Audit Report

1. When an auditor conducts an examination in accordance with generally accepted auditing

standards and concludes that the financial statements are fairly presented in accordance
with a comprehensive basis of accounting other than generally accepted accounting
principles such as the cash basis of accounting, the auditor should issue a
a. Disclaimer of opinion.
b. Review report.
c. Qualified opinion.
d. Special report.

2. In which of the following circumstances would an auditor be most likely to express an

adverse opinion?
a. The statements are not in conformity with the PFRS regarding the capitalization of
leases.
b. Information comes to the auditor's attention that raises substantial doubt about the
entity's ability to continue in existence.
c. The chief executive officer refuses the auditor access to minutes of board of
directors' meetings.
d. Control tests show that the entity's internal control is so poor that the financial
records cannot be relied upon.

3. Under which of the following circumstances would an unqualified audit opinion, with an
explanatory paragraph, not be appropriate?
a. The auditor wishes to emphasize that the client has entered into material transactions
with related parties. The substance of the related party transactions is properly
disclosed in the audited financial statements.
b. The client has completed material transactions with related parties and the auditor is
unable to persuade management to properly reflect the economic substance of the
transactions in the financial statements.
c. The client has used a method of revenue recognition that is at variance with
promulgated accounting standards. The auditor, however, agrees with the departure on
the basis that use of the promulgated standard would make the financial statements
materially misleading.
d. The auditor believes that substantial doubt exists concerning the ability of the client
to continue as a going concern.

4. Ted, an independent auditor, was engaged to perform an examination of the financial

statements of Teddy Incorporated one month after its fiscal year had ended. Although the
inventory count was not observed by Ted, and accounts receivable were not confirmed by
direct communication with debtors, Ted was able to gain satisfaction by applying
alternative auditing procedures. Ted's auditor's report will probably contain
a. A standard unqualified opinion.
b. An unqualified opinion and an explanatory middle paragraph.
c. Either a qualified opinion or a disclaimer of opinion.
d. An "except for" qualification.

5. The adverse effects of events causing an auditor to believe there is substantial doubt
about an entity's ability to continue as a going concern would most likely be mitigated by
evidence relating to the
a. Ability to expand operations into new product lines in the future.
b. Feasibility of plans to purchase leased equipment at less than market value.
c. Marketability of assets that management plans to sell.
d. Committed arrangements to convert preferred stock to long-term debt.

6. Comparative financial statements include the financial statements of a prior period which
were examined by a predecessor auditor whose report is not presented. If the predecessor
auditor's report was qualified, the successor auditor must
a. Obtain written approval from the predecessor auditor to include the prior year's
financial statements.
b. Issue a standard comparative audit report indicating the division of responsibility.
 c. Express an opinion on the current year statements alone and make no reference to the
prior year statements.
d. Disclose the reasons for any qualification in the predecessor auditor's opinion.

7. When reporting on financial statements prepared on a comprehensive basis of accounting

other than generally accepted accounting principles, the independent auditor should
include in the report a paragraph that
a. States that the financial statements are not intended to be in conformity with
generally accepted accounting principles.
b. States that the financial statements are not intended to have been examined in
accordance with generally accepted auditing standards.
c. Refers to the authoritative pronouncements that explain the comprehensive basis of
accounting being used.
d. Justifies the comprehensive basis of accounting being used.

8. After an audit report containing an unqualified opinion on a non-public client's financial

statements was issued, the client decided to sell the shares of a subsidiary that accounts
for 30% of its revenue and 25% of its net income. The auditor should
a. Determine whether the information is reliable and, if determined to be reliable,
request that revised financial statements be issued.
b. Notify the entity that the auditor's report may no longer be associated with the
financial statements.
c. Describe the effects of this subsequently discovered information in a communication
with persons known to be relying on the financial statements.
d. Take no action because the auditor has no obligation to make any further inquiries.

9. An audit report contained the following wording: "In our opinion, except for the omission
of the segment information referred to in the preceding paragraph..." This excerpt was
taken from a(n)
a. Unqualified audit opinion with an explanatory paragraph added to emphasize a matter.
b. Unqualified audit opinion with an explanatory paragraph added to describe a material
uncertainty.
c. Audit opinion qualified due to a departure from GAAP.
d. Adverse audit opinion.

10. An auditor includes a separate paragraph in an otherwise unqualified report to emphasize

that the entity being reported upon had significant transactions with related parties.
The inclusion of this separate paragraph
a. Violates generally accepted auditing standards if this information is already disclosed
in footnotes to the financial statements.
b. Necessitates a revision of the opinion paragraph to include the phrase "with the
foregoing explanation."
c. Is appropriate and would not negate the unqualified opinion.
d. Is considered an "except for" qualification of the report.

11. An audit report contains the following paragraph: "Since the company did not take
physical inventories and we were not able to apply auditing procedures to satisfy
ourselves as to inventory quantities and the cost of property and equipment, the scope of
our work was not sufficient to enable us to express, and we do not express, an opinion on
these financial statements." This paragraph illustrates a(n)
a. Disclaimer of opinion due to uncertainty.
b. Disclaimer of opinion due to scope restrictions.
c. Adverse audit opinion.
d. Audit opinion qualified for material scope restrictions.

12. An auditor's examination reveals a misstatement in segment information that is material in

relation to the financial statements taken as a whole. If the client refuses to make
modifications to the presentation of segment information, the auditor should issue a(n)
a. Qualified opinion.
b. Adverse opinion.
c. Unqualified opinion.
 d. Disclaimer of opinion.

13. When the financial statements are prepared on the going concern basis but the auditor
concludes there is substantial doubt whether the client can continue in existence and also
believes there are uncertainties about the recoverability of recorded asset amounts on the
financial statements, the auditor may issue a(an)
a. Adverse opinion.
b. "Except for" qualified opinion for scope limitation.
c. "Except for" qualified opinion for departure from GAAP.
d. Unqualified opinion with an explanatory separate paragraph.

14. Client A reports property, plant, and equipment at appraisal values and records
depreciation based on the appraised amounts. Also, the company does not defer income
taxes for temporary differences arising from using the installment method of recognizing
gross profit for tax purposes. The company uses the accrual method for financial
reporting purposes. Under these circumstances, the auditor will probably issue a(n)
a. Audit opinion qualified for a departure from GAAP.
b. Adverse audit opinion.
c. Disclaimer of opinion.
d. Unqualified audit opinion with an explanatory paragraph describing the client's unique
accounting practices.

15. In which of the following situations would an auditor ordinarily issue an unqualified
audit opinion without an explanatory paragraph?
a. The auditor wishes to emphasize that the entity had significant related party
transactions.
b. The auditor decides to make reference to the report of another auditor as a basis, in
part, for the auditor's opinion.
c. The entity issues financial statements that present financial position and results of
operations, but omits the statement of cash flows.
d. The auditor has substantial doubt about the entity's ability to continue as a going
concern, but the circumstances are fully disclosed in the financial statements.

16. How are management's responsibility and the auditor's responsibility represented in the
standard auditor's report?
Management's Auditor's
responsibility responsibility
a. Explicitly Explicitly
b. Implicitly Implicitly
c. Implicitly Explicitly
d. Explicitly Implicitly

17. An auditor should disclose the substantive reasons for expressing an adverse opinion in
________________ paragraph
a. Key audit matters paragraph.
b. Auditor’s responsibility paragraph.
c. Basis for opinion paragraph.
d. Within the notes to the financial statements.

18. When the financial statements contain a departure from generally accepted accounting
principles, the effect of which is material, the auditor should
a. Qualify the opinion and explain the effect of the departure from generally accepted
accounting principles in a separate paragraph.
b. Qualify the opinion and describe the departure from generally accepted accounting
principles within the opinion paragraph.
c. Disclaim an opinion and explain the effect of the departure from generally accepted
accounting principles in a separate paragraph.
d. Disclaim an opinion and describe the departure from generally accepted accounting
principles within the opinion paragraph.
19. Teddy Corp. accounts for the effect of a material accounting change prospectively when the
inclusion of the cumulative effect of the change is required in the current year. The
auditor would choose between expressing a(an)
a. Qualified opinion or a disclaimer of opinion.
b. Disclaimer of opinion or an unqualified opinion with an explanatory paragraph.
c. Unqualified opinion with an explanatory paragraph and an adverse opinion.
d. Adverse opinion and a qualified opinion.

20. The Securities and Exchange Commission has authority to

a. Prescribe specific auditing procedures to detect fraud concerning inventories and
accounts receivable of companies engaged in interstate commerce.
b. Deny lack of privity as a defense in third-party actions for gross negligence against
the auditors of public companies.
c. Determine accounting principles for the purpose of financial reporting by companies
offering securities to the public.
d. Require a change of auditors of governmental entities after a given period of years as
a means of ensuring auditor independence.

21. When the audited financial statements of the prior year are presented together with those
of the current year, the continuing auditor's report should cover
a. Only the current year.
b. Only the current year, but the prior year's report should be presented.
c. Both years.
d. Only the current year, but the prior year's report should be referred to.

22. A CPA engaged to examine financial statements observes that the accounting for a certain
material item is not in conformity with generally accepted accounting principles, and that
this fact is prominently disclosed in a footnote to the financial statements. The CPA
should
a. Express an unqualified opinion and insert a middle paragraph emphasizing the matter by
reference to the footnote.
b. Qualify the opinion because of the deviation from generally accepted accounting
principles.
c. Disclaim an opinion.
d. Not allow the accounting treatment for this item to affect the type of opinion because
the deviation from generally accepted accounting principles was disclosed.

23. When a principal auditor decides to make reference to another auditor's examination, the
principal auditor's report should always indicate clearly the
a. Division of responsibility
b. Magnitude of the portion of the financial statements examined by the other auditor.
c. Disclaimer of responsibility concerning the portion of the financial statements
examined by the other auditor.
d. Name of the other auditor.

24. In which of the following circumstances may the auditor issue the standard audit report?
a. The financial statements are affected by a departure from a generally accepted
accounting principle.
b. Substantial doubt exists concerning the ability of the entity to continue as a going
concern.
c. The principal auditor assumes responsibility for the work of another auditor.
d. The auditor wishes to emphasize a matter regarding the financial statements.

25. When there is a significant change in accounting principle, an auditor's report should
refer to the lack of consistency in
a. The scope paragraph.
b. An explanatory paragraph between the second paragraph and the opinion paragraph.
c. The opinion paragraph.
d. Key audit matters
26. If the auditor believes that financial statements which are prepared on a comprehensive
basis of accounting other than generally accepted accounting principles are not suitably
titled, the auditor should
a. Consider the effects of the titles on the financial statements taken as a whole.
b. Modify the auditor's report to disclose any reservations.
c. Issue a disclaimer of opinion.
d. Add a footnote to the financial statements which explains alternative terminology.

27. Tan, CPA, is the principal auditor for a multi-national corporation. Another CPA has
examined and reported on the financial statements of a significant subsidiary of the
corporation. Tan is satisfied with the independence and professional reputation of the
other auditor, as well as the quality of the other auditor's examination. With respect to
Tan's report on the consolidated financial statements, taken as a whole, Tan
a. Must not refer to the examination of the other auditor.
b. Must refer to the examination of the other auditor.
c. May refer to the examination of the other auditor.
d. May refer to the examination of the other auditor, in which case Tan must include in
the auditor's report on the consolidated financial statements a qualified opinion with
respect to the examination of the other auditor.

28. A post-audit review, conducted by another audit partner, discovered that the audit team
had failed to examine or confirm securities held in safekeeping. The amounts involved
were material in relation to reported net assets. The unqualified audit report, along
with the audited financial statements, had been released two months earlier. Based on
this information, the audit team should
a. Request the client for permission to examine or confirm the securities.
b. Notify persons known to be relying on the audit report that the report can no longer be
relied upon.
c. Draft a revised audit report containing an opinion qualified for a scope restriction.
d. Ignore the finding inasmuch as the financial statements and audit report have already
been released.

29. The auditor's report should be dated as of the date on which the
a. Report is delivered to the client.
b. Fiscal period under audit ends.
c. Field work is completed.
d. Review of the working papers is complete.

30. An audit report contains the following paragraph: "Because of the inadequacies in the
company's accounting records during the year ended June 30, 2018, it was not practicable
to extend our auditing procedures to the extent necessary to enable us to obtain certain
evidential matter as it relates to classification of certain items in the consolidated
statements of operations." This paragraph most likely describes
a. A material departure from GAAP requiring a qualified audit opinion.
b. An uncertainty that should not lead to a qualified opinion.
c. A matter that the auditor wishes to emphasize and that does not lead to a qualified
audit opinion.
d. A material scope restriction requiring a qualification of the audit opinion.

31. A limitation on the scope of the auditor's examination sufficient to preclude an

unqualified opinion will always result when management
a. Asks the auditor to report on the balance sheet and not on the other basic financial
statements.
b. Refuses to permit its lawyer to respond to the letter of audit inquiry.
c. Discloses material related party transactions in the footnotes to the financial
statements.
d. Knows that confirmation of accounts receivable is not feasible.

32. The auditor issued a qualified opinion covering the financial statements of Client A for
the year ended December 31, 2017. The reason for the qualification was a departure from
GAAP. In presenting comparative statements for the years ended December 31, 2017 and
 2018, the client revised the 2017 financial statements to correct the previous departure
from GAAP. The auditor's 2018 report on the 12/31/17 and 12/31/18 comparative financial
statements will
a. Express a qualified opinion on the 2017 financial statements and an unqualified opinion
on the 2016 statements.
b. Express unqualified opinions on both the 2017 and 2018 financial statements.
c. Retain the qualified opinion covering the 2017 statements, but add an explanatory
paragraph describing the correction of the prior departure from GAAP.
d. Render qualified audit opinions for both 2017 and 2018 financial statements given the
2018 carryover effect of the 2017 error.

33. When financial statements are presented that are not in conformity with generally accepted
accounting principles, an auditor may issue a(an)
Qualified Opinion Disclaimer
a. Yes No
b. Yes Yes
c. No Yes
d. No No

34. Under which of the following circumstances would a disclaimer of opinion not be
appropriate?
a. The auditor is engaged after fiscal year-end and is unable to observe physical
inventories or apply alternative procedures to verify their balances.
b. The auditor is unable to determine the amounts associated with illegal acts committed
by the client's management.
c. The financial statements fail to contain adequate disclosure concerning related party
transactions.
d. The client refuses to permit its attorney to furnish information requested in a letter
of audit inquiry.

35. An auditor's report would be designated as a special report when it is issued in

connection with financial statements that are
a. For an interim period and are subjected to a limited review.
b. Unaudited and are prepared from a client's accounting records.
c. Prepared in accordance with a comprehensive basis of accounting other than generally
accepted accounting principles.
d. Purported to be in accordance with generally accepted accounting principles but do
not include a presentation of the Statement of Cash Flows.

36. A limitation on the scope of an auditor's examination sufficient to preclude an

unqualified opinion will usually result when management
a. Presents financial statements that are prepared in accordance with the cash receipts
and disbursements basis of accounting.
b. States that the financial statements are not intended to be presented in conformity
with generally accepted accounting principles.
c. Does not make the minutes of the Board of Directors' meetings available to the auditor.
d. Asks the auditor to report on the balance sheet and not on the other basic financial
statements.

37. An auditor has previously expressed a qualified opinion on the financial statements of a
prior period because of a departure from generally accepted accounting principles. The
prior-period financial statements are restated in the current period to conform with
generally accepted accounting principles. The auditor's updated report on the prior-
period financial statements should
a. Express an unqualified opinion concerning the restated financial statements.
b. Be accompanied by the original auditor's report on the prior period.
c. Bear the same date as the original auditor's report on the prior period.
d. Qualify the opinion concerning the restated financial statements because of a change in
accounting principle.
38. An auditor's report includes the following statement: "The financial statements do not
present fairly the financial position, results of operations, or cash flows in conformity
with generally accepted accounting principles." This auditor's report was most likely
issued in connection with financial statements that are
a. Inconsistent.
b. Prepared in accordance with another comprehensive basis of accounting.
c. Misleading
d. Affected by a material uncertainty.

39. Restrictions imposed by a client prohibit the observation of physical inventories, which
account for 35% of all assets. Alternative audit procedures cannot be applied, although
the auditor was able to examine satisfactory evidence for all other items in the
financial statements. The auditor should issue a(an)
a. "Except for" qualified opinion.
b. Disclaimer of opinion.
c. Unqualified opinion with a separate explanatory paragraph.
d. Unqualified opinion with an explanation in the scope paragraph.

40. Anauditor may not issue a qualified opinion when

a. A scope limitation prevents the auditor from completing an important audit procedure.
b. The auditor's report refers to the work of a specialist.
c. An accounting principle at variance with generally accepted accounting principles is
used.
d. The auditor lacks independence with respect to the audited entity.

41. When there is a significant management judgment, an auditor's report should present this
under
a. The scope paragraph.
b. An explanatory paragraph between the second paragraph and the opinion paragraph.
c. The opinion paragraph.
d. Key audit matters paragraph.

42. Which of the following subsequent events will be least likely to result in an adjustment
to the financial statements?
a. Culmination of events affecting the realization value of accounts receivable owned as
of the balance sheet date.
b. Culmination of events affecting the realization of inventories owned as of the balance
sheet date.
c. Material changes in the settlement of liabilities which were estimated as of the
balance sheet date.
d. Material changes in the quoted market prices of listed investment securities since the
balance sheet date.

43. Soon after Tani's audit report was issued, Boyd learned of certain related party
transactions that occurred during the year under audit. These transactions were not
disclosed in the notes to the financial statements. Tani should
a. Plan to audit the transactions during the next engagement.
b. Recall all copies of the audited financial statements.
c. Determine whether the lack of disclosure would affect the auditor's report.
d. Ask the client to disclose the transactions in subsequent interim statements.

44. Under which of the following circumstances would a disclaimer of opinion not be
appropriate?
a. The financial statements fail to contain adequate disclosure concerning related party
transactions.
b. The client refuses to permit its attorney to furnish information requested in a letter
of audit inquiry.
c. The auditor is engaged after fiscal year-end and is unable to observe physical
inventories or apply alternative procedures to verify their balances.
d. The auditor is unable to determine the amounts associated with illegal acts committed
by the client's management.
45. An auditor concludes that there is a material uncertainty about an entity's ability to
continue as a going concern for a reasonable period of time. If the entity's disclosures
concerning this matter are adequate, the audit report may include a
Disclaimer Qualified opinion
a. Yes Yes
b. No No
c. No Yes
d. Yes No

46. Management of Ililanam Company has decided not to account for a material transaction in
accordance with the provisions of GAAP. In setting forth its reasons in a note to the
financial statements, management has clearly demonstrated that due to unusual
circumstances the financial statements presented in accordance with the GAAP would be
misleading. The auditor's report should include an explanatory separate paragraph and
contain a(an)
a. Adverse opinion.
b. Unqualified opinion.
c. Qualified opinion.
d. Disclaimer opinion.

47. In the "management discussion and analysis" (MD&A) contained in the 2015 annual report of
AB Corporation, management stated that total sales were P4.95 billion and net profit was
P500 million. The audited sales and net profit, however, were P3.8 billion and P450
million respectively. The financial statements, contained in the annual report, reflected
the audited figures and the CPA planned to issue an unqualified opinion. Upon noting the
inconsistencies between the MD&A and the audited financial statements, however, the CPA
should
a. Refer to the inconsistency in the audit report and issue a qualified audit opinion.
b. Issue an unqualified opinion without an explanatory paragraph, because the MD&A is not
covered in the audit report.
c. Issue an unqualified audit opinion with an explanatory paragraph describing the
inconsistency.
d. Render an adverse opinion on the basis that management had intentionally misrepresented
reported sales and net profit.

48. After issuing the audit report, the auditor may become aware of information that would
have affected the audit report had it been known at the time. Given discovery of such
information, the auditor must take appropriate action. Which of the following actions
would be considered inappropriate under these circumstances?
a. Determine whether the information is reliable and whether the facts existed at the date
of the audit report.
b. Draft a revised audit report expressing a qualified or adverse opinion, depending on
the materiality of the effect, and transmit the report to the stockholders.
c. Request the client to disclose, to financial statement users, the newly discovered
facts and their impact on the financial statements.
d. If the client refuses to inform third parties, the auditor should notify the board of
directors and regulatory agencies having jurisdiction over the client that the
auditors' report can no longer be relied upon.

49. An auditor would issue an adverse opinion if

a. The audit was begun by other independent auditors who withdrew from the engagement.
b. A qualified opinion cannot be given because the auditor lacks independence.
c. The restriction on the scope of the audit was significant.
d. The statements taken as a whole do not fairly present the financial condition and
results of operations of the company.

50. Which of the following best describes the auditor's responsibility for "other information"
included in the annual report to stockholders which contains financial statements and the
auditor's report?
a. The auditor has no obligation to read the "other information."
b. The auditor has no obligation to corroborate the "other information," but should read
the "other information" to determine whether it is materially inconsistent with the
financial statements.
c. The auditor should extend the examination to the extent necessary to verify the "other
information."
d. The auditor must modify the auditor's report to state that the "other information is
unaudited" or "not covered by the auditor's report."