Roque Quick Auditing Theory Chapter 10 PDF

685
CHAPTER 10
the Auditor's Report
on Financial
Statements
1. A major purpose of the auditor's report on financial state-

ments is to
A. Assure investors of the complete accuracy of the finan-
cial statements.
B. Enhance the degree of confidence of intended users in
the financial statements.
C. Deter creditors from extending loans in high-risk situa-
tions.
D. Describe the specific auditing procedures undertaken to
gather evidence for the opinion.
PSA 200 (Overall Objectives of the Independent Auditor and

the Conduct of an Audit in Accordance with Philippine
Standards on Auditing) states that the purpose of an audit is
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686 . CPA EXAMINATION REVIEWER: AUDITING THEORY
to enhance the degree of confidence of intended users in the

financial statements. This is achieved by the expression of
an opinion by the auditor on whether the financial state-
ments are prepared, in all material respects, in accordance
with an applicable financial reporting framework.
Answer A is incorrect because an auditor's opinion is not an

assurance of complete·accuracy of the financial statements.
Answer C is incorrect because while the auditor's report

may contain some information that users of financial state·
ments· may use to make informed decisions, it is not a sub-
stitute for their judgment.
Answer D is incorrect because the Auditor's Responsibility

section of the auditor's report provides only a general de·
scription of how an audit is conducted.
2. If a company's external auditor expresses an unmodifi7d

opinion as a result of the audit of the company's· financial
statements, readers of the audit report can assume that
A. The external auditor found no fraud. .
B. The company is financially sound and the financial
statements are accurate.
c. Internal control is effective. e
D. The auditor concludes that the financial statements a~
prepared, in all material respects, in accordance with t e
applicable financial reporting framework.
ditor
An UNMODIFIED OPINION is expressed when t he au. all
concludes that the financial statements are prepared,f~nan·
· t h e app l'icable in
material respects, in accordance with
cial reporting framework.
0 The Auditor's Report on Financial Statements
cW'f''ffR 1 . 687
If the auditor concl~des that, based on the audit evidence

btained, the financial statements as a whole are not free
o · l . t
from matena miss atement or is unable to obtain sufficient
appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement,
the auditor should express a modified opinion (qualified
opinion, adverse opinion or disclaimer of opinion) on the fi-
nancial statements.
Answer A is incorrect because readers may only assume

that fraud found did not, in the auditor's opinion, materially
affect the fair presentation of the statements.
Answer B is incorrect because the report contains an opin-

ion on whether the financial statements are prepared, in all
material respects, in accordance with the applicable finan-
cial reporting framework and not an appraisal of the com-
pany. Also, an unmodified opinion provides reasonable a.s-
surance that the statements are free of material misstate--
ment, not that they are accurate.
Answer D is incorrect because an unmodified opinion may

be expressed even though the auditee's internal control sys-
tem is ineffective.
3. When the financial statements contain material but not per-

vasive misstatements because the accounting policies se-
. lected are not consistent with th.e applicable financial report-
ing framework, the auditor should
A. Express a qualified opinion and describe the matter giv-
ing rise to the modification in a separate paragraph.
B. Express a qualified opinion and describe the matter giv-
ing rise to the modification within the opinion paragraph.
688 CPA EXAMINATION REVIEWER: AUDITING THEORY
C. Disclaim an opinion and describe. the matter giving rise

to the modification in a separate paragraph.
D. Disclaim an opinion and describe the matter giving rise
to the modification within the opinion paragraph.
A QUALIFIED OPINION shall be expressed when, based on

sufficient appropriate audit evidence obtained, the auditor
concludes that misstatements, individually or in the aggre-
gate, are material, but not pervasive, to the financial state-
ments.
A qualified opinion is also appropriate when the auditor is

unable to obtain sufficient appropriate audit evidence on
which to base the opinion, but the auditor concludes that
the possible effects of undetected misstatements on the fi-
nancial statements, if any, could be material but not perva-
sive.
When a qualified opinion is expressed, the auditor's reoort

should include a separate paragraph with the heading "Basis
for Qualified Opinion" that provides a description of the
matter giving rise to the expression of a qualified opinion.
This paragraph should be placed immediately before the
opinion paragraph.
If the material misstatement relates to specific amou~ts /~

the financial statements (including quantitative disc ~d
sures), the "Basis for Qualified Opinion" paragr~ph :?~uef·
include a description and quantification of the financ~~ n-
fects of the misstatement, unless impracticable. If the int~te
5
cial effects cannot be quantified, the auditor should 50
in the paragraph.
10 The Auditor's Report on Financial Statements 689
cHApiER
Answer B i~ incor:ect because a Basis for Qualified Opinion

paragraph 1s required.
Answers C a nd D are incorrect because a DISCLAIMER OF

OPINION is appropriate when the auditor is unable to ob-
tain sufficient appropriate audit evidence on which to base
the opinion, and the auditor concludes that the possible ef-
fects on the fina ncial statements of undetected misstate-
ments, if any, could be both material and pervasive.
4. A CPA engaged to audit fir:iancial statements observes that

the accounting for a certain material item is not in accord-
ance with the applicable financial reporting framework, alt-
hough the departure is prominently disclosed in a note to
the financial statements. The CPA should
A. Express an unmodified opinion but insert an Emphasis of
Matter paragraph emphasizing the matter by reference
to the note.
B. Disclaim an opinion.
c. Not allow the accounting treatment for this item to affect
the type of opinion because the departure from the re-
quirement of the applicable financial reporting frame-
work was disclosed.
D. Modify the opinion because of the departure from the
requirement of the applicable financial reporting frame-
work.
When financial statements contain material misstatements

because the accounting policies applied are not consistent
with the applicable financial reporting framework, the audi-
tor should express a QUALIFIED OPINION (if the effect is
material but not pervasive) or ADVERSE OPINION (if the e f-
fect is both material and pervasive).
69.0 CPA EXAMINATION REVIEWER: AUDITING THEORY
. i
Answer A is incorrect because an unmodified opinion is in-

appropriate when financial statements are not free from
material misstatement.
Answer B is incorrect because a disclaimer of opinion is ap-

propriate when the auditor is unable to obtain sufficient ap-
propriate audit evidence and the auditor concludes that the
possible effects of misstatements could be both material and
j
· !
pervasive. ..<
·. !
Answer C is incorrect because a note disclosure of the de-

parture from the requirement of the applicable financial re-
porting framework does not eliminate the need to modify iI
the opinion. ·~
~
5. Whenever there is a scope limitation, the appropriate re-
sponse is to issue. a/an
A. Qualified opinion
B. Adverse opinion
C. Disclaimer of opinion
D. Unmodified report, a qualification of scope and opinion,
or a disclaimer, depending on materiality.
6. When a qualified opinion is expressed, the implication is that

the auditor
A. Does not believe the financial statements are presented
in accordance with the applicable financial reporting
framework.
B. Does not know if the financial statements are presen~ed
in accordance with the applicable financial reportin9
framework.
C. Believes the financial statements are presented fairly. ·r1 .
D. . Believes the financial statements are presented fal Y
"except for" a spec,fic item of them :
~piER
If a misstatement is immaterial to the financial statements of

7· the company for t~e current period, but is expected to have
a material effect in future periods, it is appropriate to ex-
press a/an ..
A. Qualified opinion
B. unmodified opinion
c. Disclaimer of opinion
o. Adverse opinion
on January 2, 2016, the TANYA CO. received a notice from
B. its primary. suppliers that effective immediately all wholesale
prices would be i~creased 10%. On the basis of the notice,
TANYA revalued its December 31, 2015 inventory to reflect
the higher costs. As a result, the statement of financial posi-
tion reflects inventory stated at an amount higher than its
net realizable value. The inventory constituted a material
proportion of total assets; however, the effect of the revalu-
ation was material to current assets but not to total assets
or net income. In reporting on the company's financial
statements for the year ended December 31, 2015, in which
inventory is valued at the adjusted amount, the auditor
would most likely
A. Express an unmodified opinion provided the nature of
the adjustment and the amounts involved are disclosed
in notes to the financial statements.
B. Express a qualified opinion.
C. Disclaim an opinion.
D. Express an adverse opinion.
PAS 2 (Inventories) requires that inventories should be val-

ued at the lower of cost and net realizable value. Because
the effect of the misstatement is material but not pervasive,
the auditor should express a qualified opinion. The inclu-
sion of the matter in the notes does not overcome the need
for a modified opinion.
Answer A is incorrect because an unmodified opinion is in-
appropriate when financial statements are not free from
material misstatement.
Answer C is incorrect because a disclaimer of opinion is only

appropriate when there is no sufficient appropriate evi-
dence to form an opinion.
Answer D is incorrect because an adverse opinion may not

be appropriate since the effect of revaluation was not mate-
rial to total assets or net income, i.e., not _pervasive.
9. SAMANTHA APARTMENTS CO. completed construction and

began to lease a 100-unit apartment on May 28, 2014. Dur-
ing June, 50 units were leased, and an additional 30 units
were leased in July 2015.
During the month of May 2014, the company charged to ex-

pense P46,000 for the cost of advertising, a grand opening
party, and the advertising agency fee for planning the car:i~
paign. At December 31, 2015, the statement of financia
position reflected Pl 75,000 of initial direct costs incurred ~y
the company including commissions and legal fees paid in
negotiating the lease. These initial direct costs are shownd~s
an addition to the carrying a'mount of the leased asset an
1
!
being recognized as an expense over the term of the leas
on the same basis as the lease income.
nts for
During your audit of the company's financial stateme ord·
the year ended D~cember 31, 2015 (conducted. in a~~ove
ance with PSAs), no facts other than those describe~ ion to
came to your knowledge that would cause your opin ented
be other than that the financial statements were pres
cHAPT
ER 10 The Auditor's Report on Financial Statements
693
fairly in accordance with Philippine Financial Reporting

standards.
What type of opin~o~ should your report contain?

A. An adverse opinion
B. An unmodified opinion
c. A disclaimer of opinion
D. A qualified opinion
Because the transactions were accounted for properly in ac-

cordance with the requirements of PFRS on leases, an un-
modified opinion is appropriate.
io. When an auditor modifies an opinion because of inadequate

disclosure, the auditor should describe the nature of the
omission in a separate "Basis for Modification" paragraph
and modify the
Auditor's
Introductory Responsibility Oplnion
Paragra12h Paragragh Paragra12h
A. Yes No No
B. Yes Yes No
c. No Yes Yes
D. No No Yes
11. In which of the following situations would an auditor ordi-

narily choose between expressing a qualified opinion or an
adverse opinion?
A. The auditor did not observe the entity's physical invento-
ry and is unable to become satisfied as to its balance by
other auditing procedures.
B. The financial statements fail to disclose information that
is required by the applicable financial reporting frame-
work.
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C. The auditor is asked to report only on the entity's state-

ment of financial position and not on the other general
purpose financial statements.
D. Events disclosed in the financial statements cause the
auditor to have substantial doubt about the entity's abil-
ity to continue as a going concern.
Material misstatements arising from omission of disclosures

required by the acceptable financial reporting framework
may result in either a qualified or an adverse opinion.
Answer A is incorrect because a disclaimer of opinion is ap-

propriate when the auditor is unable to obtain sufficient ap-
propriate audit evidence on which to base the opinion, and
the auditor concludes that the possible effects on the finan-
cial statements of undetected misstatements, if any, could
be.both material and pervasive.
Answer C is incorrect because audits of single financial

statements may result in the expression of an unmodified
opinion (PSA 805, Special Considerations-Audits of Single
Financial Statements and Specific Elements, Accounts or
Items of a Financial Statement).
Answer D is incorrect because substantial doubt about the

entity's continued existence normally results in the addition
of an emphasis of matter paragraph immediately after the
opinion paragraph.
1
12. Yang, CPA, conc~~des that t~ere is significant doubt abo~~
GARAY CO. s ability to continue as a going concern . .
1
Garay's financial statements adequately disclo-se its flnancia
difficulties, Yang's report should
¢'pfER
Include an
Emphasis Specifically
of Matter Specifically Use the
Paragraph Use the Words
Following the Words "Going "Significant
Opinion Paragraph Concern" Doubt"
A. Yes Yes Yes
B. Yes Yes No
c. Yes No Yes
o. No Yes Yes
pSA 570 (Going Concern) gives the following illustration of
an Emphasis of Matter paragraph when the auditor is satis-
fied as to the adequacy of the note disclosure:
Emphasis of Matter
Without qualifying our opinion, we draw attention to Note X in the

financial statements which indicates that the Company incurred a
net loss of Pxxx during the year ended December 31, 20X I and, as
of that date, the Company' s current liabilities exceeded its total as-
sets by Pxxx. These conditions, along with other matters as set
fortli in Note X, indicate the existence of a material uncertainty
that may cast significant doubt about the Company' s ability to con-
tinue as a going concern.
13. Which sections of an auditor's unmodified report on financial.,

statements should refer to Philippine Standards on Auditing
(PSA) and Philippine Financial Reporting Standards (PFRS)?
PSA PFRS
A. Management's Opinion
Responsibility Auditor's Responsibility
B. Auditor's Responsibility Management's Responsibility
Opinion
C. Opinion Management's Responsibility
D. Auditor's Responsibility Opinion
14. Without affecting the CPA's willingness to express an un-.

modified opinion on the client's financial stater:nents, corpo-
rate management may refuse a request to
A. Authorize its attorney to confirm that a list of pending or
threatened litigation prepared by management includes
all items known to the attorney.
B. Change its basis of accounting for inventories from first-
in, first-out (FIFO) method to weighted average method.
C. Write down to salvage value certain equipment that is no
longer useful.
D. Allow the CPA to examine tax returns for years prior to
that of the financial statements being audited.
Even if management refuses to change its inventory costing

method from FIFO to weighted average, the financial state-
ments would still comply with the requirements of the
PFRS. Therefore, the CPA may still express an unmodified
opinion.
15. In which of the following circumstances would an auditor

most likely add an Emphasis of Matter paragraph to the au-
ditor's report while expressing an unmodified opinion? .
A. The auditor is asked to report on a single ftnancia 1
statement (e.g., a statement of financial position).
B. There is significant doubt about the entity's ability to
continue as a going concern.
C. Management's estimates of the effects future events are
unreasonable. n
D. Certain transactions cannot be tested because of rna -
agement's records retention policy.
When there is significant doubt on the entity's abilit~ t~rc~~~

tinue as a going concern, the auditor should consid
10 The Auditors Report on Financial Statei'neRIS 697
cHApTER ··
adequacy of disclosure of the material uncertainty. If ade-

quate disclosure is made in the financial statements, the au-
ditor shall express an unmodified opinion and include an
Emphasis of Matter paragraph (after the opinion paragraph)
in the report.
Answer A is incorrect because under PSA 805, an auditor

who is engaged to audit a single financial statement may ex-
press an unmodified opinion without adding an Emphasis of
Matter paragraph.
Answer C is incorrect because an unmodified opinion would

not be appropriate when financial statements contain un-
reasonable estimates.
Answer D is incorrect because a qualified opinion or a dis-

claimer of opinion is proper when there is restriction on the
scope of the audit.
16. If an auditor is satisfied that sufficient evidence supports

management's assertions about an uncertainty and its
presentation or disclosure, the auditor should
A. Express a modified opinion with ~n Emphasis of Matter
paragraph.
B. Express an unmodified opinion with an Emphasis of Mat-
ter paragraph.
C. Express an unmodified opinion with an Other Matter par-
agraph.
D. Express a qualified opinion or disclaim an opinion, de-
pending ~pon the materiality of the loss.
According to PSA 706 (Emphasis of Matter Paragraphs and

Other Matter Paragraphs in the Independent Auditor's Re-
port), if the auditor considers it necessary to draw users' at-
tention to a matter presented or disclosed in the financial

statements that, in the auditor's judgment, is of such im-
portance that it is fundamental to users' understanding of
the financial statements, the auditor shall include an Em-
phasis of Matter paragraph in the auditor's report provid-
ed that the auditor has obtained sufficient appropriate audit
evidence that the matter is not materially misstated in the
financial statements. The auditor shall include it immedi-
ately after the opinion paragraph and indicate that the audi-
tor's opinion is not modified in respect of the matter em-
phasized.
Answers A and D are incorrect because a modified opinion

(qualified, adverse or disclaimer) is appropriate when fi-
nancial statements are not free of material misstatement
and/or when the scope of the audit is limited.
Answer C is incorrect because an Other Matter paragraph

refers to a matter other than those presented or disclosed in
the financial statements that, in the auditor's judgment, is
relevant to users' understanding of the audit, the auditor's
responsibilities or the auditor's report.
17. During the year ended December 31, VICTORIA Co. report-
ed its property, plant and equipment at the lower of cost or
market (LCM) because their fair value had declined. The
loss has been included in the income statement and the ad-
justment has been fully disclosed in the notes. If a CPA be·
lieves that the values reported in the financial statements
are reaso·nable, what opinion should be expressed?
A. An unmodified opinion.
B. A "subject to" qualified opinion.
C. An adverse opinion
D. A disclaimer of opinion
\ ...
\

cttAprER
under PAS ~6 (Property, Plant, and Equipment), a company

maY report its proper~y, plant and equipment using the cost
model or the revaluat10n model. Recording them at LCM is
therefore not consistent with the requirement of the PAS.
ASsuming that the effects are material, the auditor should
express either a qualified or adverse opinion.
Answer A is incorrect because a material misstatement in

the financial statement precludes an unmodified opinion.
Answer B is incorrect because the use of "subject to" in a

qualified opinion is prohibited.
~! Answer D is incorrect because a disclaimer is appropriate

'Oij.
when the scope limitation does not permit expression of an
nenr opinion.
18. Reference to "financial statements" in PSA 700 (Forming an

~ Opinion and Reporting on Financial Statements), means
~a A. A complete set of general purpose financial statements,
I~ tt including the related notes.
i0f'1 B. A complete set of financial statements prepared to meet
the financial information needs of specific users.
C. A complete set of financial statements prepared in ac-
at· cordance with a special purpose framework.
tir D. A complete set of financial statemeAts prepared in ac-
iii cordance with either a general or special purpose
t- framework.
tf-
iltt Reference to "financial statements" in PSA 700 means a
complete set of general purpose financial statements, in-
cluding the related notes.
j L
General purpose financial statements are financial state-

ments prepared in accordance with a general purpose
framework, i.e., a financial reporting framework designed to
meet the common financial information needs of a wide
range of users.
Answers B, C and D are incorrect because PSA 800 (Special

Considerations-Audits of Financial Statements Prepared in
Accordance with Special Purpose Frameworks) applies to
financial statements prepared in accordance with a special
purpose framework, i.e., a financial reporting framework
designed to meet the financial information needs of specific
users.
19. Which of the following statements best describes a compli-

ance framework?
A. A compliance framework requires compliance with the
requirements of the framework and acknowledges ex-
plicitly or implicitly that, to achieve fair presentation of
the financial statements, it may be necessary for man-
agement to provide disclosures beyond those specifically
required by the framework.
B. A compliance framework requires compliance with the
requirements of the framework and acknowledges ex-
plicitly that it may be necessary for management to de-
part from a requirement of the framework to achieve fair
presentation of the financial statements.
C. A compliance framework only requires compliance with
the requirements of the framework.
D. A compliance framework refers to a financial reporting
framework designed to meet the financial information
needs of specific users.
ctlApfER
The term "fair pr~sentation framew_ork" is used to refer to

financial reportmg framework that requires compliance
~ith the requirements of the framework and:
i. Acknowledges explicitly or implicitly that, to achieve
fair presentation of the finandal statements, it may
be necessary for management to provide disclosures
beyond those specifically required by the frame-
work; or
ii. Acknowledges explicitly that that it may be neces-
sary for management to depart from a requirement
of the framework to achieve fair presentation of the
financial statements.
The term "compliance fram·e work" is used to refer to a fi-

nancial reporting framework that requires compliance with
the requirements of the framework, but does not contain
the acknowledgements in (i) or (ii) above. (PSA 700, par. 7)
20. Which of the following should be considered when forming

an opinion on the audited financial statements?
I. Whether sufficient appropriate audit evidence has
been -obtained.
II. Whether uncorrected misstatements are material, in-
dividually or in aggregate.
III. The qualitative aspects of the entity's accounting
practices, including indicators of possible bias in man-
agement's judgments.
A. I only
B. I and III only
C. I and II only
D. I, II, and III
21. When reporting on financial statements prepared in accord-

ance with a compliance framework, the auditor shall evalu-
ate
a. The overall presentation, structure and

content of the financial statements. No Yes No Yes
b. Whether the financial statements,
including the related notes, represent
the underlying transacijons and events
in a manner that achieves fair presentation. No Yes Yes No ·
The auditor's evaluation should include consideration of (a)

and (b) above when reporting on financial statements pre-
pared in accordance with a , fair presentation framework
(PSA 700, par 14).
22. Management and, when appropriate, those charged with

governance have responsibility for
I. The preparation of the financial statements.
II. An adequate description of the framework applied in the
preparation of the financial statements.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
23. An audit client's description that its financial statements a~e

prepared in accordance with a particular applicable financial
reporting framework is appropriate only if .
A. The financial statements comply with all the require·
ments of that framework that are effective during the
period covered by the financial statements.
\
B. The financial statements are in substantial compliance I
I
with that framework.
I
Cf'lApfER
The financial statements adequately disclose the signifi-

c. cant acc~unting policie_s selected and applied.
The terminology used in the financial statements includ-
o. ing the title of each financial statement, is appropriate.
To distinguish it from reports that might be issued by others,

4
2 · such as by officers of the entity, the board of directors, or
trom the reports of other auditors who may not have to
abide by the sa~e ,ethical requirements as the independent
auditor, the auditors report should have an appropriate
A. Addressee
B. Title
c. Signature
o..
Opinion
The auditor's report should have a title that clearly indi-

cates that it is the report of an independent auditor. The ti-
tle "Independent Auditor's Report" affirms that the auditor
has met all of the relevant ethical requirements regarding ·
independence and, therefore, distinguishes the independent
auditor's report from reports issued by others.
25. The audit report date on an unmodified report indicates

A. The last date on which users may institute a lawsuit
against either the client or the auditor.
B. The last day of the auditor's responsibility for the review
of significant events occurring after the end of the re-
porting period.
C. The end of the r~porting period.
D. The date on which the financial statements were fried
with the Securities and Exchange Commission.
26. The auditor's report should be addressed

A. Only to the shareholders of the entity whpse financial
statements are being audited.
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B. Only to the board of directors of the entity whose finan-

cial statements are being audited.
C. To the CEO or the CFO of the entity whose financial
statements are being audited.
D. Either to the shareholders or the board of directors of
the entity whose financial statements are being audited.
The auditor's report is ordinarily addressed to those for

whom the report is prepared, often either to the sharehold-
ers or to those charged with governance of the entity whose
financial statements are being audited.
27. Which of the following is included in the introductory or

opening paragraph of the auditor's report?
A. Identification of the financial statements audited, includ-
ing the date of and period covered by the financial
statements.
B. A statement that the financial statements are the re-
sponsibility of the entity's management.
C. A statement that the audit was conducted in accordance
with Philippine Standards on Auditing.
D. A statement that the responsibility of the auditor is to
express an opinion on the financial statements based on
the audit.
The introductory paragraph shall identify the entity whose

financial statements have been audited and shall state that
the financial statements have been audited. The introducto·
ry paragraph shall also:
a) Identify the title of each of the financial statements
that comprise the complete set of financial state·
men ts;
.
b) Refer to the summary of significant . oli·
accounting P
cies and other explanatory information; and
cW'prER
c) Specify the date and period covered by the financial

statements.
pSA 700 (For~ing an Opini?n and Reporting on Financial

Statements) gives the followmg example of an independent
auditor's report:
Independent Auditor's Report
[Appropriate Addressee]
Report on the Financial Statements
We have audited the accompanying financial statements of the

ABC Company, which comprise the statement of financial position
as of at December 3 I, 20X I, and the statement of comprehensive
income, statement of changes in equity and statement of cash flows
for the year then ended, and a summary of significant accounting
policies and other explanatory information.
Management's Responsibility for ·the Financial Statements
Management is responsible for the preparation and fair presenta-

tion of these financial statements in accordance with Philippine Fi-
nancial Repo1ting Standards, and for such internal control as man-
agement determines is necessary tp enable the preparation of fi-
nancial statements that are free from material misstatement,
whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opm1on on these financial

statements based on our audit. We conducted our audit in accord-
ance with Philippine Standards on Auditing. Those standards re-
quire that we comply with ethical requirements and plan aQd per-
form the audit to obtain reasonable assurance about whether the fi-
nancial statements are free from material misstatement.
An audit involves performing procedures to obtain evidence about

the amounts and disclosures in the financial statements. The pro-
cedures selected depend on the auditor's judgment, including the
assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk as-
sessments, the auditor considers internal control relevant to the en-
tity'.s preparation and fair presentation of the financial statements
in order fo design audit procedures that are appropriate in the cir-
cumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity's internal control. An audit also in-
cludes evaluating the appropriateness of accounting policies used
and the reasonableness of accounting estimates made by manage-
ment, as well as evaluating the overall presentation of the financial
statements.
We believe that the audit evidence we have obtained is sufficient

and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements present fairly, in all mate-

rial respects, the financial position of ABC Company as of De-
cember 3 I, 20X I, and of its financial performance and its cash
flows for the year then ended in accordance with Philippine Finan-
cial Reporting Standards.
Report on Other Legal and Regulatory Requirements
[Form and content of this section of the auditor 's report will vary de-
pending on the nature of the auditor's other reporting responsibilities.}
[Auditor's signature]
[Date of the auditor's report]
I
[Auditor' s address] .
.
.
.
cHAp-O:R
entity's management is responsible for the preparation

zs. And fair presentation of the financial statements. Its re-
an nsibility includes the following, except ·
~o Designing, implementing, an~ maintaining internal con-
trol relevant to the preparation and presentation of fi-
nancial statements.
B. Making accounting estimates that are reasonable in the
circumstances.
c. selecting and a~plying appropriate accounting policies.
o. Assessing the risks of material misstatement of the fi-
nancial statements.
The independent auditor-not the entity's management-

should make an assessment of the risks of material mis-
statement of the financial statements, whether due to fraud
or error.
29, The opinion paragraph of the auditor's report

I. Identifies the applicable financial reporting framework
on which the financial statements are based.
II. Expresses an opinion on the financial statements.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
As illustrated in the standard, the opinion paragraph of the

auditor's report reads:
"In our opinion, the financial statements present fairly, in all

!llaterial respects, the financial position of ABC Company as
of December 31, 20Xl, and of its financial performance and
its cash flows for the year then ended in accordance with
Philippine Financial Reporting Standards."
. - ~
.....
:_~ .
--;
. . ·;.. ·.-~... .· ~··_~(.
..
.....
__£ ,. :
30. The following statements relate to the date of the auditor's

report. Which is false?
A. The auditor should date the report as of the completion
date of the audit.
B. The date of the auditor's report should not be earlier
than the date on which the financial statements are
signed or approved by management.
C. The date of the auditor's report should not be later than
the date on which the financial statements are signed or
approved by management.
D. The date of the auditor's report should always be later
than the date of the financial statements (i.e., the bal-
ance sheet date).
PSA 700 states that since the auditor's opinion is provided

on the financial statements and the financial statements are
the responsibility of management, the auditor is not in a po-
sition to conclude that sufficient appropriate audit evidence
has been obtained until the auditor obtains evidence that a
complete set of financial statements has been prepared and
management has accepted responsibility for them.
31. Which of the following statements best expresses the objec-

tive of the traditional audit of financial statements?
A. To express an opinion on the fairness with which the
statements present financial position, financial perfo~
mance, and cash flows in accordance with Philippine Fi·
nancial Reporting Standards.
B. To express an opinion on the accuracy with which the
statements present financial position, financial perfo~
man:e, and cash flows in accordance with Philippine Ft·
nanc1al Reporting Standards.
C. To ~ake suggestions as to the form or content of the fl·
nancial statements or to draft them in whole or in part.
cHApTER 709
0 . To as~ure adoption of_ sound accounting policies and the

establishment and maintenance of internal control.
The object.i ve of the traditional financial statement audit' is

for the auditor to express an opinion (or a disclaimer of
opinion) on the fairness, in all material respects, of the fi-
nancial statements prepared and presented by the client's
management.
The auditor's report should clearly state whether the audit

was conducted in accordance with PSAs, and whether, in the
opinion of the independent auditor, the financial statements
are presented in accordance with Philippine Financial Re-
porting Standards.
Answer B is incorrect because the auditor expresses an

opinion on the fairness (not the accuracy) of financial
statements.
Answer C is incorrect because the auditor may make sugges-

tions as to the form or content of the financial statements or
may draft them in whole or in part, but his/her responsibil-
ity is confined to the expression of an opj nion on their fair-
ness.
Answer D is incorrect because the client's management is

responsible for adopting sound accounti~g policies and es-
tablishing and maintaining internal control.
32. Which of the following best describes why an independent

auditor is asked to express an opinion on the fair presenta-
tion of financial statements?
A. It is a customary courtesy that all shareholders receive

an independent report on management's stewardship in
managing the affairs of the business.
B. The opinion of an independent party is needed because
a company may not be objective with respect to its own
financial ·statements.
C. It is difficult to prepare financial statements that fairly
present a company's financial position, financial perfor-
mance, and cash flows without the expertise of an inde-
pendent auditor.
D. It is management's responsibility to seek available inde-
pendent aid in the appraisal of the financial information
shown in its financial statements.
The independent auditor's opinion lends credibility to the

financial statements prepared and presented by an entity's
management.
Answer A is incorrect because, although it is a customary

courtesy that all shareholders receive an independent re·
port on management's stewardship function, it is not the
primary reason why an independent report is issued to ac·
company the financial statements.
Answer C is incorrect because the preparation of financial

statements is the sole responsibility of an entity's manage·
ment.
Answer D is incorrect, because the independent audito:'~

function is to express an opinion on the fairness of !in~n~~:.
statements, not to make an appraisal of the financial 10
mation shown in an entity's financial statements.
'

cwV'~~
are management's responsibility and the auditor's re-
33. ~;:nsibility represented in the auditor's report?
Management's Auditor's
Resoonsibility Responsibility
Implicitly Implicitly
A. Implicitly Explicitly
a. Explicitly Implicitly
c. Explicitly Explicitly
o.
In which of the following c~rcumstances would an auditor
34· most likely add an. Emphas1.s of Matter paragraph to the
auditor's report while e~pressmg an unmodified opinion?
A. There is a subst~nt1al doubt about the entity's ability to
continue as a going concern.
B. Management's estimates of the effects of future events
are unreasonable.
c. No depreciation has been provided in the financial
statements.
o. Certain transactions cannot be tested because of man-
agement's records retention policy.
According to the standard, the auditor should modify. the

auditor's report by adding an emphasis of matter paragraph
to highlight a material matter regarding a going concern
problem.
PSA 570 (Going Concern) gives the following example of

such a paragraph:
"Without qualifying our opinion, we draw attention to Note X in

the financial statements which indicates that the Company incurred
a net loss of Pxxx during the year ended December 31, 20X I and,
as of that date, the Company's current liabilities exceeded its total
assets by Pxxx. These conditions, along with other matters as set
-
forth in Note X, indicate the existence of a material uncertainty

which may cast significant doubt about the Company's ability to
continue as a going concern."
Answer B is incorrect because financial statements contain-

ing unreasonable management's estimates are not fairly
presented and will preclude the auditor from expressing an
unmodified opinion.
Answer C is incorrect because an auditor who is asked to

report on one financial statement may appropriately ex-
press an unmodified opin•on without adding an Emphasis of
Matter paragraph in the audit report.
Answer D is incorrect because a scope limitation will re-

quire a qualified opinion or a disclaimer of opinion.
35. An Emppasis of Matter paragraph of an auditor's report de-

scribes an uncertainty as follows:
Without qualifying our opinion, we draw altention to Note
X to the financial statements. The Company is the defend-
ant in a lawsuit alleging infringement of certain patent
rights and claiming royalties and punitive damages. The
Company has filed a counter action and preliminary hear-
ings and discovery proceedings on both actions are in
progress. The ultimate outcome of the matter cannot pres-
ently be determined, and no provision for any liability that
may result has been made in the financial statements.
What type of opinion should the auditor express under these

circumstances?
A. Unmodified
B. "Except for" qualified
C. "Subject to" qualified
D. Disclaimer of opinion
10 The Auditor's Report on Financial Statements 71 3
c~prER
The addition of an E~phasis of Matter paragraph because of

significant uncertamty (other than a going concern prob-
~em) does not affect the auditor's opinion. As indicated
above, the ~mp,hasi~ ~f M.atter paragraph refers to the fact
that the auditors opmIOn 1s not qualified.
Answer B is incorrec~ ~ecau~e an uncertainty does not nec-

essarily lead to a qualified opmion.
Answer C is incorrect because the use of the qualifying

phrase "subject to" is not allowed.
Answer Dis incorrect because a disclaimer of opinion would

be appropriate in extreme cases, such as situations involv-
ing multiple uncertainties that are significant to the financial
statements.
36 . An auditor's responsibility to express an opinion on the fi-

nancial statements is
A. Implicitly represented in the auditor's report.
a. Explicitly represented in the "Auditor's Responsibility"
section of the auditor's report.
c. E~plicitly represented in the "Management's Responsibil-
ity" paragraph of the auditor's report. ·
D. Explicitly represented in the opinion paragraph of the
auditor's report.
The "Auditor's Responsibility" section begins with "Our re-

sponsibility is to express an opinion on these financial
statements based on our audit."
37. The existence of audit risk is recognized by the statement in

the auditor's report that the auditor
A. Is responsible for expressing an opinion on the financial
statements, which are the responsibility of management.
B. Realizes some matters, either individually or in the ag-

gregate, are important while other matters are not im-
portant.
C. Obtains reasonable assurance about whether the finan-
cial statements are free of material misstatement.
D. Assesses the accounting principles used and also evalu-
ates the overall financial statement presentation.
Audit risk is the risk that the auditor may give an inappro-
priate opinion on financial statements that are materially
misstated. The existence of audit risk is recognized by the
statement in the auditor's report that the auditor obtained
reasonable (not absolute) assurance about whether the fi-
nancial statements are free of material misstatement.
Answers A, B, and Dare incorrect because they don't pertain

to a.u dit risk ·
38. Which of the following statements is a basic element of the

auditor's report?
A. The auditor is responsible for the preparation and fair
presentation of the financial statements.
B. The financial statements are consistent with those of the
prior period.
C. An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the fi-
nancial statements.
D. The disclosures provide reasonable assurance that the
financial statements are free of material misstatement.
39. Which paragraphs of an auditor's report on financial stat~:

ments should refer to Philippine Financial Reporting Stan
ards?
A. Introductory and Opinion ..
B. Auditor's Responsibility and Management's ResponsibrlrtY
\

ct'4pffR
C Introductory and Auditor's Resp<>nsibility

·. Management's Responsibility and Opinion
0
An independent ~uditor d.iscovers that a payroll supervisor of
40. the company, being audited has misappropriated PS0,000.
jhe company s to~.1 assets and income before tax are P70
U· I
rnillion and P15 mrlhon, respectively. Assuming no other is-
sues affect the report, the auditor's report will most likely
contain a/an
).
A. unmodified opinion
'y . Disclaimer of opinion
6
c. Adverse opinion
' I
D. ~ope qualification
As Jong as the misappropriation is accounted for properly,

an unmodified opinion will be appropriate because the fi-
nancial statements will be fairly presented in accordance
with Philippine Financial Reporting Standards. Moreover,
the amount of misappropriation is immaterial relative to the
company's assets and income.
41. A client makes test counts on the basis of a statistical plan.

The auditor observes such counts as are deemed necessary
and is able to become satisfied as to the reliability of the cli-
ent's procedures. In report~ng on the results of the audit,
the auditor
A. Must qualify the opinion if the inventories were ·material.
B. Can express an unmodified opinion.
C. Must comment in an Emphasis of Matter paragraph as to
the inability to observe year-end inventories.
D. Is required to disclaim an opinion if the inventories were
material.
716 CPA EXAMINATION REVIEWER: AUDITIN(; THEORY
The auditor may express an unmodified opinion and the au-

dit report need not refer to the failure to observe year-end
physical count and to the alternative procedures applied.
Answer A is incorrect because a qualified opinion is inap-

propriate if there is no significant scope limitation and the
financial statements are fairly presented.
Answer C is incorrect because a comment in an Emphasis of

Matter paragraph concerning the omission of a procedure is
not required if the auditor has become satisfied by perform-
ing alternative procedures.
Answer D is incorrect because, given no significant scope

limitation, a disclaimer of opinion is unnecessary.
42. A note to the financial statements of the Prudent Bank indi-

cates that all of the records relating to the bank's business
operations are stored on magnetic disks, and" that no emer- ·
gency backup systems or duplicate disks are stored because
the bank and its auditors consider the occurrence of a catas-
trophe to be remote. Based upon this note, the auditor's re-
port should express
A. A qualified opinion
B. An unmodified opinion
C. An adverse opinion
D. A "subject to" opinion
The bank's failure to have backup records does not affe~t

the fairness of the financial statements. Hence, an unmodi-
fied opinion is appropriate.
43. An ~ud!tor who uses the work of an expert may refer to the
auditors expert in the auditor's report if the
ctiflpfER
Expert is employed. by the entity.

A·
B. Expert's work provides the auditor greater assurance of
reliability.
Auditor expresses a qualified opinion or an adverse opin-
e. ion related to the work of the expert.
o. Auditor indicates a division of responsibility related to the
work of the expert.
par. A42 of PSA 620 (Using the Work of an Auditor's Expert)

states, "It may be appropriate in some circumstances to re-
fer to the auditor's expert in an auditor's report containing a
modified opinion to explain the nature of the modification ..
In such circumstances, the auditor may need the permission
of the auditor's expert before making such a reference."
Answer A is incorrect because an expert employed by the

entity is a management's expert, not an auditor's expert.
Answer B is incorrect because, although the work of an ex-

pert is expected to provide greater assurance of reliability,
reference to the auditor's expert's work is justified only
when the opinion is modified as a result of the expert's
work.
Answer D is incorrect because PSA 620 provides that if the

auditor makes reference to the work of an auditor's expert
in the auditor's report when such reference is relevant to an
understanding of a modification to the auditor's opinion, the
auditor shall indicate in the auditor's report that such refer-
ence does no~ reduce his/her responsibility for the 019inion.
44. When would the auditor refer to the work of an appuaiser in

the auditor's report?
-
718 CPA EXAMINATION REVIEWER: AUDITING ·THEORY
A. An adverse opinion is expressed based on a difference of

opinion between the client and the outside appraiser as
to the value of certain assets.
B. A disclaimer of opinion is expressed because of a scope
limitation imposed on the auditor by the appraiser.
C. A qual.ified opinion is expressed because of a matter un-
related to the work of the appraiser.
D. An unmodified opinion is expressed and an Emphasis of
Matter paragraph is added to disclose the use of the ap-
praiser's work.
According to PSA 620, the auditor may refer to the auditor's

expert if a modified report is to be issued as a result of the
expert's work.
Answer B is incorrect because the appraiser is not in a posi-

tion to limit the scope of the auditor's work since the audi·
tor can engage another appraiser.
Answer C is incorrect because the auditor's qualification

must be related to the expert's work.
Answer D is incorrect because the auditor should not refer

to the work of an expert if an unmodified report is to be is·
sued.
45. A modified opinion on the financial statements is necessarY

when
I. The auditor concludes, based on the audit evidence ob~
tained, that the financial statements as a whole are no
free from material misstatement. ·ate
II. The auditor is unable to obtain sufficient appropn nts
audit evidence to conclude that the financial staterne
as a whole are free from material misstatement.
cttAprfR
A· I only.
n only.
c:
6
Either I or II
D. Neither I nor II
Which of the following terms is used in the standard to de-

46. scribe the effects .on the financial statements of misstate-
ments or the possible effects on the financial statements, if
any, that are undetected due to an inability to obtain suffi-
cient appropriate audit evidence?
A. persuasive
B. Pervasive
c. Material
o. Extensive
According to the standard, pervasive effects on the finan-
cial statements are those that, in the auditor's judgment:
1) Are not confined to specific elements, accounts or
items of the financial statements;
2) If so confined, represent or could represent a sub-
stantial proportion of the financial statements; or
3) In relation to disclosures, are fundamental to users'
understanding of the financial statements.
47. The auditor shall express an adverse 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
B. Tht! auditor is unable to obtain sufficient appropriate au-
dit evidence on which to base the opinion, but the audi-
tor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could
be material but not pervasive.
-
720 CPA EXAM/NATION REVIEWER: AUDITING THEORY
C. The auditor, having obtained sufficient appropriate audit

evidence, concludes that misstatements, individually or
in the aggregate, are both material and pervasive to the
D. The auditor is unable to obtain sufficient appropriate au-
dit evidence on which to base the opinion, and the audi-
tor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could
be both material and pervasive.
48. A limitation on the scope of the audit may arise from

I. Circumstances beyond the control of the entity.
II. Circumstances relating to the nature and timing of the
auditor's work.
III. Limitations imposed by management.
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III
49. The auditor's inability to obtain sufficient appropriate au~it

evidence (limitation on scope of the audit) arising from cir·
cumstances beyond the control of the entity includes when ·
A. The entity's accounting records have been destroyed. h
· t e
B. Management prevents the auditor from observing
counting of the physical inventory. . .
C. The auditor determines that performing substantive pr~s
cedures alone is not sufficient, but the entity's contro
are n?t ~ffective. . t the
D. The t1mmg of the auditor's appointment 1s such tha ·cal
51
auditor is unable to observe the counting of the phY
inventories.
10 The Auditor's Report on Financial Stalements 721
cW'pfER
A paragraph in~luded in the auditor'~ report that refers to a

50. rnatter appropnat~ly presen~ed or. disclosed in the financial
statements th~t, . in the auditor's Judgment, is of such im-
ortance that it is fund~mental to users' understanding of
fhe financial statements 1s called
A. Explanatory paragraph
B. Other Matter paragrap~
c. Basis for Modified Opinion paragraph
D. Emphasis of Matter paragraph
The following are examples of circumstances where the au-

ditor may consider it necessary to include an Emphasis of
Matter paragraph:
• An uncertainty relating to the future outcome of ex-
ceptional litigation or regulatory action.
• Early application (where permitted) of a new ac-
counting standard that has a pervasive effect on the
financial statements in advance of its effective date.
• A major catastrophe that has had, or cont!nues to
have, a significant effect on the entity's financial po-
sition.
51. When the auditor includes an Emphasis of Matter paragraph

in the auditor's unmodified report, the auditor shall
A. Include it immediately before the Opinion paragraph.
B. Use the heading "Emphasis of Matter" or other appropri-
ate heading.
C. Indicate that the auditor's opinion is modified in respect
of the matter emphasized.
D. Include it immediately after the Management's Responsi-
bility ~aragraph.
52. Which of the following should be included in the opinion

paragraph when an auditor expresses a qualified opinion?
72.2- CPA EXAMINATION REVIEWER: AUDITING THEORY
With the Foregoing

Subject to Exolanation
A. Yes No
B. No Yes
c. No No
D. Yes Yes
Par. A22 of PSA 705 states, "When the auditor expresses a

qualified opinion, it would not be appropriate to use
phrases such as "with the foregoing explanation" or "subject
to" in the opinion paragraph as these are not sufficiently
clear or forceful."
53. In which of the following circumstances would an auditor

usually choose between expressing a qualified opinion or
disclaiming an opinion?
A. Departure from the requirements of the applicable finan-
cial reporting framework.
B. Unreasonable justification for a change in accounting
principle.
C. Inability to obtain sufficient appropriate audit evidence.
D. Inadequate disclosure of accounting policies.
A limitation on the scope of the auditor's work whether im·

posed by the client or by circumstances such as the inad~
quacy of the accounting records, the timing of the auditor_s
work, or the inability to obtain sufficient appropriate audit
evidence may require expression of a qualified opinion or a
disclaimer of opinion.
54. An auditor decides to express a qualified opinion on an _en:

ty's financial statements because a major inadequacy in 'rn
computerized accounting records prevents the auditor fro f
0
applying necessary procedures. The opinion paragraph
10 The Audij()r's Report on Financial Statements 723
cttAplfR
the auditor's report should state that the qualification per-

. s to
~inA client-imposed scope limitation.
:· A departure f:om PSAs.
6
C. Inadequ~te disclosure of necessary information.
o. The possible effects on the financial statements.
When there is a limitation on the scope of the auditor's work
that requires expression of a qualified opinion or a dis-
claimer of opinion, the auditor's report should describe the
limitation and indicate the possible adjustments to the fi-
nancial statements that might have been determined to be
necessary had the limitation not existed.
Answer A is incorrect because the opinion paragraph should

state that the qualification pertains to the possible effect on
the financial statements and not to the scope limitation it-
self.
Answer B ,is incorrect because the audit was conducted in

accordance with PSAs.
Answer C is incorrect because the issue is the auditor's fail-

ure to apply necessary procedures and not inadequate dis-
closure.
55. Sam, CPA, was engaged to audit the financial statements of

Mantha Corp. after its fiscal year had ended. The timing of
Sam's appointment as auditor and the start of field work
made confirmation of accounts receivable by direct commu-
nication with the debtors ineffective. However, Sam applied
other procedures and was satisfied as to the reasonableness
of the account balances. Sam's auditor's report most likely
contained a/an
It-
724 CPA EXAMINATION REVIEWER: AUDITING.THEORY
A. Qualified opinion because of a scope limitation.

B. Qualified opinion because of a departure from PSAs.
C. Unmodified opinion.
D. Unmodified opinion with an Emphasis of Matter para-
graph.
By applying alternative procedures, the CPA was satisfied

about the reasonableness of the account balances. Hence,
no scope limitation exists and the CPA may express an un-
modified opinion. The auditor's report need not refer to the
omission of the confirmation procedures or the perfor-
mance of alternative procedures.
Answers A and B are incorrect ·because no scope limitat_ion

exists and the CPA has not departed from PSAs.
Answer D is incorrect because there is no basis given to add

an emphasis of matter paragraph in the auditor's report.
56. In which of the following situations would an auditor ordi-

narily choose between expressing a qualified opinion or an
adverse opinion?
A. The auditor wishes to emphasize an unusually important
subsequent event.
B. The financial statements fail to disclose information that
is required by Philippine Financial Reporting Standards.
C. Events disclosed in the financial statements cause the
auditor to have substantial doubt about the entity's abil-
ity to continue as a going concern.
D. The auditor did not observe the entity's physical invento-
ry and is unable to become satisfied as to its balance bY
other auditing procedures.
A disagreement with management concerning the accept~·

bility of the accounting policies selected, the method of thetr
cHApTER
application, or the. adequacy of financial statement disclo-

sures may lead to either a qualified or an adverse opinion.
Answer .A is incorrect because the auditor may include an

Emphasis of Matter paragraph in his/her unmodified audi-
tor's report to emphasize an unusually important subse-
quent event.
Answer C i~ ~ncorrect because the auditor, without qualify-

ing the opm10n, should add an Emphasis of Matter para-
graph to highlight a material matter regarding a going con-
cern problem.
Answer D is incorrect because a scope limitation does not
lead to an adverse opinion.
S7. Under which of the· following circumstances would a dis-

claimer of opinion not be appropriate?
A. The financial statements fail to contain adequate disclo-
sure concerning related party transactions.
B. The auditor is engaged after fiscal year-end and is una-
ble to observe the physical inventories or apply alterna-
tive procedures to verify their balances.
c. The auditor is unable to determine the amounts associ-
ated with fraud committed by the client's management.
D. The client refuses to permit its attorney to furnish infor-
mation requested in a letter of audit inquiry.
A disclaimer of opinion should be expres~ed when the pos-

sible effect of a limitation on the scope of the auditor's work
is so material and pervasive that the auditor has not been
able to obtain sufficient appropriate audit evidence and, ac-
cordingly, is unable to express an opinion on the financial
statements. Inadequate disclosure concerning related party
transactions is not a scope limitation.
Answers B, C, and D are incorrect because a scope limitation

may result in a qualified opinion or a disclaimer of opinion.
58. When a publicly held company refuses to include in its au-

dited financial statements any of the segment information
that the auditor believes is required, the auditor should ex-
press a/an
A. Disclaimer of opinion because of the significant scope
limitation.
B. Adverse opinion because of a significant uncertainty.
C. Unmodified opinion with an Emphasis of Matter para-
graph emphasizing the matter.
D. Qualified opinion because of inadequate disclosure.
The auditor should express either a qualified or an adverse

opinion if material information that the auditor believes is
required to be disclosed is not disclosed in the financial
statements.
Answer A is incorrect because inadequate disclosure is a

departure from PFRS, not a scope limitation.
Answer B is incorrect because the auditor should consider

adding an Emphasis of Matter paragraph if there is a signi~
cant uncertainty. However, this does not ordinarily result 10
an opinion modification.
Answer C is incorrect because inadequate disclosure leads

to either a qualified opinion or an adverse opinion.
59. When a client will not permit inquiry of outside legal counsel,
the audit report will ordinarily contain a/an
A. Disclaimer of opinion.
B. Adverse opinion.
..• p'fER
Cf:V"
C. "Subjec:t to" qu~l~fied opinion.

. unmodified opinion with an Emphasis of Matter para-
0
graph.
A limitation on .the scope o.f the auditor's work, whether im-

osed by the client or by circumstances, will lead to a quali-
~ed opinion or a disclaimer of opinion.
Answer B is incorrect because a scope limitation will never
lead to an adverse opinion.
Answer C is incorrect because the standard clearly states

that a qualified opinion should be expressed as being 'except
for' the effects of the matter to which the qualification re-
lates.
Answer D is incorrect because a scope limitation results in a

qualified opinion or a disclaimer of opinion.
60. Which of the following phrases would an auditor most likely

include in the auditor's report when expressing a qualified
opinion because of inadequate disclosure?
A. Do not present fairly in all material respects.
B. Except for the omission of the information included in
the Basis for Qualified Opinion paragraph.
C. With the foregoing explanation of these omitted proce-
dures.
D. Subject to the departure from PFRS, as described above.
Inadequate disclosure, if material to the financial statements

taken as a whole, is a departure from PFRS and will lead to
either a qualified or an adverse opinion.
An auditor's report qualified for inadequate disclosure

should include an emphasis of matter paragraph preceding
- .. .
.,. . ...- , '=: m-:- .- -

-----.- ~ ---·- - -- --- ~-· ·- --- ~ _-
the opinion paragraph that explains the reason for the quali-
fication.
The opinion paragraph states, "In our opinion, except for the
omission of the information included in the Basis for Quali-
fied Opinion paragraph, the financial statements present
fairly ... "
Answer A is incorrect because the phrase "do not present

fairly" is used when the auditor expresses an adverse opin-
ion.
Answers C and D are incorrect because the phrases "with

the foregoing explanation" and "subject to" should not be
used when expressing a qualified opinion.
61. An auditor's report includes the following statement: "In our

opinion, because of the effects of the matters discussed in
the Basis for Adverse Opinion paragraph, the financial
statements do not present fairly, in all material respects, the
financial position of ABC Company as of December 31, 20X1,
and of its financial performance and its cash flows for the
year then ended in accordance with Philippine Financial Re-
porting Standards." This auditor's report contains a/an
A. Adverse opinion with an Emphasis of Matter paragraph.
B. Adverse opinion with an Other Matter paragraph.
C. Adverse opinion with an Explanatory paragraph. _
D. Adverse opinion with a Basis for Adverse Opinion para
graph.
bil·
A disagreement with management regarding the accepta 1·r
. of the accounting policies selected, the metho d 0 f .the •
1ty
- · 1
app l1cat1on or t h e adequacy of financial statemen t disco
sures could lead to a qualified or an adverse opinion.
ct!Aprt:R
'f he a
uditor
. should express
. an adverse
. opinion when the ef-
ct of a disagreement ts so material and pervasive to the fi-
fe ncial statements that a qualification is not adequate to
~~sclose the misleading or incomplete nature of the financial
sta tements. The statement
, . ,, quoted which includes the
phrase "do not present 1 arr1Y expresses an adverse opinion.
In which of the following circumstances would an auditor be

62· rnost likely to :xpress an adverse opinion?
A. The financial statements are not in conformity with the
Philippine Accounting Standards (PAS) on capitalization
of leases.
B. Tests of controls show that the entity's internal control is
so poor that it cannot be relied upon.
c. The Chief Executive Officer refuses the auditor atcess to
minutes of board of directors' meetings.
D. Information comes to the auditor's attention that raises
substantial doubt about the entity's ability to continue as
a going concern.
The auditor should express an adverse opinion when the fi-

nancial statements are not presented fah;Jy in accdrdance
with Philippine Financial Reporting Standards.
Answer B is incorrect because an ineffective internal control

system is not a basis for an adverse opinion.
Answer C is incorrect because a limitation on the -scope of

the auditor's work could lead to a qualified opinion or a dis-
claimer of opinion.
Answer D is incorrect because significant doubt about the

entity's continued existence, if adequately disclosed in the
financial statements, does not result in the modification of
~------------------1~
1 -----
the opinion but requires an Emphasis of Matter paragraph

following the opinion paragraph.
63. An auditor should ·disclose the substantive reasons for ex-

pressing an·adverse opinion in the Basis for Adverse Opinion
paragraph
A Following the opinion paragraph.
B. Preceding the opinion paragraph.
C. Following the introductory paragraph.
D. Within the notes to the financial statements.
When the auditor's report contains an adverse opinion, the

opinion paragraph refers to the Basis for Adverse Opinion
paragraph(s) preceding the opinion paragraph. This para-
graph should contain a clear description of the substantive
reasons for the adverse opinion and, unless .impracticable, a
quantification of the possible effect(s) on the financial
statements.
64. When an auditor expresses an adverse opinion, the opinion

paragraph should include
A. The principal effects of the departure from the require-
ments of the PFRS.
B. The substantive reasons for the financial statements be·
ing misleading.
C. A direct reference to a separate paragraph disclosing the
basis for the opinion. t
D. A description of the uncertainty or scope limitation tha
prevents an unmodified opinion.
I ' I1
When the auditor expresses an adverse opinion, the opi~ ct
10
paragraph of the auditor's report should include a di~fs)

reference to the Basis for Adverse Opinion paragrap he
preceding the opinion paragraph that clearly states all t
substantive reasons for the adverse opinion.
cHApfER
Answers A and B are incorrect because the principal effects

f the departure from the requirements of the PFRS and all
0 .
the substantive _reasons
f
?:
the adverse opinion are dis-
closed in the Basis for Mod1f1ed Opinion paragraph(s).
Answer D is incorrect because an uncertainty or a scope lim-

itation does not lead to an adverse opinion.
There are two broad financial reporting frameworks for

65
· comparatives: the corresponding figures and the compara-
tive financial statements. Which of the following statements
is correct concerning these reporting frameworks?
A. Under the corresponding figures framework, the corre-
sponding figures for the prior period(s) are integral part
of the current period financial statements.
B. Under the corresponding figures framework, the corre-
sponding figures for the prior period(s) are considered
separate financial statements.
c. Under the comparative financial . statements framework,
the comparative financial statements for the prior peri-
od(s) are intended to be read in conjunction with the
amounts and other disclosures relating to the current pe-
riod.
D. Under the comparative financial statements framework,
the amounts and other disclosures for the prior period(s)
form part of the current period financial statements.
Under PSA 710 (Comparative Information - Corresponding

Figures and Comparative Financial Sta~ements), the two fi-
nancial reporting frameworks are:
Corresponding figures where amounts and other disclo-

sures for the precedi"ng period are included as part of the
current period financial statements, and are intended to be
__ _:__._-- ... ~-
read in relation to the amounts and other disclosures relat-

ing to the current period.
These corresponding figures are not presented as complete

financial statements capable of standing alone, but are an in-
tegral part of the current period financial statements in-
tended to be read only in relationship to the current period
figures.
Comparative financial statements where amounts and

other disclosures for the preceding period are included for
comparison with the financial statements of the current pe-
riod, but do not form part of the current period financial
statements. The comparative financial statements are con-
sidered separate fin01ncial statements.
66. The following statements relate to the auditor's reporting

responsibilities regarding comparative information. Which
is/are correct?
I. For corresponding figures, the auditor's report only re-
fers to the financial statements of the current period.
II. For comparative financial statements, the auditor's re-
port refers to each period that financial statements are
presented.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
Because the corresponding figures are included as part of

the current period financial statements and are intended to
~e read +n conjunction with the amounts and other disclo-
sures relating to the current period, the auditor's report _on·
ly refers to the financiaJ statements of the current period·
cH.APT
ER 10 The Auditor's Report on Financial Statements 733
But because th~ comparative financial statements are con -

sidered separate ~inancial statements, the auditor's report
refers to each period that financial statements are present-
ed.
PSA 710 states that the extent of audit procedures per-

67. h d
formed on t e correspon ing figures is significantly less than
for the audit of the current period figures. The auditor's
procedures are ordinarily limited to ensuring that the corre-
sponding figures have been correctly reported and are ap-
propriately classified. The auditor should assess whether
I. Accounting policies used for the corresponding figure~
are consistent with those of the current period or
whether appropriate adjustments and/or disclosures
have been made.
II. Corresponding figures agree with the amounts and oth-
er disclosures presented in the prior period or whether
appropriate adjustments and/or disclosures have been
made.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
68. In which of the following circumstances would an auditor's

report least likely include specific reference to the corre-
sponding figures?
A. When the auditor's report on the prior period, as previ-
ously issued, included a modified opinion and the matter
which gave rise to the modification is resolved and
properly dealt with in the financial statements.
B. When the auditor's report. on the prior period, as previ-
ously issued, included a modified opinion and the matter
which gave rise to the modification is unresolved, and
results in a modification of the auditor's report regarding

the current period figures.
C. When the auditor's report on the prior period, as previ-
ously issued, included a modified opinion and the· matter
which gave rise to the modification is unresolved, but
does not result in a modification of the auditor's report ·
regarding the current period figures.
D. When the auditor's report on the prior period financial
statements containing a material misstatement included
an unmodified opinion and the prior period financial
statements have not been revised and reissued, and the
corresponding figures have not been properly restated
and/or appropriate disclosures have not been made.
Par. A3 of PSA 710 states, "When the auditor's report on the

prior period, as previously issued, included a qualified opin-
;on, a disclaimer of opinion, or an adverse opinion and the
matter which gave rise to the modified opinion is resolved
and properly accounted for or disclosed in the financial
statements in accordance with the applicable financial re-
porting framework, the auditor:s opinion on the current pe- ·
riod need not refer to the previous modification."
69. According to PSA 710, the incoming auditor may refer to t~e
predecessor auditor's report on the corresponding figures. in
the incoming auditor's report for the current period. The in-
coming auditor's report should indicate
I. That the financial statements of the prior period were
audited by the predecessor auditor.
II. The ty;:>e of opinion issued by the predecessor auditor.
III. The date of the predecessor auditor's report.
A. I and II only
8. II and III only
C. I and III only
cHAprER
I~
o. I, II, and III
~ When t~e. prior ~eriod financial s~atements are not audited,

70. the incoming auditor should state. in the auditor's report that
'it
I. The corresponding figures are unaudited.
~
II. The incoming auditor is not required to perform proce-
~
dures regarding opening balances of the current period.
~
A. I only
~ a. II only
~ c. Both I and II
~ o. Neither I nor II
~
PSA 710 states, "If the prior period financial statements

were not audited, the auditor shall state in an Other Matter
paragraph in the auditor's report that the corresponding
figures a re unaudited. Such a statement does not, however,
relieve the auditor of the requirement to obtain sufficient
appropriate a udit evidence tha.t the opening balances do not
contain misstatements that materially affect the current pe-
riod's financial statements."
71. J, CPA, audited JST Company's prior-year financial state-

ments. These statements are presented with those of the
current year for comparative purposes without J's auditor's
report, which expressed a qualified opinion. In drafting the
current year's auditor's report, S, CPA, the incoming auditor,
should
I. Not name J as the predecessor auditor.
II. Indica.te the type of opinion issued by J.
• III. Indicate the substantive reasons for J's qualification.
N. Indicate the date a·f J's auditor's report.
A. I, II, and IV only
B. II, III, and IV only
736 CPA EXAMINATION REVIEWER: A°UDITING THEORY
C. I, II, and III only

D. I, II, III, and N
PSA 710 states that when the financial statements of the

prior period were audited by another auditor,
a) the predecessor auditor may reissue the audit report

on the prior period with the incoming auditor only
reporting on the current period; or
b) th~ incoming auditor's report shall indicate:

i. that the financial statements of the prior period
were audited by the predecessor auditor;
ii. the type of opinion issued by the predecessor
auditor and, if the opinion was modified, the
reasons therefor;
iii. the date of that report.
It should be emphasized tha.t the requirement in (b) above

is to state that the prior year's financial statements were
audited by the predecessor auditor, not to name the prede-
cessor auditor.
72. When comparative financial statements are presented, the

auditor's opinion on the financial statements shall refer to
A. Current period only.
B. Current period and those of the other periods presented.
C. Current and immediately preceding period only.
D. Periods presented plus one preceding period.
PSA 710 provides that when comparative financial sttite-

ments a~e presente~, the auditor's opinion shall refer:~
each period for which financial statements are present
and on which the audit opinion is expressed.
,,pfER
c,H"
comparative financi~I statements include the financial

73. tatements of the prior year that were audited by a prede-
~essor auditor whose re.port is not presented. If the prede-
cessor's report was qualified, the incoming auditor should
A. Express an opinion only on the current year's statements
and make no reference to the prior year's statements.
6. Issue an updated comparative audit report indicating the
division of responsibility.
c. Request the client to ,reissue the predecessor's report on
the prior year's statements.
D. Indicate the substantive reasons for the qualification in
the predecessor auditor's opinion.
When the predecessor auditor's report is not presented, the

incoming auditor's report shall indicate:
i. that the financial statements of the prior period were
audited by the predecessor auditor;
ii. the type of opinion issued by the predecessor audi-
tor and, if the opinion was modified, the substantive
reasons therefor; and
iii. the date of the report.
Answer A is incorrect because, when comparative financial

statements are presented, the auditor's opinion (or dis-
claimer of opinion) should be expressed individually on the
financial statements of each period presented.
Answer B is incorrect because the standard does not require

indication of divided responsibility.
Answer C is incorrect because, although the predecessor

auditor may reissue the audit report on the prior period
with the incoming auditor reporting only on the current pe-
. __
--,
I
I
I
738 CPA EXAMINATION REV/EWE~: AUDITING THEORY !

.i
!
riod, the situation in the question is that the predecessor

auditor's report is not presented.
74. Comparative financial statements include the prior ye~r's

statements that were audited by a predecessor auditor
whose report is not presented. If the predecessor's report
was unmodified, the incoming auqitor should
A. Indicate in the auditor's report that the predecessor au-
ditor expressed an unmodified opinion.
B. Express an opinion on the current year's statements
alone and make no reference to the prior year's state-
ments.
C. Obtain a letter of representations from the predecessor
auditor concerning any matters that might affect the in-
coming auditor's opinion. ·
D. Request the predecessor auditor to reissue the prior
year's report.
Answer Bis incorrect because, according to PSA 710, when

comparative financial statements are presented, the auditor
should issue a report in which the comparative financial
state~en~s are specifically identified. The auditor's opinion
(or d1sc.laune.r of opinion) should be expressed individually
on the fmanc1a\ statements of each period presented.
An~wer C is incon~ect because the incoming auditor is re-

quired t~ communicate with the predecessor auditor prior
to accepting the audit engagement. .
Answer D 15 · ·
. , incorrect because, although the predecessor
au d1tor s report may b · d t
th e reissue , the question states tha
e predecessor auditor's report is not presented.
75.
;~~~~~~~~~s9sor .athudithor,.who .is satisfied after properly
wi t e 1ncom1ng auditor, has reissued
10 ihe Auditor's Report on Financial Statements 739
c~ApfER
his/her auditor's rep_ort, on prior year financial statements.

The predecessor auditors rep~rt sh~uld
A Refer to the work of the incoming auditor in the scope
· and opinion paragraphs.
Refer to the report of the incoming auditor only in the
B. scope paragraph.
C. Refer to both thhe work and the report of the incoming
auditor only in t e opinion paragraph.
o. Not refer to the report or the work of the incoming audi-
tor.
p'SA 710 states that when the financial statements of the

prior period were ~udited by another auditor, the predeces-
sor auditor may reissue the audit report on the prior period
with the incoming auditor only reporting on the current pe-
riod. The reissued report should not refer to the report or
work of the incoming auditor.
Answers A, B, and Care incorrect beca use the reissued re-

port should not refer to the report or the work of the incom-
ing auditor.
76. An auditor expressed a qualified opinion on the prior year's

financial statements because of a lack of adequate disclo-
sure. These financial statements are properly restated in the
current year and presented in comparative. form with the
current year's financial statements. The auditor's updated
report on the prior year's financial statements should
A. Make no reference to the type of opinion expressed on
the prior year's financial statements.
B. Express an unmodified opinion on the restated financial
statements of the prior year. ,
C. Be accompanied by the auditor's original report on the
prior year's financial statements.
. .
=_...,..,.,,,..._
. . . ..
.· .·."a ,.c - I· j t·• ·~-~"' '*;; ' ;~;;;z ;,;,;....i~ ;·. ·: i -=;&71
... - - _. _, ,-_:·;'t, - .. c ·· -:'C-. . - · -- ...
a ,•
,/ .
D. Continue to express a qualified opinion on the prior

year's financial statements.
During the course of the audit of the current period, the au-
ditor may become aware of circumstances or events that
materially affect the financial statements of a prior period.
For example, if the auditor expressed a qualified opinion on
the prior year financial statements because of a departure
from PFRS and such statements are restated in the current
period to conform with the requirements of the PFRS, the
continuing auditor's updated report should refer to the re-
statement and express an unmodified opinion. Moreover,
the report should contain an Other Matter paragraph to dis-
close the substantive reasons for the different opinion.
Answer A is incorrect because the auditor's report should

contain an Other Matter paragraph to disclose the substan-
tive reasons for the change and the type of opinion previ-
ously expressed by the auditor.
Answer C is incorrect because the original auditor's report

should not be reissued.
Answer Dis. incorrect because the auditor should express a

different opinion.
77. In performing the audit on the current period financial

statements, the incoming auditor in certain unusual circurn·
I that
stances, may become aware of a material misstatement
affects the prior period financial statements on which t~fie
. di 1-
pre.decessor auditor had previously reported without rno d
cation. In these circumstances, the incoming auditor shoul
I. Discuss th~ matter with management.
II. Request that the predecessor auditor be informed.
cHAprER
A. I only
6 II only
· Both I and II
c. Neither I nor II
o.
According to PSA 71~, "If the auditor concludes that a mate-
rial misstatement exists that affects the prior period finan-
cial statements on which the predecessor auditor had previ-
ously reported without modification, the auditor shall com-
municate the misstatement with the appropriate level of
management and those charged with governance and re-
quest that the predecessor auditor be informed. If the. prior
period financial statements are amended, and the predeces-
sor auditor agrees to issue a new auditor's report on the
amended financial statements of the prior period, the audi-
tor shall report only on the current period."
78. The following statements relate to unaudited prior year fi-

nancial statements that are presented in comparative form
with audited current year financial statements. Which is in-
correct?
A. The incoming auditor should state in the auditor's report
that the comparative financial statements are unaudited.
8. The incoming auditor need not perform audit procedures
regarding opening balances of.the current period.
C. Clear disclosure in the financial statements that the
comparative financial statements are unaudited is en-
couraged.
D. In situations where the incoming auditor identities that
the prior year unaudited figures are materially misstated,
the auditor should request management to revise the
prior year's figures or if management refuses to do so,
appropriately modify the report.
According to PSA. 710, a statement in the auditor's report

that the prior period financial statements . are unaudited
does not refieve the auditor of the requirement to carry out
appropriate procedures regarding opening balances of the
current period.
79. A client is presenting comparative (two-year) financial

statements. Which of the following is correct concerning
reporting responsibilities of a continuing auditor?
A. The auditor may issue either one audit report on both
presented years, or two audit reports, one on each year.
B. The auditor should issue one audit report, but only on
the most recent year.
C. The auditor should issue two audit reports, one on each
year.
D. The auditor should issue one audit report that is on both
presented years.
When comparative financial statements are presented, the

auditor should issue a report in which the comparatives are
specifically identifi ed because the auditor's opinion is ex-
pressed individually on the financial state ments. of each pe-
riod pre.sented.
80. When audited financial statements are presented in a docu-

ment (e.g., annual report) containing other information, the
auditor 't
1
A. Should read the other information to consider whether
is inconsistent with the audited financial statements. it
B. Has no responsibility for the other information because
is not part of the basic financial statements. or-
e. Has an obligation to perform auditing procedures to c
roborate the other information. r in·
D. Is required to express a qualified opinion if the othe
formation has a material misstatement of fact.
., 6 p'fER
crv- .
An auditor _conclud~s th.at there is a material inconsistency in

81· the other mfo~mation in . an annual report to shareholders
containing audited fin~nc1al statements. If the auditor con-
dudes that the financial statements do not require revision,
but the client refuse.s to revise or eliminate the material in-
consistency, the auditor may
A. Disclaim an opinion on the financial statements after ex-
plaining the material inconsistency in an emphasis of
matter paragraph.
B. Revise the auditor's report to · include an Other Matter
paragraph describing the material inconsistency.
c. Express a qualified opinion after discussing the matter
with the client's directors.
o. Consider the matter closed because the other infor-
mation is not in the audited statements.
B2. PSA 720 (The Auditor's Responsibility in Relation to Other

Information in Documents Containing Audited Financial
Statements) states, "If, on reading the other information,
the auditor identifies a material inconsistency, the auditor
should determine whether the audited financial statements
or the other information needs to be revised." What type of
opinion should be expressed if the client refuses to make the
necessary revision in the financial statements?
A. Disclaimer of opinion.
B. Qualified opinion or disclaimer of opinion.
C. Unmodified opinion with an Other Matter paragraph de-
scribing the material inconsistency.
D. Qualified or adverse opinion.
83. Which of the following phrases would an auditor most likely

include in the auditor's report when expressing a qualified
opinion because of inadequate disclosure?
A. Subject to the departure from generally accepted ac-
counting principles, as described above.
··- -;_ .
. ..:
~ "--:--·-,...:.....
-~ .. ,t.·-· ·'i". ---- -
- ~---- .- -. ---- ---r :---~ .. . .......

- .... _
. . . .-
·"····~·
B. With the· foregoing explanation of these omitted disclo-

sures.
C. Except for the omission of the information discussed in
the Basis for Qualified Opinion paragraph.
D. Do not present fairly in all material respects.
The Qualified Opinion paragraph states, "In our opinion, ex-

cept for the omission of information discussed in the Basis
for Qualified Opinion paragraph, the financial statements
present fairly ... "
Answers A and Bare incorrect. When the auditor expresses

a qualified opinion, it would not be appropriate to use
phrases such as "with the foregoing explanation " or "subject
to" in the opinion paragraph as these are not sufficiently
clear or forceful. (PSA 705 (Revised and Redrafted), par. A22)
Answer D is incorrect because the phrase "do not present

--- ------,..........~ --
fairly" is used when expressing an adverse opinion.
84. LEONOR CO.'s financial statements adequately disclose ~n

certainties that concern future events, the outcome of ~hie~
are not susceptible to reasonable estimation. The auditors
report should include
A. An unmodified opinion
B. A "subject to" qualified opinion
C. An "except for" qualified opinion
D. An adverse opinion
AASCALERT
Series 2 of 2011 . . \ _2010
Reporting on Information Required by BIR Revenue Regulation (RR, 15
. tion on
85. RR 15-2010 requires disclosure of specific informa h twill
various taxes in the Notes to Financial Statements t a
\_
o1&prER 10 The Auditor's Report on Financial Statements
cnr . 745
ccornpany the income tax returns to b .
~ese disclosure requirements e filed with the BIR.
A· form ·part of the disclosure requireme t
rt f th d.
d
n 5 un er PFRS
B. Form pa o e 1sclosure requirements d ·
SMEs. un er PFRS for
C. form part of the disclosure requirements under PFRS
and PFRS for SMEs.
o. Do not form pa~ ?.f t~e disclosure requirements under
PFRS and other ' h1hpp1ne financial reporting frameworks
such as PFRS for SMEs.
86 . Under the PSAs,dthe tax information required by RR 15 _2010

that is presente as part of the notes to the financial state-
ments is considered
A. Significant information
B. Other information
c. Supplementary information
D. Material information
Supplementary information, as defined in the glossary of the

PSAs is "information that is presented together with the fi-
nancial statements that is not required by the applicable fi-
nancial reporting framework used to prepare the financial
statements, normally presented in either supplementary
s~hedules or as additional notes."
The supplementary information may be differentiated from

the financial statements by:
• Disclos ing the supplementary information in a sepa-
rate note at the end of the required notes to the fi-
nancial statements which is clearly label ed as ·"Sup-
pl ementa ry Information ."
r...._----------;:'f ~ f
• Removing any cross-references from the financial

statements to the separate note on supplementary
information.
87. The tax information disclosures under RR 15-2010 are re-

quired to be presented
A. Only in the consolidated financial statements.
B. Both in the consolidated financial statements and the
separate financi.al statements of the parent company and
its subsidiary/ies.
C. Only in the consolidated financial statements and the
separate financial statements of the parent company.
0. Only in the separate financial statements of the parent
company and the separate financial statements of the
subsidiary /ies.
The consolidated financial statements are not the financial

statements to be submitted to the BIR accompanying the in-
rnme tax returns. Hence, the required disclosures under RR
15-2010 are to be presented in .the separate financial state-
ments only.
88. Where the supplementary information required by RR 15·

2010 is not clearly differentiated from the financial state·
ments, such supplementary information shall be
A. Addressed in a separate section in the auditor's report
under the sub-title "Report on Other Legal and Regulato·
ry Requirements."
B. Addressed in a separate section in the auditor's report
und~r the sub-title "Report on the Supplementary Infor·
mat1on Required under RR 15-2010."
C. Addressed in an emphasis-of-matter paragraph in the
auditor's report.
D· covered by the auditor's opinion on the financial
· 5tate· ·'
ments.
\

ci-lAp~R
When the supplementary information required under RR 15-

~I 89· 2010 is not pre~e~ted
I~ A. The auditors Report on the Financial Statements" would
not be affected beca~se such supplementary information
is not part of the basic financial statements.
B. The audit?r is precluded from expressing an opinion on
the financial statements.
C. The aud!tor:s report should contain a qualified opinion.
o. The auditors report should contain an adverse opinion.
90 The supplementary information required under RR 15-2010

· is clearly differentiated from the audited financial state-
ments. How would the "Report on the Supplementary In-
formation" be affected if the auditor's "Report on the Finan-
cial Statements" contains an adverse opinion?
A. The auditor should express a qualified opinion on the
supplementary information. ·
s. To attain consistency in reporting, the auditor should ex-
press an adverse opinion on the supplementary infor-
mation.
c. The auditor is precluded from expressing an opinion on
the supplementary information.
D. The auditor should express an unmodified opinion on the
supplementary information because such information is
not a required part of the audited financial statements.
The auditor is precluded from expressing an opinion on the

supplementary information when his/her ,;Report on the
Financial Statements" contains either an adverse opinion or
a disclaimer of opinion.
The auditor's report on the supplementary information

should state that, "Because of the significance of the matter
described in the Basis for Adverse (or Disclaimer of) opinion
~~------------~
, ! --~
i
748 CP'A EXAMINA1WN REVIEWER: AUDITING THEORY
paragraph; it is inappropriate to and we do not express an

opinion on the information referred to above."
TRUE OR FALSE
1. PSA 700 (Forming an Opinion and Reporting on Financial

Statements) requires that the audit report must be titled and
that the title must include the word "independent."
2. An auditor may be unable to express an unmodified opinion

if an immaterial departure from PFRS is present in the finan-
cial statements.
3. If financial statements fail to disclose a material fact, the

auditors may disclose the information in an emphasis of
matter paragraph and issue an unmodified opinion on the
statements.
4. The opening paragraph of the standard unmodified audit

report states that the audit is designed to obtain reasonable
assurance whether the statements are free of material mis-
statement.
5. The client's management is responsible for the fairness of

the representations made in financial statements.
6. The audit report date on an unmodified report indicates t!1e

last day of the auditor's responsibility for the review of sig-
nificant events that occurred subsequent to the date of the
7. When the audited financial statements of the prior year are

presented together with those of the current year, the con-
tinuing auditor's report should cover only the current year.
c~prER
If financial sta_tements contain a material departure from

s. pfRS, the auditor usually should not issue an unmodified
opinion.
nie introductory par~graph of the unmodified audit report

9. states that the financial statements are the responsibility of
management.
If the auditor believes that there is minimal likelihood that

10· resolution of an uncertainty will have a material effect on the
financial statements, the auditor would issue an "except for"
qualified opinion.
11. When there is a significant

. question about a company's abil-
;ty to continue as a going concern, the report issued is usu-
ally modified with an emphasis of matter paragraph.
12 . If the statement of financial position of a company is dated

December 31, 2015, the audit report is dated February 12,
2016, and both are released on February 25, 2016, this indi-
cates that the auditor has searched for subsequent events
that occurred up to February 12, 2016.
13. The adverse effects of events causing an auditor to believe

there is substantial doubt about an entity's ability to contin-
ue as a going concern would likely be mitigated by evidence
relating to the feasibility of plans to purchase leased equip-
ment at less than market value.
14. The auditor is required to issue a disclaimer of opinion in the

event of a going concern problem.
15. Audit report issued for financial statements of a c<;>mpany

should refer to PFRS in the auditor's responsibility para-
graph.
~~~-- ~'*~0M'. . . .l !•r••,. . . . . . . . . . . .11·1·11 il2i· i~~i,·ijiiiij1ir;i-i'1ii· ;·rv
:;i;,;»=~ 1:-:·::~:,·:~·:J:·•:
r~ii1
16. Th_e audit r~port is normally addressed to the company's

chief executive officer or chief financial officer.
17. The auditor is required to issue a disclaimer of opinion in the

event of a material uncertainty.
18. The financial statements most commonly audited by external

auditors are the statement of financial position, the state-
ment of comprehensive income, and the statement of
changes in retained earnings.
19. A client-imposed scope limitation will generally result in an

adverse opinion.
20. Whenever an auditor issues a qualified report, he or she

must use the term "with the foregoing explanation" in the
opinion paragraph.
21. When an auditor does not confirm material accounts receiv-

able, but is satisfied by the application of alternative auditing
procedures, he normally should issue an unmodified opinion,
but disclose elsewhere in the report this departure from a
customary procedure.
22. When an auditor expresses an adverse opinion, the opin~~

paragraph should include a direct reference to a separ
paragraph disclosing the basis for the opinion.
23. Materiality is an essential consideration in dete~minin~a~c~

appropriate type of report under a given set of circurn
es.
. . . . t tements
24. An auditor would issue an adverse opinion if the ~ ~ osition
taken as a whole do not fairly present the financ1a P
and financial performance of the company.
10 The Auditor's Report oo Financial Statements 751
ctlAprER
!he predecessor auditor, after properly communicating with
z5. h successor auditor, has reissued a report because the au-
~·~ client desires comparative financial statements. The pre-
d1 cessor auditor's report should make no reference to the
r:port or the work of the successor auditor.
i
~
[ ,: :{ ;\
KEY ANSWERS
1. B 19. c 37. c 55. c 73. D

2. D 20. D 38. c 56. B 74. A
3. A 21. A 39. D 57. A 75. D
4. D 22. c 40. A 58. D 76. B
5. D 23. A 41. B 59. A 77. c
6. D 24. B 42. B 60. B 78. B
7. B 25. B 43. c 61. D 79. D
8. B 26. D 44. A 62. A 80. A
9. B 27. A 45. c 63. B 81. B
10. c 28. D 46. B 64. c 82. D
11. B 29. c 47. c 65. A 83. c
12. A 30. c 48. D 66. c 84. A
13. B 31. A 49. A 67. c 85. D
14. B 32. B so. D 68. A 86. c
15. B 33. D 51. B 69. D 87. D
16. B 34. A 52. c 70. A 88. D
17. c 35. A 53. c 71. D 89. A
18. A 36. B 54. D 72. B 90. c
cHApl€R
f 01tfALSE
fltlJ
6. True 11. False 16. False 21. False
rrue
1.
7. False 12. True 17. False 22. True
2. false
8. True 13. False 18. False 23. True
3. false
9. False 14. False 19. False 24. True
4, false
10. False 15. False 20. False 25. True
s. True

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685

1. A major purpose of the auditor's report on financial state-

PSA 200 (Overall Objectives of the Independent Auditor and

686 . CPA EXAMINATION REVIEWER: AUDITING THEORY

to enhance the degree of confidence of intended users in the

Answer A is incorrect because an auditor's opinion is not an

Answer C is incorrect because while the auditor's report

Answer D is incorrect because the Auditor's Responsibility

2. If a company's external auditor expresses an unmodifi7d

If the auditor concl~des that, based on the audit evidence

Answer A is incorrect because readers may only assume

Answer B is incorrect because the report contains an opin-

Answer D is incorrect because an unmodified opinion may

3. When the financial statements contain material but not per-

C. Disclaim an opinion and describe. the matter giving rise

A QUALIFIED OPINION shall be expressed when, based on

A qualified opinion is also appropriate when the auditor is

When a qualified opinion is expressed, the auditor's reoort

If the material misstatement relates to specific amou~ts /~

Answer B i~ incor:ect because a Basis for Qualified Opinion

Answers C a nd D are incorrect because a DISCLAIMER OF

4. A CPA engaged to audit fir:iancial statements observes that

When financial statements contain material misstatements

Answer A is incorrect because an unmodified opinion is in-

Answer B is incorrect because a disclaimer of opinion is ap-

Answer C is incorrect because a note disclosure of the de-

6. When a qualified opinion is expressed, the implication is that

If a misstatement is immaterial to the financial statements of

PAS 2 (Inventories) requires that inventories should be val-

Answer C is incorrect because a disclaimer of opinion is only

Answer D is incorrect because an adverse opinion may not

9. SAMANTHA APARTMENTS CO. completed construction and

During the month of May 2014, the company charged to ex-

fairly in accordance with Philippine Financial Reporting

What type of opin~o~ should your report contain?

Because the transactions were accounted for properly in ac-

io. When an auditor modifies an opinion because of inadequate

11. In which of the following situations would an auditor ordi-

694 CPA EXAMINATION REVIEWER: AUDITING THEORY

C. The auditor is asked to report only on the entity's state-

Material misstatements arising from omission of disclosures

Answer A is incorrect because a disclaimer of opinion is ap-

Answer C is incorrect because audits of single financial

Answer D is incorrect because substantial doubt about the

Without qualifying our opinion, we draw attention to Note X in the

13. Which sections of an auditor's unmodified report on financial.,

D. Auditor's Responsibility Opinion

14. Without affecting the CPA's willingness to express an un-.

Even if management refuses to change its inventory costing

15. In which of the following circumstances would an auditor

When there is significant doubt on the entity's abilit~ t~rc~~~

adequacy of disclosure of the material uncertainty. If ade-

Answer A is incorrect because under PSA 805, an auditor

Answer C is incorrect because an unmodified opinion would

Answer D is incorrect because a qualified opinion or a dis-

16. If an auditor is satisfied that sufficient evidence supports

According to PSA 706 (Emphasis of Matter Paragraphs and

tention to a matter presented or disclosed in the financial

Answers A and D are incorrect because a modified opinion

Answer C is incorrect because an Other Matter paragraph

10 The Auditor's Report on Financial Statements 699

under PAS ~6 (Property, Plant, and Equipment), a company