponding figures.
• Prior period audited by a predecessor auditor: the auditor may state in an Other Matter paragraph that the predecessor audited the prior period, the type of opinion expressed and, if modified, the reasons, and the date of that report.
• Prior period not audited: an Other Matter paragraph states that the corresponding figures are unaudited, but this does not relieve the auditor of obtaining evidence that opening balances are not materially misstated (PSA 510).

Comparative financial statements: if the auditor's updated opinion on the prior period differs from the opinion previously expressed, the substantive reasons are disclosed in an Other Matter paragraph.

Other information (PSA 720): the auditor reads the other information in the annual report (such as the chairman's message and management discussion) for material inconsistencies with the financial statements or the auditor's knowledge. The auditor reports on it in an Other Information section but expresses no opinion on it.