Philippine Standards on Auditing 260

Communication with those Charged with Governance

PSA 260 deals with the auditors responsibility to communicate with those charged with governance in relation to
an audit of financial statements. The objectives of the auditor are to:
o
o
o
o

Communicate with those charged with governance and responsibilities of the auditor in relation to the
financial statement audit, and an overview of the planned scope and timing of the audit;
Obtain from those charged with governance information relevant to the audit;
Provide those charged with governance with timely observations arising from the audit that are significant
and relevant to their responsibility to oversee the financial reporting process; and
Promote effective two-way communication between the auditor and those charged with governance.

The auditors responsibilities in relation to the financial statement audit:

o
o

The auditor is responsible for forming and expressing an opinion on the financial statements that have
been prepared by management with the oversight of those charged with governance; and
The audit of the financial statements does not relieve management or those charged with governance of
their responsibilities.

Significant findings from the audit:

o

o
o

The auditors view about significant qualitative aspects of the entitys accounting practices, including
accounting policies, accounting estimates and financial statement disclosures. When applicable, the
auditor shall explain to those charged with governance why the auditor considers a significant accounting
practice, that is acceptable financial reporting framework, not to be most appropriate to the particular
circumstances of the entity;
Significant difficulties, if any, encountered during the audit;
Unless all of those charged with governance are involved in managing the entity:
Material weaknesses, if any, in the design, implementation or operating effectiveness of internal
control that have come to the auditors attention have been communicated to management .
Significant matters, if any, arising from the audit that were discussed, or subject to
correspondence with management; and
Written representations the auditor is requesting.
Other matters, if any arising from the audit that, in the auditors professional judgement, are significant to
the oversight of the financial reporting process.

Effective two-way communication is important in assisting:

o

The auditor and those charged with governance in understanding matters related to the audit in the
context, and in developing a constructive working relationship. This relationship is developed while
maintaining the auditors independence and objectivity;
The auditor in obtaining from those charged with governance information relevant to the audit. For
example, those charged with governance may assist the auditor in understanding the entity and its
environment, in identifying appropriate sources of audit evidence, and in providing information about
specific transactions or events; and
Those charged with governance in fulfilling their responsibility to oversee the financial reporting process,
thereby reducing the risks of material misstatement of financial statements.

The auditor shall communicate in writing with those charged with governance regarding significant findings from
the audit when, in the auditors professional judgement, oral communication would not be adequate. Written
communications need not include all matters that arose during the course of the audit; it may also include an
engagement letter that is provided to those charged with governance.
Documentation of oral communication may include a copy of minutes prepared by the entity retained as part of
the audit documentation where those minutes are in appropriate record of the communication.

Philippine Standards on Accounting 700

Forming an Opinion and Reporting on Financial Statements
PSA 700 deals with the auditors responsibility to form an opinion on the financial statements. It also deals with
the form and content of the auditors report issued as a result of an audit of financial statements. It promotes
consistency in the audit report. Consistency in the auditors 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 have been conducted in accordance with globally recognized standards. It also helps to promote the
users understanding and to identify unusual circumstances when they occur.
The objectives of the auditor are to form an opinion on the financial statements based on the evaluation of the
audit evidence obtained, including evidence obtained about comparative financial statements or comparative
financial information, and to express clearly that opinion on the financial statements through a written report that
also describes the basis for that opinion.
Form of Opinion. The standard explains when and how the auditor should express his or her opinion on the
financial statements, specifically:
o
o

Unmodified Opinion is expressed when the auditor concludes that the financial statements are
presented fairly, in all material respects, in accordance with the applicable financial reporting framework.
Modified Opinion is expressed when in the auditors report, in accordance with PSA 705, the auditor:
Concludes that, based on the audit evidence obtained, the financial statements as a
whole are materially misstated; or
Is unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatements.

If the auditor concludes that the financial statements do not achieve fair presentation, he or she should discuss
the matter with management and, depending on how the matter is resolves, should determine whether it is
necessary to modify the opinion in the auditors report in accordance with PSA 705.
Form of Auditors Report for Audits Conducted in Accordance with PSA
Title. Includes the word independent to clearly indicate that it is the report of an independent auditor.
Addressee. Addressed as required by the circumstances of the engagement (to the engaging person or body).
Introductory Paragraph. This should identify the entity whose financial statements have been audited, state that
the financial statements have been audited, identify the title of each statement that the financial statements
comprise, and specify the date or period covered by each financial statement that the financial statements
comprise.
Managements responsibility for the financial statements. Describes managements responsibility for the
preparation and fair presentation of the financial statements, including: a) an explanation that management is
responsible for the preparation and fair presentation of the financial statements in accordance with the applicable
financial reporting framework; b) the design, implementation, and maintenance of internal control relevant to the
preparation and fair presentation of financial statements that are free from material misstatements, whether due to
fraud or error.
Internal Control. If the auditor also has a responsibility to express an opinion on the effectiveness of internal
control in conjunction with the audit of the financial statements, he or she should omit the phrase concerning
internal control above that the auditors consideration of internal control is not for the purpose of expressing an
opinion on the effectiveness of internal control, and accordingly, no such opinion is expressed.
Sufficient audit evidence. The auditors report should state whether the auditor has obtained is sufficient and
appropriate to provide a basis for the auditors opinion.
Philippine Standards on Accounting 530

Audit Sampling
PSA 530 defines audit sampling as the application of an audit procedure to less than 100% of the items within
an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or
class. Test controls, accounts receivable confirmations, inventory observations, pricing and clerical tests, vouching
fixed assets and expense account balances, and test purchases and sales cut-offs are few examples of
procedures in which sampling applications may occur.
It provides guidance relating to the auditors judgement about establishing tolerable misstatement (similar to
performance materiality) for specific audit procedures and on the application of sampling to test of controls. It
directs auditors to use tolerable misstatements calculated at the account classification level (rather than at the
financial statement level) when calculating sample sizes.
Deciding to Sample or Not to Sample. A sampling population is the recorded population (account balance, class
of transaction, units, etc.) minus the aggregate sum of the amounts of individually significant items. The sampling
requirements in the clarified auditing standards are applicable when sampling populations are material and other
analytical and tests of balances procedures are not used to satisfy audit objectives. Material sampling populations
are normally those in excess of the lower limit of individually significant items at the assertion level, or the account
classification level for smaller audits.
Some of these factors and their impact on the determination of individually significant items are:

Risk of material misstatement at the financial statement level. High risk will lower tolerable
misstatement and cause more items to be considered individually significant items. Low risk will result in
fewer individually significant items.
Risk of material misstatement at the financial statement classification/assertion level. High risk in
the financial statement classifications will result in lower tolerable misstatement and more individually
significant items; low risk will produce the opposite.
Tolerable misstatement (performance materiality) levels. Lower levels of tolerable misstatement for
financial statement classifications will produce more individually significant items (i.e., a greater
percentage of a classification would be subjected to auditing procedures). Higher levels of tolerable
misstatement will permit lesser coverage of account balances.

Planning a Strategy Not to Sample. Because sampling applications may take more time than performing nonsampling procedures, some auditors are planning strategies not to sample on smaller engagements other than
certain audits of regulated industries or governments that require some form of sampling. For some recorded
populations, instead of sampling, it may be more cost-effective to audit individually significant items comprising a
significant portion of the recorded population.
Auditors will usually audit lesser amounts of inventories than of receivables or fixed assets because of the relative
cost of obtaining evidence. In doing so, less evidence is obtained supporting the opinion on the financial
statements taken as a whole, which may cause evidence requirements for other account classifications to be
greater. This subjective consideration will also affect decisions about the necessary audit coverage of the other
account classifications.
Planning Non-sampling Applications. When a strategy not to sample is planned, certain sampling populations
may be greater than the lower limit for individually significant items. Depending on the number and characteristics
of the units in the sampling population, and on the percentage of the recorded population audited by other nonsampling procedures, it may be appropriate to select a limited number of units from the sampling population for
additional non-sampling procedures similar to those performed for individually significant items.