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Since 1977

AUDITING THEORY L. R. CABARLES/J.M. D. MAGLINAO


AT.2817—Forming the Auditor's Opinion and Report Contents MAY 2020

Suggested Readings:
1. PSA 500, Audit Evidence
2. PSA 450, Evaluation of Misstatements Identified during the Audit
3. PSA 220, Quality Control for an Audit of Financial Statements
4. PSA 260, Communication with Those Charged with Governance
5. PSA 265, Communicating Deficiencies in Internal Control to Those Charged with Governance and Management
6. PSA 700, Forming an Opinion and Reporting on the Financial Statements
7. PSA 701, Communicating Key Audit Matters in the Independent Auditor’s Report
8. PSA 705, Modifications to the Opinion in the Independent Auditor’s Report
9. PSA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
10. PSA 710, Comparative Information—Corresponding Figures and Comparative Financial Statements
11. PSA 720, The Auditor’s Responsibilities Relating to Other Information in Documents Containing Audited Financial
Statements
12. Chapter 17, Auditing: A Risk-Based Approach, Part 1-Theory 2019 Issue—1st Edition by Cabarles/Ocampo/Valdez

DISCUSSION QUESTIONS
Forming Opinion and Report—An Overview 4. Management estimates the company's allowance for
1. Forming the auditor’s opinion and report includes doubtful accounts as P200,000, and the auditors
a. b. c. d. develop an estimate that suggests that the amount
Determining the sufficiency and should be between P230,000 and P250,000. The
appropriateness of audit factual (known) misstatement in this situation is:
evidence obtained. Yes Yes Yes Yes a. P0 c. P40,000
Evaluating the materiality of b. P30,000 d. P50,000
misstatements identified. Yes Yes Yes No
Performing necessary quality 5. Which of the following statements is correct regarding
control review. Yes Yes No Yes the auditor's accumulation of identified misstatements?
Communicating audit results a. The auditor must accumulate all misstatements
with management and those identified during the audit.
charged with governance. Yes No No Yes b. The auditor must only accumulate individually
material misstatements identified during the audit.
Determining SAAE c. The auditor must accumulate misstatements
2. After the auditor has completed all audit procedures, it identified during the audit, other than those that
is necessary to combine the information obtained to are clearly trivial.
reach an overall conclusion as to whether the financial d. None of the above.
statements are fairly presented. This is a highly
subjective process that relies heavily on: 6. At the end of the audit the auditor is supposed to
a. generally accepted auditing standards. accumulate and evaluate the need for adjustment of
b. the Code of Professional Ethics. a. known uncorrected errors.
c. generally accepted accounting principles. b. unknown projected errors.
d. the auditor’s professional judgment. c. carryover of prior year errors.
d. all of the above.
Evaluating Materiality of Misstatements
3. Projected misstatements refer to 7. What is the likely aggregate misstatement (LAM) when
a. Misstatements about which there is no doubt the audit results are as follows?
b. Differences arising from management’s judgments • Likely misstatement = P1,000
concerning accounting estimates that the auditor • Identified misstatement found in non-
considers unreasonable, or the selection or representative samples = P850
application of accounting policies that the auditor • Misstatements found in prior year’s financial
considers inappropriate statements = P2,500 (of which P1,900 was
c. The auditor’s best estimate of misstatements in corrected in the prior year)
populations, involving the projection of a. P1,850 c. P2,900
misstatements identified in audit samples to the b. P2,450 d. P3,500
entire populations from which the samples were
drawn 8. When expressing an unqualified opinion, the auditor
d. Misstatements that the auditor has accumulated who evaluates the audit findings should be satisfied
during the audit and that management has not that the
corrected a. Amount of known misstatement is documented in
the management representation letter.
b. Estimate of the total likely misstatement is less
than a material amount.

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c. Amount of known misstatement is acknowledged d. The financial statements are free from material
and recorded by the client. misstatement, but disclosure of the proposed
d. Estimate of the total likely misstatement includes adjustments is required in the notes to the
the adjusting entries already recorded by the financial statements.
client.
13. In a qualified, adverse, or disclaimer report, the
Performing Engagement Quality Control Review auditor
(EQCR) a. has not performed a satisfactory audit.
9. Which of the following is likely to be carried out as part b. is not satisfied that the financial statements are
of an engagement quality control review for a listed presented fairly
entity? c. either of the two responses
(1) Review of audit working paper files to ensure that d. none of the two responses.
the audit has been performed in accordance with
professional standards and regulatory and legal 14. This term is used to describe the effects or possible
requirements effects on the financial statements of a matter that, in
(2) Review of selected audit documentation relating to the auditor’s judgment, are not confined to specific
significant audit judgements elements, accounts or items of the financial
(3) Review of the engagement team's evaluation of statements, or, if confined, represent or could
the firm's independence towards the audit represent a substantial proportion of the financial
(4) Consideration of whether appropriate consultations statements, or, in relation to disclosures, are
have taken place on differences of fundamental to users’ understanding of the financial
opinion/contentious matters statements
a. (1) and (3) a. Persuasive c. Pervasive
b. (2) and (4) b. Reasonable d. Effective
c. (1), (2) and (4)
d. (2), (3) and (4) 15. What audit opinions would be possible when the
audited company refuses to record adequate
Communicating with TCWG, MGT, and Other Parties amortization for fixed assets? Assume the amount in
10. All of the following matters need to be communicated question exceeds materiality.
with those charged with governance in an audit of a. Only unqualified or adverse opinions are possible.
financial statements irrespective of an entity’s b. Only qualified or adverse opinions are possible.
governance structure or size. In accordance with PSA c. Only adverse or denial opinions are possible.
260, Communication with Those Charged with d. Only qualified or unqualified opinions are possible.
Governance, which of the following shall be
communicated in writing in case of listed entities? 16. If the financial statements, including accompanying
a. The auditor’s responsibilities in relation to the notes, fail to disclose information that is required by
financial statement audit. PFRSs, the auditor should express either a(an)
b. Planned scope and timing of the audit. a. “Except for qualified opinion or adverse opinion.
c. Significant findings from the audit. b. Adverse opinion or a “subject to” qualified opinion.
d. Auditor independence. c. “Subject to” qualified opinion or unqualified opinion
with a separate explanatory paragraph.
11. Which of the following statements is correct concerning d. Unqualified opinion with a separate explanatory
an auditor’s required communication with those paragraph or an “except for” qualified opinion.
charged with governance of an audit client?
a. This communication is required to occur before the 17. A departure from PFRS is disclosed in a note to the
auditor’s report on the financial statements is financial statements. The auditor should:
issued. a. Issue an unqualified opinion, with no explanatory
b. This communication should include discussion of paragraph, since the departure from PFRSs is
any significant disagreements with management disclosed
concerning the financial statements. b. Issue an unqualified opinion, but emphasize the
c. Any significant matter communicated to the audit matter in an explanatory paragraph
committee should be communicated to c. Issue a qualified opinion
management. d. Disclaim an opinion
d. Significant audit adjustments proposed by the
auditor and recorded by management need not be 18. Eagle Company’s financial statements contain a
communicated with those charged with departure from PFRSs because, due to unusual
governance. circumstances, the statements would otherwise be
misleading. The auditor should express an opinion
The Auditor's Opinions that is
12. A client decides not to make an auditor’s proposed a. Unqualified but not mention the departure in the
adjustments that collectively are not material and auditor’s report.
wants the auditor to issue the report based on the b. Unqualified and describe the departure in a
unadjusted numbers. Which of the following separate paragraph.
statements is correct regarding the financial statement c. Qualified and describe the departure in a separate
presentation? paragraph.
a. The financial statements are free from material d. Qualified or adverse, depending on materiality, and
misstatement, and no disclosure is required in the describe the departure in a separate paragraph.
notes to the financial statements.
b. The financial statements do not conform with 19. Of the two major categories of scope restrictions, (1)
GAAP. those caused by client and (2) those caused by
c. The financial statements contain unadjusted conditions beyond the control of either client or
misstatements that should result in a qualified auditor, the effect on the auditor’s judgment is
opinion. a. the same for either.

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b. More serious for 1 than for 2. 26. The audit report is normally addressed to the
c. More serious for 2 than for 1. Board of Shareholders President of the
d. Negligible. Directors entity
a. Yes Yes Yes
20. Restrictions imposed by a client prohibit the b. No Yes Yes
observation of physical inventories, which account for c. Yes Yes No
35% of all assets. Alternative audit procedures cannot d. Yes No No
be applied, although the auditor was able to examine
satisfactory evidence for all other items in the financial Opinion
statements. The auditor should issue a(an) 27. The opinion section of the auditor’s report includes the
a. “Except for” qualified opinion. following, except:
b. Disclaimer of opinion. a. Identification of the entity whose financial
c. Unqualified opinion with a separate explanatory statements (FSs) have been audited.
paragraph. b. Statement that the FSs have been audited.
d. Unqualified opinion with an explanation in the c. Title of each of the FSs that comprise the complete
auditor’s responsibility paragraph. set of FSs.
d. Reference to "basic financial statements" without
21. King, CPA, was engaged to audit the financial indicating the title of each of the FSs.
statements of Newton Company after its fiscal year
had ended. King neither observed the inventory count 28. The opinion section of the auditor’s report includes the
nor confirmed the receivables by direct communication following, except:
with debtors, but was satisfied concerning both after a. Reference to the summary of significant accounting
applying alternative procedures. King’s auditor’s policies and other explanatory notes
report most likely contained a(an) b. Specific date and period covered by the FSs.
a. Qualified opinion. c. Reference to Philippine Standards on Auditing.
b. Disclaimer of opinion. d. Identifies the applicable financial reporting
c. Unqualified opinion without mentioning the framework on which the FSs are based.
alternative procedures.
d. Unqualified opinion with an explanatory paragraph. 29. The auditor's standard report states that the financial
statements are presented fairly
The Auditor's Reports a. with reasonable assurance.
22. The independent auditor’s report may be classified as b. in all material respects.
a. Unmodified. c. without significant errors.
b. Modified due to modified opinions. d. on a consistent basis.
c. Modified due to Emphasis of Matter and Other
Matter paragraphs without necessarily modifying Basis for Opinion
the opinion. 30. The basis for opinion section of the auditor’s report
d. All of the above. includes the following, except:
a. That the audit was conducted based on PSAs.
Unmodified Auditor’s Report b. A reference to the section of the auditor’s report
23. PSA 700 Forming an opinion and reporting on financial that describes the auditor’s responsibilities under
statements sets out the basic elements of an auditor's the PFRSs.
report. Which of the following is not included in an c. A statement that the auditor is independent of the
unmodified auditor's report? entity in accordance with the relevant ethical
a. Management's responsibility for the financial requirements relating to the audit, and has fulfilled
statements the auditor’s other ethical responsibilities in
b. Auditors' responsibilities accordance with these requirements; and
c. Audit opinion d. A conclusion that whether the auditor believes that
d. Deficiencies of internal controls the audit evidence the auditor has obtained is
sufficient and appropriate to provide a basis for the
24. Under PSA 700, the following are mandatory to be auditor’s opinion.
included in the auditor’s report for audits of financial
statements of listed entities but only voluntary for Material Uncertainty Related to Going Concern
entities other than listed entities, except 31. Which of the following is not a condition to include a
a. A section to communicate key audit matters. separate going concern section with a heading
b. Disclosure of the name of the engagement partner, “Material Uncertainty Related to Going Concern” in the
with a “harm’s way” exemption. auditor’s report?
c. Material uncertainty related to going concern. a. The use of the GC basis of accounting is
d. All of the above. appropriate.
b. A modified opinion is appropriate in respect of the
Title and Addressee matter.
25. To distinguish it from reports that might be issued by c. Reference to the note in the financial statements
others, such as by officers of the entity, the board of that describes the material uncertainty.
directors, or from the reports of other auditors who d. A statement that these events or conditions
may not have to abide by the same ethical indicate that a material uncertainty exists that may
requirements as the independent auditor, the auditor’s cast significant doubt on the entity’s ability to
report should have an appropriate continue as a going concern.
a. Addressee c. Signature
b. Title d. Opinion

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32. C Co has a substantial bank loan which is due to d. Standardized, highly technical language and not
mature in 20X8, and the company plans to negotiate entity-specific to promote comparability of reports
for a new loan in March 20X8. The auditors concluded
that the company’s use of the going concern Other Information
assumption in the financial statements for the year 37. Which of the following best describes the auditor's
ended 31 December 20X7 is appropriate. However, responsibility for "other information" included in the
they believe there is a material uncertainty related to annual report to stockholders, which contains financial
going concern, which has been appropriately disclosed statements and the auditor's report?
in the financial statements. What action should the a. The auditor has no obligation to read the "other
auditor take with regards to going concern in the information."
auditor’s report? b. The auditor has no obligation to corroborate the
a. Express an unmodified opinion and describe the "other information" but should read the "other
material uncertainty in the other matter paragraph information" to determine whether it is materially
b. Express an unmodified opinion and describe the inconsistent with the financial statements.
material uncertainty in the material uncertainty c. The auditor should extend the examination to the
related to going concern paragraph extent necessary to verify the "other information."
c. Express a modified opinion and describe the d. The auditor must modify the auditor's report to
material uncertainty in the emphasis of matter state that the "other information is unaudited" or
paragraph "not covered by the auditor's report."
d. Express a qualified opinion and describe the
material uncertainty in the basis for qualified 38. It exists when other information contradicts
opinion paragraph information contained in the audited financial
statements.
Key Audit Matter a. Material inconsistency
33. In which of the following situations the auditor may b. Material misstatement of fact
communicate KAM in the auditor’s report? c. Material weaknesses
a. When a law or regulation precludes disclosure. d. Misstatement
b. When adverse consequences of communicating the
KAM would reasonably be expected to outweigh 39. If an amendment to other information in a document
the public interest benefits of such communication. containing audited financial statements is necessary
c. When a disclaimer of opinion is expressed. and the entity refuses to make the amendment, the
d. When a qualified or adverse opinion is expressed. auditor would consider issuing:
a. Qualified or adverse opinion
34. Under PSA 701, which of the following refers to the b. Unqualified opinion with explanatory paragraph
term “Key Audit Matters (KAM)”? c. Qualified or disclaimer of opinion
a. Matters that were communicated with those d. Unqualified opinion.
charged with governance.
b. Matters that required significant auditor attention. Responsibilities of MGT and TCWG for the F/S
c. Matters that, in the auditor’s professional 40. An entity’s management is responsible for the
judgment, were of most significance in the audit of preparation and fair presentation of the financial
the financial statements of the current period. statements. Its responsibility includes the following,
d. It exists when the magnitude of its potential except
impact is such that, in the auditor’s judgment, a. Designing, implementing, and maintaining internal
clear disclosure of the nature and implications of control relevant to the preparation and
the uncertainty is necessary for the presentation of presentation of financial statements.
the financial statements not to be misleading. b. Making accounting estimates that are reasonable
in the circumstances and selecting and applying
35. PSA 701 sets out a decision framework for auditors appropriate accounting policies.
using the communications with those charged with c. The assessment of the entity’s ability to continue
governance as a starting point. From the matters as a going concern and the appropriateness of the
communicated with those charged with governance, going concern.
the auditor determines those matters that required d. Assessing the risks of material misstatement of the
significant auditor attention. In fulfilling this financial statements.
requirement, the auditor is NOT always required to
explicitly consider Auditor’s Responsibilities for the Audit of the F/S
a. Areas of higher assessed risks of material 41. The auditor’s responsibility section of the auditor’s
misstatement, or significant risks identified. report includes the following, except:
b. Areas of lower assessed risks of material a. The auditor’s objectives to obtain limited
misstatement, or no significant risks identified. assurance.
c. Significant auditor judgments relating to areas in b. An explanation that misstatements can arise from
the financial statements that involved significant fraud or error.
management judgment, including accounting c. A description of the meaning of materiality.
estimates that have been identified as having high d. An explain that the auditor exercises professional
estimation uncertainty. judgement and maintains professional skepticism
d. The effect on the audit of significant events or throughout the audit.
transactions that occurred during the year.

36. Which of the following is not included in the description


of a KAM in the auditor’s report?
a. Why the matter was considered to be a KAM
b. How the matter was addressed in the audit
c. Reference to the any related disclosure(s)

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Other Reporting Responsibilities 46. If management chooses to place supplementary


42. Statement 1: The auditor’s report shall name the information that is not considered integral part of the
location in the country or jurisdiction where the auditor financial statements in footnotes to the financial
practices. statements, this information should be clearly marked
as
Statement 2: When the auditor addresses other
a. Unaudited.
reporting responsibilities in the auditor’s report on the
b. Supplementary information required by the SEC.
financial statements that are in addition to the
c. Disclosures required by the SEC.
auditor’s responsibility under PSAs, these other
d. Audited financial data required by GAAP.
reporting responsibilities shall be addressed in a
separate section in the auditor’s report. This separate
47. If management declines to present supplementary
section shall be sub-titled “Report on Other Legal and
information that is not considered integral part of the
Regulatory Requirements”, unless these other
financial statements required by the Securities and
reporting responsibilities address the same topics as
Exchange Commission (SEC), the auditor should issue
those presented under the reporting responsibilities
a(n)
required by the PSAs in which case the other reporting
a. Adverse opinion.
responsibilities may be presented in the same section
b. Qualified opinion with an other-matter paragraph.
as the related report elements required by the PSAs as
c. Unmodified opinion.
long as the wording of the auditor’s report clearly
d. Unmodified opinion with an additional other-matter
differentiates the other reporting responsibilities from
paragraph.
those under the PSAs.
a. True, True
Name of Partner, Signature, Address and Date
b. False, True
48. When financial statements are audited by an
c. False, False
accounting firm, the partner-in-charge of engagement
d. True, False
ordinarily signs in the name of the firm because:
a. The partner-in-charge of engagement should be
43. When is the case that supplementary information is
relieved of any responsibility regarding the opinion
covered by the auditor’s opinion?
issued.
a. The supplementary information is integral part of
b. It is required by reporting standards.
the financial statements and is presented as a
c. The firm assumes responsibility for the audit.
supplementary schedule.
d. The opinion becomes more credible if signed in
b. The supplementary information is integral part of
name of the firm.
the financial statements and is presented as an
additional note disclosure.
49. The following statements relate to the date of the
c. The supplementary information is not integral part
auditor’s report. Which is false?
of the financial statements but is presented as an
a. The auditor should date the report as of the
additional note disclosure.
completion date of the audit
d. Both (a) and (b).
b. The date of the auditor’s report should not be
earlier than the date on which the financial
44. Which of the following is the least likely way to report
statements are signed or approved by
on supplementary information that is considered
management
integral part of financial statements?
c. The date of the auditor’s report should not be later
a. In the auditor’s report as part of “Report on the
than the date on which the financial statements
Audit of Financial Statements”.
are signed or approved by management.
b. In the auditor’s report as part of “Report on the
d. The date of the auditor’s report should always be
Audit of Financial Statements” if addressing the
later than the date of the financial statements (i.e.,
same topics as those presented under the
the balance sheet date).
reporting responsibilities required by PSAs and the
wording of the auditor’s report clearly
50. The audit report date is important to users because it
differentiates the other reporting responsibilities
indicates the
from those under the PSAs.
a. Last day of the fiscal period.
c. In the auditor’s report as part of “Report on Other
b. Last day of the auditor’s responsibility for the
Legal and Regulatory Requirements”.
review of significant events that occurred after the
d. As a separate independent auditor’s report on
date of the financial statements.
supplementary information.
c. Date on which the financial statements were filed
with the SEC.
45. Which statement is correct concerning required
d. Last day on which users may institute a lawsuit
supplementary information not considered integral part
either client or auditor.
of the financial statements?
a. The auditor has no responsibility for required
Modified Auditor’s Report—Modified Opinion
supplementary information as long as it is outside
Modified Auditor’s Report—Modified Opinion
the basic financial statements.
51. In cases where the auditor expressed a modified
b. The auditor's only responsibility for required
opinion, which section of the auditor’s report is not
supplementary information is to determine that
modified?
such information has not been omitted.
a. Auditor’s opinion
c. The auditor should apply certain limited procedures
b. Basis for opinion
to the required supplementary information, and
c. Description of auditor’s responsibilities
report deficiencies in, or omissions of, such
d. Responsibilities for the financial statements
information.
d. The auditor should apply tests of details of
transactions and balances to the required
supplementary information, and report any
material misstatements in such information.

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52. When the auditor modifies the opinion on the financial 57. Which of the following statements is correct relating to
statements, the auditor shall, in addition to the specific Other Matter paragraph in the financial statements?
elements required by PSA 700, do the following in the a. A paragraph that refers to a matter other in the
Basis for Opinion section financial statements that is relevant to
a. b. c. d. understanding of the audit, the auditor’s
Amend the heading “Basis for responsibilities or the auditor’s report.
Opinion”. Yes Yes Yes Yes b. The auditor shall include this paragraph
Describe the matter giving rise immediately after the Opinion paragraph.
to the modification. Yes Yes Yes No c. The auditor shall include this paragraph
Quantify the financial effects of immediately after any Emphasis of Matter
the material misstatement, paragraph
unless impracticable. Yes Yes No Yes d. The auditor shall provide a modified opinion as a
State if it is not practicable to result of adding Other Matter paragraph.
quantify the financial effects. Yes No No Yes
Explain how disclosures are 58. Which of the following is not one of the requirements
misstated. Yes No No Yes in including an Other Matter paragraph?
Disclose reasons for inability to a. The inclusion is not prohibited by law or regulation.
obtain sufficient appropriate b. The matter has not been determined to be a key
audit evidence. Yes Yes No Yes audit matter to be communicated in the auditor’s
Amend the phrase to provide a report.
basis for the auditor’s opinion c. The auditor would not be required to modify the
to include the word opinion result of the matter.
“qualified” or “adverse”. Yes Yes No Yes d. All of the above.
When the auditor disclaims an
opinion, the auditor’s report 59. Which of the following circumstances will the auditor
least likely add an Other Matter paragraph?
shall not include the elements
required by paragraphs 28(b) a. The auditor is unable to resign from an
engagement even though the possible effect of an
and 28(d) of PSA 700. Yes Yes No Yes
inability to obtain sufficient appropriate audit
evidence due to a limitation on the scope of the
53. When an auditor expresses an adverse opinion he/she
audit imposed by management is pervasive.
should disclose the substantive reasons for such an
b. Restriction on distribution of the auditor’s report.
opinion in an explanatory paragraph.
c. Reporting on comparative information, and such
a. Within the notes to the financial statements
information had not been audited or was audited
b. Preceding the opinion paragraph
by a different auditor.
c. Following the opinion paragraph
d. Report on the pervasiveness of related party
d. Preceding the introductory paragraph
transactions that have been disclosed in the
financial statements.
54. If the auditor expresses disclaimer of opinion in the
auditor’s report, which section should be omitted?
60. Maffle Corporation presents comparative financial
a. KAM
statements ended December 31, 2019 and 2018. ABC
b. Auditor’s responsibilities
and Co., CPAs is the newly appointed auditor for the
c. Management’s responsibilities
year 2019. The prior year financial statements were
d. Other reporting responsibility
audited by another auditor who expressed an
unmodified opinion. After the audit ended on March 31,
Modified Auditor’s Report—Emphasis of Matter
2020, the auditor’s findings include:
(EOM) and Other Matter (OM) paragraphs
55. Statement 1: The inclusion of an Emphasis of Matter • The Accounts Receivable as of December 31, 2019,
paragraph in the auditor's report does not affect the though not pervasive, is materially misstated.
auditor's opinion on the financial statements in respect
of the matter emphasized. • The client’s production facilities were razed by fire
on February 10, 2020. This event has been
Statement 2: An Emphasis of Matter paragraph is not adequately disclosed in the notes to financial
used when the issue has been covered as a key audit statements.
matter.
a. True, true c. False, true In the auditor’s report, the auditor most likely should
b. True, false d. False, false include a(an)
a. Unmodified opinion and an emphasis of matter
56. An additional paragraph reads as follows: paragraph.
b. Qualified opinion and an emphasis of matter
On October 15, 2018, the Company emerged from paragraph.
bankruptcy. As discussed in the Note 25 to the c. Unmodified opinion, an emphasis of matter
financial statements, the Company accounted for the paragraph, and an other matter paragraph.
reorganization using “fresh accounting” and, as a d. Qualified opinion, an emphasis of matter
result, the post-reorganization financial statements are paragraph, and an other matter paragraph.
not comparable to the pre-organization financial
statements. Our opinion is not modified in respect of Auditor’s Report—Comparative Information
this matter. 61. In accordance with PSA 710, comparative information
may be
The paragraph likely is intended to:
a. Corresponding figures
a. Qualify an opinion
b. Comparative financial statements
b. Emphasize a matter
c. Either a or b
c. Report an inconsistency
d. Neither a nor b
d. Indicate a departure from PFRS

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Corresponding Figures b. Continue to express a qualified opinion on the prior


62. They are not presented as complete financial year's financial statements.
statements capable of standing alone, but are an c. Make no reference to the type of opinion expressed
integral part of the current period. on the prior year's financial statements.
a. Corresponding figures d. Express an unqualified opinion on the restated
b. Comparative financial statements financial statements of the prior year.
c. Supplementary report
d. Notes of financial statements 66. When reporting on prior period financial statements in
connection with the current period’s audit, if the
63. When corresponding figures are presented, the auditor’s opinion on such prior period financial
auditor’s opinion shall not refer to the corresponding statements differs from the opinion the auditor
figures except previously expressed, the auditor shall disclose the
a. If the auditor’s report on the prior period included substantive reasons for the different opinion in
a modified opinion and the matter which gave rise a. The Key Audit Matter section
to the modification is unresolved. b. An Emphasis of Matter paragraph
b. If a material misstatement exists in the prior year c. An Other Matter paragraph
financial statements on which an unmodified d. Any of the above
opinion has been previously issued.
c. In the case of initial audit such as when the prior 67. Jewel, CPA, audited Infinite Co.'s prior year financial
year financial statements were unaudited or statements. These statements are presented with
audited by a predecessor auditor. those of the current year for comparative purposes
d. All of the above. without Jewel's auditor's report, which expressed a
qualified opinion. In drafting the current year's
Comparative Financial Statements auditor's report, Crain, CPA, the successor auditor,
64. A client is presenting comparative (two-year) financial should do the following in an Other Matter paragraph
statements. Which of the following is correct I. Not name Jewel as the predecessor auditor.
concerning reporting responsibilities of a continuing II. Indicate the type of report issued by Jewel.
auditor? III. Indicate the substantive reasons for Jewel's
a. The auditor should issue one audit report that is on qualification.
both presented years. IV. The date of the predecessor auditor’s report
b. The auditor should issue two audit reports, one on a. I and II only.
each year. b. II and III only.
c. The auditor should issue one audit report, but only c. I and III only
on the most recent year. d. I, II, III, and IV.
d. The auditor may issue either one audit report on
both presented years, or two audit reports, one on 68. When unaudited financial statements are presented in
each year. comparative form with audited financial statements in
a document filed with the Securities and Exchange
65. An auditor expressed a qualified opinion on the prior Commission, such statements should be
year's financial statements because of a lack of
Marked as State as “unaudited” in an
adequate disclosure. These financial statements are
"unaudited" Other Matter paragraph
properly restated in the current year and presented in
a. Yes No
comparative form with the current year's financial
b. Yes Yes
statements. The auditor's updated report on the prior
year's financial statements should c. No Yes
a. Be accompanied by the auditor's original report on d. No No
the prior year's financial statements.
- now do the DIY drill -

DO-IT-YOURSELF (DIY) DRILL


1. What audit opinion would be appropriate when the but that cannot be calculated exactly because it
auditor has formed an opinion that the financial involves an estimate.
statements are not fairly presented in all material c. The auditor concludes that there is a going-
respects due to a departure from GAAP? concern issue for the auditee company.
a. Unqualified c. Adverse d. The auditor was not appointed as the auditor until
b. Qualified d. Denial after year end, after the inventory count, and was
unable to satisfy herself concerning inventory
2. If the scope of the examination has been satisfactory values by other means.
for all items except for one of material amount, the
auditor should issue a (an) 4. In which of the following situation would a decision of
a. Unqualified opinion. c. Disclaimer of opinion. selecting between a qualified or adverse opinion be
b. Qualified opinion. d. Adverse opinion. inappropriate?
a. A limitation in the scope of the audit.
3. Which of the following would require a denial b. The financial statements are significantly
(disclaimer) of the audit opinion? misleading.
a. There is a material misstatement that in the c. A disagreement between the auditor and the client
auditor’s opinion will overstate the value of an arose because of capitalization of research and
investment by P1,000,000. development costs.
b. There is a misstatement that is in the range of d. A required disclosure that is significant is omitted
P200,000 to P300,000 (materiality is P100,000), from the financial statements.

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EXCEL PROFESSIONAL SERVICES, INC.

5. Misstatements detected during the audit that were a. Explicit description of the respective responsibilities
initially deemed to be immaterial (unless clearly trivial) of management and the auditor in all auditor’s
must be summarized to determine their: reports
a. control. b. Separate GC section required when material
b. quantitative effect. uncertainty exists, with a heading “Material
c. aggregate effects. Uncertainty Related to Going Concern”
d. nature of misstatement. c. Requirement to challenge adequacy of disclosures
for GC “close calls”
6. What happens to the sufficiency of audit evidence d. All of the above
collected if in the final review new information causes
the engagement partner to decide that a lower 12. The audit report issued by Lozano and Co., CPAs,
materiality threshold is required and as a result the included the following paragraph that followed the
partner reduces planning materiality for the audit? opinion paragraph:
a. more evidence may be required.
b. less evidence may be required. Without qualifying our opinion we draw attention to
c. the client may be asked to make correcting Note 11 to the financial statements. The Company
entries. is the defendant in a lawsuit alleging infringement
d. Both A and C. of certain patent rights . . .

7. Which of the following is not a required communication This paragraph is considered:


with the audit committee? a. an inappropriate reporting practice
a. accounting policies. b. an additional information to be a part of the notes
b. accounting estimates. to financial statements.
c. economic trends. c. an emphasis of matter regarding uncertainty which
d. difficulties encountered. is considered an acceptable reporting practice
d. inappropriate because it contradicted the
8. Which of the following shall be included in the written unqualified opinion issued by the auditor
communication of significant deficiencies in internal
control? 13. An explanatory paragraph may be added to the audit
a. A description of the deficiencies and an explanation report while at the same time issuing an unqualified
of their potential effects. opinion in all cases except when:
b. The purpose of the audit was for the auditor to a. the client has changed an accounting principle with
express an opinion on the financial statements. the agreement of the auditor.
c. The audit included consideration of internal control b. there is an immaterial departure from PFRS to
relevant to the preparation of the financial ensure fair presentation with the agreement of the
statements in order to design audit procedures auditor.
that are appropriate in the circumstances, but not c. the audit opinion is partly based on the work of
for the purpose of expressing an opinion on the another auditor
effectiveness of internal control. d. the audit work has been materially limited by
d. All of the above. management.

9. How is the auditor’s report on the financial statements 14. The auditor's inquiries of management regarding
that require final approval by stockholders before such supplementary information on the effects of price level
financial statements are issued publicly dated? changes should be directed to the judgments made
a. The auditor’s report should be dated coinciding the concerning
date of approval of the financial statements by the a. Relevance and validity.
stockholders. b. Measurement and presentation.
b. The auditor’s report should be dated after the c. Accuracy and objectivity.
approval of the financial statements by the d. Rights and obligations.
stockholders.
c. The date of the auditor’s report coincides the date 15. Unaudited financial statements for the prior year
of approval of the financial statements by the presented in comparative form with audited financial
board of directors. statements for the current year should be clearly
d. The audit report should be dual dated, the first marked to indicate their status and
date coinciding the approval by the board of I. The report on the prior period should be reissued
directors and the second date to coincide with the to accompany the current period report.
approval by the stockholders. II. The report on the current period should include as
a separate paragraph a description of the
10. In addition to the company’s financial statements, responsibility assumed for the prior period's
which of the following would be covered by the financial statements.
auditor’s standard report? a. I only.
a. The notes to the financial statements b. II only.
b. Comparative figures in the financial statements c. Both I and II.
c. The company’s tax return for the year being d. Either I or II.
audited
d. The company’s budget for net income for the year 16. The predecessor auditor, who is satisfied after properly
being audited communicating with the successor auditor, has
reissued a report because the audit client desires
11. Which of the following changes to PSAs and the comparative financial statements. The predecessor
auditor's report have been caused by enhanced auditor auditor's report should make
reporting on going concern (GC)? a. Reference to the report of the successor auditor
only in the scope paragraph.

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EXCEL PROFESSIONAL SERVICES, INC.

b. Reference to the work of the successor auditor in d. Read the other information to determine that it is
the scope and opinion paragraphs. consistent with the audited financial statements.
c. Reference to both the work and the report of the
successor auditor only in the opinion paragraph. 21. An auditor concludes that there is a material
d. No reference to the report or the work of the inconsistency in the other information in an annual
successor auditor. report to shareholders containing audited financial
statements. If the auditor concludes that the financial
17. When single-year financial statements are presented, statements do not require revision, but the client
an auditor ordinarily would express an unqualified refuses to revise or eliminate the material
opinion in an unmodified report if the inconsistency, the auditor may
a. Auditor is unable to obtain audited financial a. Revise the auditor's report to include a separate
statements supporting the entity's investment in a explanatory paragraph describing the material
foreign affiliate. inconsistency.
b. Entity declines to present a statement of cash b. Issue an "except for" qualified opinion after
flows with its balance sheet and related statements discussing the matter with the client's board of
of income and retained earnings. directors.
c. Auditor wishes to emphasize an accounting matter c. Consider the matter closed since the other
affecting the comparability of the financial information is not in the audited financial
statements with those of the prior year. statements.
d. Prior year's financial statements were audited by d. Disclaim an opinion on the financial statements
another CPA whose report, which expressed an after explaining the material inconsistency in a
unqualified opinion, is not presented. separate explanatory paragraph.

18. Before reissuing the prior year's auditor's report on the 22. It exists when other information, not related to
financial statements of a former client, the predecessor matters appearing in the audited financial statements,
auditor should obtain a letter of representations from is incorrectly stated or presented.
the a. Material inconsistency
Former client's Successor b. Material misstatement of fact
management auditor c. Material weaknesses
a. Yes Yes d. Misstatement
b. Yes No
c. No Yes 23. With regard to how KAM was addressed in the audit,
d. No No the description may include the following, except
a. Aspects of the auditor’s response or approach and
19. In May 20X9, an auditor reissues the auditor’s report brief overview of procedures performed
on the 20X7 financial statements at a continuing b. Indication of the outcome of the auditor’s
client’s request. The 20X7 financial statements are not procedures
restated and the auditor does not revise the wording of c. Key observations with respect to the matter
the report. The auditor should d. None of the above
a. Dual date the reissued report.
b. Use the release date of the reissued report. 24. When comparative financial statements are presented,
c. Use the original report date on the reissued report. which refers to financial statements "taken as a
d. Use the current period auditor’s report date on the whole," should be considered to apply to the financial
reissued report. statement of the
a. Periods presented plus one preceding period.
20. When audited financial statements are presented in a b. Current period only.
client's document containing other information, the c. Current period and those of the other periods
auditor should presented.
a. Perform inquiry and analytical procedures to d. Current and immediately preceding period only.
ascertain whether the other information is
reasonable. 25. An auditor's report on comparative financial
b. Add an explanatory paragraph to the auditor's statements should be dated as of the date the
report without changing the opinion on the a. Report is issued.
financial statements. b. Auditor's fieldwork is completed.
c. Perform the appropriate substantive auditing c. Fiscal year ends.
procedures to corroborate the other information. d. Last subsequent event occurred.

J - end of AT.2817 - J

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