Audit reports in the Philippines

The Securities and Exchange Commission (SEC) defines an audit as an “Examination of the statements by an independent certified public accountant in accordance with Generally Accepted Auditing standards in the Philippines (GAAP) for the purpose of expressing an opinion whether the financial statements are presented fairly, in all material respects, in accordance with generally accepted accounting principles in the Philippines.”

They are essential processes for all kinds of businesses in the Philippines. These establishments, be they small upstart firms or worldwide conglomerates, can immensely benefit from having a competent public accountant perform a detailed analysis of all the transactions they’ve conducted thus far to see if their records and see if it is accurate to their actual profits while following the accounting principles mandated by Philippine law.

The Audit Report is defined by the SEC as a “document in which an independent certified public accountant indicates the scope of the audit which he has made and sets forth a clear written expression of his opinion regarding the financial statements taken as a whole, or an assertion to the effect that an overall opinion cannot be expressed. When an overall opinion cannot be expressed, the reason/s, therefore, shall be stated.”

The report showcases the findings of the accountant/auditor and the scope of their audit. It presents their opinion on the company’s financial statements and how they’ve reached their conclusions. It also determines if the company’s financial statements are accurate to its cash flow, financial performance, and financial position.

Four types of Audit Reports

The accountant/auditor’s goal with the audit report is to form their opinion based on their findings. These new perspectives can help determine if the company’s financial statements have avoided any errors or material misstatements that can make them non-compliant with Philippine law. Additionally, the opinion/perspective of the inspecting accountant/auditor will be the basis for what kind of audit report is received by the corporation.

1.) Unqualified Opinion/Unmodified Opinion

 The auditor/accountant shall declare an unmodified opinion if they conclude that all financial statements are prepared, and in all material respects in the audit report are following the applicable financial reporting framework.

Note that this opinion does not assure that no misstatements were found during the audit or that no misstatements were corrected at year-end. The lack of misstatements could indicate that an auditing agency could have already corrected them. It’s also possible that if there were misstatements, they were not material quantitively and qualitatively.  
In these kinds of audit reports, the auditor’s evaluation will take into consideration both the quantitative and qualitative materiality established based on the prescribed Commission on Audit’s (COA’s) guidelines.

Lastly, this opinion does not confirm if the audited agency fully complies with all the laws, rules, and regulations, or that the uses of funds on the agency’s programs, projects and activities are economical, effective, or efficient (does not provide absolute assurance).

2.)Qualified Opinion

A qualified opinion is given when an auditor/accountant is not able to provide an unqualified audit report for several reasons such as the company’s financial records not following the standards given by the GAAP or if the checker discovers material misstatements that can be isolated in one part of the financial statements. 

This means that the misstatements found do not severely affect the whole financial statement. The error is not too serious and can be rectified with minimal effort. An auditor shall declare a qualified opinion if:

• (a) They have gathered sufficient appropriate evidence and have determined the existence of misstatements, individually or in the aggregate, that are material, but not pervasive to the financial statements. Or;  
• (b) They are unable to collect enough appropriate audit evidence on which to base the opinion, however, this means the auditor determines the possible effects on the financial statements of undetected misstatements, if any are present, could be material but are not pervasive. 

3.) Disclaimer Opinion

The accountant/auditor will declare a Disclaimer opinion if:  

• (a) They cannot gather enough audit evidence to base their opinion, while also determining the potential effects of the undetected misstatements on the financial statements, if there are any, are potentially both material and pervasive.
• (b) in situations with highly rare instances where there are multiple uncertainties, they conclude that, notwithstanding having obtained sufficient appropriate audit evidence regarding each of the individual uncertainties, determines that it is not possible to form an opinion on the financial statements due to the potential interaction of the uncertainties and their overall effect on the entire financial statement.

In these cases, the auditor/accountant deems that they can’t provide concrete audit evidence and that it has a severe negative effect on the company’s financial statement. The checkers can also declare a disclaimer of opinion if they were not able to observe and review certain operation procedures practiced by the establishment. If they can’t be sure these practices are compliant with GAAP standards, they cannot give an opinion approving a company’s financial statement.

4.) Adverse Opinion

Auditors shall express an adverse opinion if when having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the entire financial statement. These errors are very serious and mean that there has been a severe gross misstatement and potentially Fraud committed during the completion of the company’s financial statements.

This can also be declared when reports done by the company is not in accordance with a compliance framework, and the financial statements submitted by the corporation have not been prepared, in all material respects, in accordance with said applicable financial reporting framework.  

A misstatement of this caliber reflects poorly on the establishment; it can show that the company did not take the necessary preparations to be compliant with GAAP financial statement standards. If an auditor/accountant gives an opinion like this, it means that the company’s financial statement will be rejected by all financial institutions or investors.

Companies should avoid incurring an opinion like this since it showcases the unreliability of the company’s financial statement and can even put the management of said company into question. Note that in the Philippines, corporations that are conducting their business through fraud are penalized with fines ranging from Two Hundred Thousand Pesos (PHP 200,000) to Two Million Pesos (PHP 2,000,000).

The individual responsible for forming a corporation through fraud or has assisted directly or indirectly is fined in a range starting from Two hundred thousand pesos (P200,000.00) to Two million pesos (P2,000,000.00). If the fraud proves to be injurious or detrimental to the public, the penalty increases from Four hundred thousand pesos (P400,000.00) to Five million pesos (P5,000,000.00).

When the violation of this provision is injurious or detrimental to the public, the penalty is a fine ranging from Four hundred thousand pesos (P400,000.00) to Five million pesos (P5,000,000.00).

The differences between Audit Report opinions

The COA of the Philippines states that the four types of audit reports in the Philippines, fall under two categories. They clarify that qualified opinion, adverse opinion, and Disclaimer opinion all fall under the “Modified opinion” category and are  issued when an auditor/accountant:

1. Concludes that, based on the audit evidence obtained, the financial statements are not free from material misstatement,
2. Is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements are free from material misstatement.

The COA then created a graphic table that showcases these differences in easy-to-understand terms:

The type of audit opinion received by your business is a good indication of your establishment’s efficiency, accuracy, and honesty. It can showcase unknown weaknesses in your procedures that may hinder your business or even lead to criminal offences like fraud or tax evasion.

We recommend following the standards provided by GAAP to ensure that you only receive the most glowing opinions regarding your financial statements. For more information on these standards, click HERE to get started.

The auditor shall express an unmodified opinion when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework

The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements