The scope of this Philippine Standard on Auditing (PSA) addresses the auditor's duty to

issue an appropriate report when the auditor determines that a change to the auditor's opinion
on the financial statements is required after forming an opinion in compliance with PSA 700
(Redrafted).

So there are three (3) types of modified opinions these are; a qualified opinion, an
adverse opinion, and a disclaimer of opinion. The type of modified opinion that is appropriate is
determined by the following:

(a) The nature of the matter giving rise to the modification, that is, whether the financial
statements are materially misstated or, in the case of an inability to obtain sufficient
appropriate audit evidence, may be materially misstated; and

(b) The auditor’s judgment about the pervasiveness of the effects or possible effects of the
matter on the financial statements.

The effective date of this PSA for audits of financial statements for periods beginning on
or after December 15, 2009.

The objective of the auditor is to express clearly an appropriately modified opinion on

the financial statements that are necessary when:

(a) The auditor concludes, based on the audit evidence obtained, that the financial statements
as a whole are not free from material misstatement; or

(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the
financial statements as a whole are free from material misstatement.

For the purpose of the PSAs, there are following terms with its meaning:

(a) Pervasive – A term used, in the context of misstatements, to describe the effects on the
financial statements of misstatements or the possible effects on the financial statements of
misstatements, if any, that are undetected due to an inability to obtain sufficient appropriate
audit evidence.

(b) Modified opinion – A qualified opinion, an adverse opinion or a disclaimer of opinion.

There are circumstances when a modification to the auditor’s opinion is required. The
auditor shall modify the opinion in the auditor’s report when; First, the auditor concludes that,
based on the audit evidence obtained, the financial statements as a whole are not free from
material misstatement; or second, The auditor is unable to obtain sufficient appropriate audit
evidence to conclude that the financial statements as a whole are free from material
misstatement.
 In determining the type of modification to the auditor’s opinion, there are three (3)
types for this;

Qualified Opinion—wherein the auditor shall express a qualified opinion when:

(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are material, but not pervasive, to the financial
statements; or

(b) The auditor is unable to obtain sufficient appropriate audit evidence on which to
base the opinion, but the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be material but not pervasive.

Adverse Opinion—wherein 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.

Disclaimer of Opinion—wherein the auditor shall disclaim an opinion when the auditor
is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the
auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive.

Consequence of an inability to obtain sufficient appropriate audit evidence due to a

management-imposed limitation after the auditor has accepted the engagement.

First, if after accepting the engagement, the auditor becomes aware that management
has imposed a limitation on the scope of the audit that the auditor considers likely to result in
the need to express a qualified opinion or to disclaim an opinion on the financial statements,
the auditor shall request that management remove the limitation. Second, if management
refuses to remove the limitation referred to in paragraph 11, the auditor shall communicate the
matter to those charged with governance and determine whether it is possible to perform
alternative procedures to obtain sufficient appropriate audit evidence. Third, if the auditor is
unable to obtain sufficient appropriate audit evidence, the auditor shall determine the
implications as follows: (a) If the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be material but not pervasive, the
auditor shall qualify the opinion; or (b) If the auditor concludes that the possible effects on the
financial statements of undetected misstatements, if any, could be both material and pervasive
so that a qualification of the opinion would be inadequate to communicate the gravity of the
situation, the auditor shall; (i) Resign from the audit, where practicable and not prohibited by
law or regulation; or (ii) If resignation from the audit before issuing the auditor’s report is not
practicable or possible, disclaim an opinion on the financial statements. Lastly, if the auditor
resigns as contemplated by paragraph 13(b)(i), before resigning, the auditor shall communicate
to those charged with governance any matters regarding misstatements identified during the
audit that would have given rise to a modification of the opinion.

Other considerations relating to an adverse opinion or disclaimer of opinion, when the

auditor feels it is appropriate to express a negative opinion or disclaimer. The auditor's report
shall not express an opinion on the financial statements as a whole, often include an
unmodified opinion on the same financial reporting system on a single financial statement or
one or more separate financial statement elements, accounts, or items.

There is a form and content of the auditor’s report when the opinion is modified.

Basis for Modification Paragraph. When the auditor modifies the opinion on the
financial statements, the auditor must include a paragraph in the auditor's report that describes
the matter that caused the change, in addition to the basic elements required by PSA 700
(Redrafted). This paragraph should appear immediately before the opinion paragraph in the
auditor's report, with the heading “Basis for Qualified Opinion,” “Basis for Adverse Opinion,” or
“Basis for Disclaimer of Opinion,” as appropriate.

If the financial statements contain a material misstatement due to the failure to disclose
information that is needed to be reported, the auditor must: (a) Discuss the non-disclosure with
those charged with governance; (b) Describe in the basis for modification paragraph the nature
of the omitted information; and (c) Unless prohibited by law or regulation, include the omitted
disclosures, provided it is practicable to do so and the auditor has obtained sufficient approp
riate audit evidence about the omitted information.

Opinion Paragraph. When the auditor modifies the audit opinion, the auditor shall use
the heading “Qualified Opinion,” “Adverse Opinion,” or “Disclaimer of Opinion,” as appropriate,
for the opinion paragraph.

When the auditor expresses a qualified opinion in response to a material misstatement

in the financial statements, the auditor must state in the opinion paragraph that, in the
auditor's opinion, except for the effects of the matter(s) described in the Basis for the Qualified
Opinion, except for the effects of the matter(s) described in the Basis for the Qualified Opinion,
except for the effects of the matter(s) described in the Basis for the Qualified Opinion, except
for the effects of the Paragraph on Qualified Opinion.

(a) The financial statements present fairly, in all material respects in accordance with
the applicable financial reporting framework when reporting in accordance with a fair
presentation framework; or
 (b) The financial statements have been prepared, in all material respects, in accordance
with the applicable financial framework when reporting in accordance with a compliance
framework.

When the auditor expresses an adverse opinion, the auditor shall state in the opinion
paragraph that, in the auditor’s opinion, because of the significance of the matter(s) described
in the Basis for Adverse Opinion paragraph:

(a) The financial statements do not present fairly in accordance with the applicable
financial reporting framework when reporting in accordance with a fair presentation
framework; or

(b) The financial statements have not been prepared, in all material respects, in
accordance with the applicable financial reporting framework when reporting in accordance
with a compliance framework

When the auditor disclaims an opinion due to an inability to obtain sufficient

appropriate audit evidence, the auditor shall state in the opinion paragraph that:

(a) because of the significance of the matter(s) described in the Basis for Disclaimer of
Opinion paragraph, the auditor has not been able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion; and, accordingly,

(b) the auditor does not express an opinion on the financial statements.

Description of auditor’s responsibility when the auditor expresses a Qualified or Adverse

Opinion. When an auditor issues a qualified or adverse opinion, the auditor must update the
definition of the auditor's obligation to state that the auditor assumes the audit evidence
acquired is sufficient and acceptable to support the auditor's modified audit opinion.

Description of auditor’s responsibility when the auditor disclaims an opinion. The

auditor shall update the introductory paragraph of the auditor's report to state that the auditor
was hired to audit the financial statements if the auditor disclaims an opinion owing to an
inability to gather sufficient appropriate audit evidence.

Communication with those charged with Governance. When the auditor expects to
modify the opinion in the auditor’s report, the auditor shall communicate with those charged
with governance the circumstances that led to the expected modification and the proposed
wording of the modification.