LYCEUM OF ALABANG

BUSINESS MANAGEMENT EDUCATION

SECOND SEMESTER, SY 2018-19

THE COMPLETION OF AUDIT RESPONSIBILITIES IN AN AUDIT

OF FINANCIAL STATEMENTS

1. The auditor is required to perform procedures designed to obtain sufficient appropriate audit
evidence that all events up to the date of the auditor’s report that may require adjustment of, or
disclosure in, the financial statements have been identified. (PSA 560- Subsequent Events)
2. The auditor considers four important dates during the completion of the audit, namely:
a. date of financial statements
b. date of approval of the financial statements
c. date of the auditor’s report
d. date the financial statements are issued
3. Date of financial statements is the date of the end of the latest period covered by the financial
statements, which is the date of the most recent statement of financial position in the financial
statements subject to audit.
4. Date of approval of the financial statements- is the date on which those with the recognized
authority assert that they have prepared the entity’s compete set of financial statements and that
they have taken responsibility over them. The date of approval of the financial statements for the
purposes of the PSAs is the earlier date on which those with the recognized authority determines that
a complete set of financial statements has been prepared.
5. Date of the Auditor’s Report is the date selected by the auditor to date the report on the financial
statements which should not be earlier than the date on which the auditor has obtained sufficient
appropriate evidence on which to base his opinion.
6. Date the financial statements are issued is the date that the auditor’s report and audited
financial statements are made available to intended parties in most cases the date these statements
are filed with regulatory bodies.
7. The auditor has no responsibility to seek audit evidence to identify subsequent events since this is
the responsibility of management. But when the auditor becomes aware of events which have a
material effect on financial statements that have not been issued, the auditor should discuss the
matter with management and seek to have an amended financial statements.
8. The auditor’s performance of subsequent events procedures would depend on the information that
is available and the extent to which the accounting records have been prepared since the date of
the financial statements.
9. The auditor has the rights and obligations to seek legal advice when management has issued the
financial statements despite the auditor’s advice not to issue the financial statement to third parties
to prevent reliance on the auditor’s report on the financial statements.
10. The auditor is required to apply analytical procedures at the planning and overall review stages of
the audit as well as at other stages of audit. These analytical procedures are very important for the
following reasons and purposes:
a. Assist in the overall review of the reasonableness of the financial statements,
b. Ensure financial statements that are consistent with the knowledge of the auditor of the
business entity, and
c. Corroborate conclusions formed during the audit.
11. The auditor’s responsibility is to consider the appropriateness of the management use of the going
concern assumption in the preparation of the financial statements and consider whether there are
material uncertainties about the entity’s ability to continue as a going concern that need to be
disclosed in the financial statements. (PSA 570).
12. The auditor does not have the responsibility to design audit procedures other than inquiry of
management to test for indications of events or conditions which cast significant doubt on the entity’s
 ability to continue as a going concern beyond the period assessed by management that is twelve
months from the balance sheet date.

13. The auditor should consider the need to modify the auditor’s report due to the limitation of the
audit scope when management refuses to make or extend its assessment of the entity’s ability to
continue as a going concern when requested to do so by the auditor.
14. The auditor should inform those who are charged with governance of those uncorrected
misstatements aggregated by the auditor during the audit that were determined by management
to be immaterial, both individually and in the aggregate, to the financial statements as a whole.
15. Both the auditor and management have the responsibility to communicate matters required by PSA
260. The non- communication of the auditor does not relieve management to its responsibility and
vice-versa. The communication of these matters by management, however, affects the forms and
timing of the responsibility of the auditor to communicate.
16. As part of the auditor’s communication, those charged with governance are informed of the
following:
a. Those audit matters of governance interest that have come to the attention of the auditor
as a result of the performance of the audit, and
b. An audit of the financial statements is not designed to identify all matters that may be
relevant to those charged with governance.
17. The auditor should communicate audit matters of governance interest on a timely basis, either orally
or in writing depending on the following factors:
a. The size, operating structure, legal structure and communication processes of the entity;
b. The nature, significance and sensitivity of the audit matters;
c. The arrangement made with regard to periodic meetings or reporting of the audit matters;
and
d. The amount of on-going contact and dialogue the auditor has with those charged with
governance.
18. The auditor’s assessment of the audit risks and materiality may change from the time of initial
planning the engagement to the time of evaluating the results of audit procedures.
19. The auditor must consider the following when drawing audit conclusions as to whether the
financial statements are prepared in conformity with the acceptable financial reporting
framework:
a. The accounting policies selected and applied are consistent with the financial reporting
framework and are appropriate to the circumstances;
b. The accounting estimates made by management are appropriate under the circumstances;
c. The information presented in the financial statements is relevant, reliable, comparable and
understandable; and
d. The financial statements provide sufficient disclosures to enable users to understand the
effect of material transactions and events on the information conveyed in the financial
statements.
20. The auditor should assess whether the aggregate of uncorrected misstatements that have been
identified during the audit is material in his evaluation of the fair presentation of the financial
statements.
21. The aggregate of the uncorrected misstatements comprises the specific misstatements identified by
the auditor including the net effect of uncorrected misstatements identified in previous period
and those misstatements which cannot be specifically identified.
22. Where misstatements are material, the auditor needs to consider reducing audit risk by extending
audit procedures or requesting management to adjust the financial statements. The auditor should
consider modifying his audit report in case management refuses to make such adjustment.
23. The auditor is not responsible to make any inquiry regarding audited financial statements after they
have been issued. When events brought to the attention of the auditor requiring management’s
revision of the financial statements, the auditor should perform procedures necessary to form an
opinion on the revised financial statements.
24. Because of the difficulties encountered by the auditor in detecting material misstatements due to
fraud, it is important that the auditor gets a written representation from management
confirming that it has disclosed to the auditor the results of management assessment of the risk that
the financial statements may be materially misstated as a result of fraud and its knowledge of actual,
suspected or alleged fraud affecting the entity.
25. Written representations are important source of audit evidence because these afford the auditor
to consider the significant issues that may arise. Likewise, management may consider such matter
seriously, thus enhancing the quality of its representations.
26. The auditor shall obtain written representations from management signed by the Chief Executive
Officer, Chief Finance Officer or other authorized officials knowledgeable about the subject of
representations that:
a. It acknowledges its responsibility for the design, implementation and maintenance of
internal control to prevent and detect fraud;
b. It has disclosed to the auditor the results of the assessment of the risk that the financial
statements may be materially misstated as a result of fraud;
c. It has disclosed to the auditor its knowledge of fraud or suspected fraud affecting the
entity involving management and employees who have significant roles in internal control,
or that the fraud could have material effect on the financial statements; and
d. It has disclosed to the auditor its knowledge of any allegation of fraud, or suspected fraud,
affecting the entity’s financial statements communicated by employees, former employees,
regulators or other concerned persons.
27. The audit objectives in the audit of commitments and contingencies are to determine whether all
significant commitments and contingencies as of the balance sheet date are shown properly in the
financial statements and the disclosures made are in accordance with applicable financial reporting
framework.
28. The auditor shall evaluate the following as part of forming an audit opinion:
a. Whether the identified related party relationships and transactions have been appropriately
accounted for and disclosed in accordance with the applicable financial reporting
framework; and
b. Whether the effects of the related party relationships and transactions prevent the financial
statements from achieving fair presentation or cause the financial statements to be
misleading.
29. The auditor should consider the effect of subsequent events on the financial statements and on
the auditor’s report. (PSA 560)
30. Subsequent events refers to both events occurring between the date of the financial
statements and the date of the auditor’s report, and facts discovered after the date of the audit
report.
31. Date of the financial statements is the date of the latest period covered by the financial
statements, which normally is the date of the most recent balance sheet in the financial statements
subject to audit.
32. Date of approval of the financial statements is the date on which those with the recognized
authority assert that they have prepared the entity’s complete set of financial statements, including
the related notes, and that they have taken responsibility for them.
33. Date of the auditor’s report is the date selected by the auditor to date the audit report on the
financial statements.
34. Date the financial statements are issued is the date that the auditor’s report and audited
financial statements are made available to third parties , which may be , in many circumstances, the
date that they are filed with the regulatory authority.
35. The auditor should perform procedures designed to obtain sufficient appropriate audit evidence that
all events up to the date of the auditor’s report that may require adjustment of, or disclosure in, the
financial statements have been identified. (PSA 560, paragraph 3)
36. When, after the date of the auditor’s report but before the date the financial statements are issued,
the auditor becomes aware of the fact which may materially affect the financial statements, the
auditor should consider whether the financial statements need amendment, should discuss the
matter with the management, and should take the action appropriate in the circumstances. (PSA
560, paragraph 10)
37. When, after the financial statements have been issued, the auditor becomes aware of the fact which
existed at the date of the auditor’s report and which, if known at that date, may have caused the
auditor to modify the auditor’s report, the auditor should consider whether the financial statements
need revision, should discuss the matter with management, and should take the action appropriate in
the circumstances. (PSA 560, paragraph 15)
38. The new auditor’s report should include an “emphasis of a matter paragraph” referring to a
note to the financial statements that more extensively discusses the reason for the revision of the
previously issued financial statements and to the earlier report issued by the auditor.
39. When planning and performing audit procedures and in evaluating the results thereof, the auditor
should consider the appropriateness of the management’s use of the going concern assumption in
the preparation of the financial statements. (PSA 570, paragraph 2)
40. The auditor should remain alert for evidence of events or conditions which may cast significant doubt
on the entity’s ability to continue as a going concern throughout the audit. If such events or
conditions are identified, the auditor should, in addition to performing the procedures in paragraph
26 of PSA 570, consider whether they affect the auditor’s assessment of the components of the audit
risk. (PSA 570, paragraph 12)
41. When events or conditions have been identified which may cast significant doubt on the entity’s
ability to continue as a going concern, the auditor should:
a. Review management’s plans for future actions based on the going concern assumption;
b. Gather sufficient appropriate evidence to confirm or dispel whether or not a material
uncertainty exists through carrying out procedures considered necessary, including
considering the effect of any plans of management and other mitigating factors; and
c. Seek written representations from management regarding its plans for future action. (PSA
570, paragraph26)
42. If adequate disclosure is made in the financial statements, the auditor should express an unqualified
opinion but modify the auditor’s report by adding an emphasis of the matter paragraph that
highlights the existence of a material uncertainty relating to the event or condition that may cast
significant doubt on the entity’s ability to continue as a going concern and draws attention to the
note in the financial statements that discloses the matter set out in paragraph 32 of PSA 570. (PSA
570, paragraph 33)

43. EXERCISES-MULTIPLE CHOICE:

1. There are important dates the auditor must consider in completing the audit report
which includes the following, except
a. The date of the auditor’s report
b. The date of the approval of the financial statements
c. The date the financial statements are issued
d. The date the auditor’s report is issue
2. It is the date that the auditor’s report and the audited financial statements are made
available to intended parties

a. Date of the auditor’s report

b. Date the financial statements are issued
c. Date of the approval of the financial statements
d. None of the above
3. The responsibility to identify subsequent events does not lie with the following
person/s, except

a. The External Auditor

b. The Chief Accountant
c. The Internal Auditor
d. The Management.

4. There are varied reasons for the analytical procedures that must be performed by
the auditor such as the following, excluding

a. Assist in the overall review of the financial statements

b. Ensure the completion of the audit and the issuance of the audit report.
c. Ensure financial statements that are consistent with the knowledge of the auditor of the
business entity
d. Corroborate conclusions found during the audit

5. When there is limitation of the audit scope such as when management refuses to
extend the assessment of the firm’s ability to continue as a going concern when
requested to do so by the auditor, the auditor may consider the following actions,
except

a. Issue a clean opinion.

b. Modify his audit report
c. Issue a disclaimer opinion
d. Issue a qualified opinion

6. Which of the following audit procedures is not appropriate when obtaining audit
evidence for contingencies?

a. Verification of sales contracts

b. Examination of credit balances in the expense accounts
c. Reading minutes of meetings
d. Inquiring from the client’s lawyer

7. The activity that is ordinarily performed towards the end of an audit engagement

a. Test of controls
b. Obtaining written management representations
c. Securing engagement letter from client
d. Review of subsequent event

8. In an audit of interest bearing notes receivable, which of the following related

account would also be considered by the auditor in his examination?

a. Accrued interest payable

 b. Interest income
c. Interest expense
d. Bad debts expense

9. The written representations obtained from management is intended to

a. To make the auditor as responsible for the financial statements

b. To waive management responsibilities on the financial statements
c. To make it understood that management is really the one responsible for the financial
statements
d. To use as a substitute source of audit evidence

10. Which of the following subsequent events will cause adjustment in the entity’s year-
end financial statements?

a. Issuance of bonds for P 5 million on January 30 of the ensuing year

b. Settlement of damage lawsuit for injury that happened on February 29 of the following year
c. Settlement of court case for P 500,000 that was estimated at P 50,000 at year-end.
d. Fire damage of P 2 Million on March 15 of the subsequent year

11. The subsequent discovery of facts by the auditor during the audit refers to
knowledge obtained after

a. The date when the financial statement was issued

b. The date of the auditor’s report
c. The audit report release date
d. The date the financial statements was revised

12. The PSAs do not require which of the following as part of essential audit
documentation?

a. Engagement letter
b. Management written representations
c. Attorney’s letter
d. Management letter

13. Which of the following is least likely to be considered by the auditor in the audit of
property, plant and equipment?

a. the pricing of products

b. the estimates of the service life of depreciable assets in relation to the computation of
depreciation
c. the costs of repairs and maintenance
d. the methods of depreciation used

14. The auditor would most likely obtain audit evidence of subsequent events through
which of the following substantive procedures?

a. Authentication of the genuineness of the audit evidences acquired after year-end

b. Investigating changes in the stockholders’ equity that occur after year-end
c. Confirmation of bank balances after year-end
d. Sending confirmation letters to the suppliers after year-end
15. In an audit of statement of cash flows, which of the following items would an
auditor least likely consider as receipts or payments of cash?

a. Operation
b. Investing
c. Financing
d. Appraisal

16. The auditor will most likely consider in his final stage on audit which of the following
procedures?

a. Understanding business environment

b. Confirmation from third parties
c. Inspection and observation of physical facilities
d. Perform analytical procedures

17. Which of the following event that occurs on January 15, 2015 would most likely
cause an adjustment of the books at December 31, 2014?

a. Business combination
b. Temporary closure due to strike
c. Retirement of bonds
d. Settlement of court case

18. In considering a question of going concern in an audit, which of the following is

correct with regard to the auditor’s responsibility?

a. Perform analytical procedures on probability of bankruptcy

b. Assess whether there is substantial doubt as to the ability of the entity as a going concern
c. Determine that related uncertainties are disclosed in the audit report
d. Issue a report with a “going concern” modification

19. The audit report which is dual dated for a subsequent event occurring after the
completion of field work but before the issuance of the auditor’s report indicates
that the auditor is responsible for events occurring subsequent to the completion of
the field work covering

a. All events occurring until the date of the last subsequent event referred to
b. All events specifically referred to
c. All events occurring through the date of issuance of the report
 d. All events occurring through the date of submission of the report to client

20. The auditor’s decision whether or not to dual date the audit report depends largely
on his willingness to

a. Perform additional audit procedures

b. Accept responsibility for subsequent events
c. Permit inclusion of a note captioned “unaudited” subsequent to the date of the audit report
d. assume responsibility for subsequent events after the issuance of the audit report

44. CASE STUDY:

1. XYZ Company engages an auditor to perform an independent audit of its financial statements for
the year just ended. The auditor has considered as one of the audit procedures the possibility of
securing necessary written representations from management that risk and control assessment
were regularly done in order to prevent or minimize error and fraud on the financial statements.
Likewise, the auditor requested management other written representations from management
about the latter’s knowledge of alleged fraud and errors that might have caused material
misstatement in the financial statements. However, the auditor was not able to get these written
representations from concerned management officials for reasons not made known to the
auditor.

Required:

1. What courses of action are available to the auditor under the

circumstances?
If management does not provide one or more of the requested written
representations, the auditor should:
a. discuss the matter with management;
b. reevaluate the integrity of management and evaluate the effect that this may have
on the reliability of representations (oral or written) and audit evidence in general; and
c. take appropriate actions, including determining the possible effect on the opinion in
the auditor's report

2. Is management right in withholding such vital information needed by the

auditor? No the management is not right in withholding such vital information
needed by the auditor for the audit because written representations are internal
sources of evidence which is necessary for the audit procedures. In addition it is part
of audit of financial statements performed in accordance with generally accepted
auditing standards and provides guidance concerning the representations to be
obtained.

3. Should written representations be made an integral part of the terms of

the audit agreement to avoid this kind of situation?
Yes, because written representations are an important source of audit evidence. If
management modifies or does not provide the requested written representations, it
may alert the auditor to the possibility that one or more significant issues may exist.
Further, a request for written rather than oral representations, in many cases, may
prompt management to consider such matters more rigorously, thereby enhancing
the quality of the representations
2. GCA Firm has been in operation for fifteen years with a moderate growth rate. The firm has
engaged a new independent auditor to conduct a risk-based audit of its latest financial
statements. As an experienced practitioner, the auditor wanted to know why there is change in
auditor considering the former auditor has been engaged throughout the previous operating
years of the business entity. The new auditor requested the client to arrange a one-on-one
meeting with his predecessor specifically to inquire about the results of previous audits among
others. Likewise, the new auditor familiarize himself with the business environment and all the
things that are necessary in accepting and entering into a audit engagement and in the
preparation of an audit plan. At the outset, the new auditor came to know about the inability of
the firm to continue as a going concern due to various factors that must be determined and
confirmed through the application of appropriate audit procedures that would enable the new
auditor to obtain sufficient and appropriate audit evidences regarding the issue at hand. On the
other hand, the client, knowing that the new auditor is already aware of the condition of the
firm and the reason why it changed its former auditor, does not want to fully cooperate and
also tries to withhold some vital information required by the auditor.

Required:

1. Why should the auditor require from the client considering that he has
already identified the inability of the firm to operate as a going concern?
The going concern assumption is a fundamental principle in the preparation of financial
statements. Under the going concern assumption, an entity is ordinarily viewed as continuing in
business for the foreseeable future with neither the intention nor the necessity of liquidation,
ceasing trading or seeking protection from creditors pursuant to laws or regulations. Accordingly,
assets and liabilities are recorded on the basis that the entity will be able to realise its assets and
discharge its liabilities in the normal course of business. The auditor require the client because
management's assessment of the entity's ability to continue as a going concern is a key part of the
auditors' consideration of the going concern assumption.

2. Should the auditor till accept the audit engagement considering the
limitation posed by the client in conducting the audit and in rendering an
opinion on the financial statements?
In my opinion no, because in the preconditions for an audit are not present such as the
limitations and the management is not fully cooperating the auditor should discuss the
matter with management, and should not accept the engagement unless required to do so by
law or regulation.