PHILIPPINE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS 61st ANNUAL NATIONAL CONVENTION

THE NEW AND REVISED STANDARDS FOR AUDIT REPORTING

Iloilo City May 23 26, 2007

THE NEW AND REVISED STANDARDS FOR AUDIT REPORTING

PSA 700 (Revised) Independent Auditors

Report on a Complete Set of General Purpose Financial Statement

PSA 701, Amended as a Result of PSA 700 (Revised) Modifications to the Independent
Auditors Report

PSA 800, Amended as a Result of PSA 700 (Revised) The Independent Auditors 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 auditors report for an emphasis of matter, a qualified opinion, a disclaimer of opinion or an adverse opinion.

Differences of these Standards (continued)

PSA 800 establishes standards on the form and content of the auditors 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.

Auditors 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 auditors report should contain a clear expression of the auditors opinion on the financial statements

PSA 700 (Revised)

Establishes standards & provides guidance on the independent auditors 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

PSA 700 (Revised) New Wording for the Independent Auditors Report
- Required for auditors reports dated on or after

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..December 31, 2006 - Includes five paragraphs - Paragraphs are clearly identified - Clearer distinction between managements responsibilities and auditors responsibilities
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Auditors Report Old Wordings First 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.

Auditors Report Old Wordings Second 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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Auditors Report Old Wordings Third 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 Auditors Report

- Title - Addressee - Introductory paragraph - Managements responsibility for the financial statements - Auditors responsibility - Auditors Opinion - Other reporting responsibilities - Auditors signature - Date of auditors report - Auditors address
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Elements of the New Auditors 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 auditors report from reports issued by others Example: Independent Auditors Report
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Elements of the New Auditors 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 Stockholders ABC Company

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Introductory Paragraph
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.

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Managements 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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Auditors 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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Auditors Responsibility Continued.. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors 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 entitys 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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Auditors Responsibility Continued.. opinion on the effectiveness of the entitys 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
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).
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Elements of the New Auditors Report Other Reporting Responsibilities Additional responsibilities to report on matter that are supplementary to the auditors responsibility to express an opinion on the FS Should be addressed in a separate section following the opinion paragraph.

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Sample of a Report on Other Legal and Regulatory Requirements

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 material respects in relation to the basic financial statements taken as a whole.
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Auditors Signature
PUNONGBAYAN & ARAULLO

By:

Lilian S. Linsangan Partner CPA Reg. No. 0046660 TIN 109-228-234 PTR No. 0267683, January 2, 2007, Makati City SEC Accreditation No. 0008-AR-1 BIR AN 08-002511-3-2005 (Dec. 27, 2005 to 2008)

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Elements of the New Auditors Report

Date of the Auditors 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 entitys 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 Auditors Report

Auditors Address The auditors 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 Auditors Report Situations that Require Modification:
Matters that DO NOT Affect the Auditors Opinion: Emphasis of matter Matters that DO affect the Auditors 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 auditors opinion, should clearly indicate that the auditors 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 users 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 Matter
Without 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 Auditors Report

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

There is a limitation on the scope of the auditors 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 Auditors 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 entity
The 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 circumstance

The timing of the auditors appointment is such that he is unable to observe the conduct of the physical count of inventories The entitys 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 Opinion
We did not observe the counting of the physical inventories as of December 31, 2006, since that date was prior to the time we were initially engaged as auditors for the Company. Owing to the nature of the Companys records, we were unable to satisfy ourselves as to inventory quantities by other audit procedures.

Qualified Opinion
In 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 Opinion
The Companys management restricted us from observing the counting of inventories and sending out requests for confirmation of receivables to customers. The Companys 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 of inventories and accounts receivables.

Disclaimer of Opinion
Because 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 Opinion

The companys inventories are recognized in the balance sheet at P16 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 Opinion
In 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 Opinion
As discussed in Note x to the financial statements, ABC Companys 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, we believe 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 Companys 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 Auditors Report on Special 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 FS
Single FS Specified accounts Elements of accounts Items 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 audited A statement of the responsibility of the entitys 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 practices A description of the work the auditor performed

Opinion paragraph containing an expression of opinion on the financial information Date of the report Auditors address Auditors 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 title 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.

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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 entitys 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 entitys 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 auditors professional competence or consider the use of an expert. Report should state whether, in the auditors 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 entitys 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 entitys financial position and results of operations, summarized information should be read in conjunction with the entitys 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 derived Example: 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 entitys 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 auditors report thereon Date of the report Auditors address Auditors signature

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** End **

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