DE LA SALLE UNIVERSITY MANILA

RVR – COB DEPARTMENT OF ACCOUNTANCY

INTTHRY 2nd Term AY 17 - 18

Auditing Theory AT – Quizzer 13

Prof. Francis H. Villamin
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“FORMING AN OPINION AND REPORTING ON F/S”

1. To distinguish it from reports that might be issued by others, such as by officers of the entity, the
board of directors, or from the reports of other auditors who may not have to abide by the same
ethical requirements as the independent auditor, the auditor’s report should have an appropriate
a. Addressee
b. Title
c. Signature
d. Opinion

2. The auditor’s report should be addressed

a. Only to the shareholders of the entity whose financial statements are being audited.
b. Only to the board of directors of the entity whose financial statements are being audited.
c. Either to the shareholders or the board of directors of the entity whose financial statements are
being audited.
d. Either to the shareholders or the board of directors, or both, of the entity whose financial
statements are being audited.

3. An entity’s management is responsible for the preparation and fair presentation of the financial
statements. Its responsibility includes the following, except
a. Designing, implementing, and maintaining internal control relevant to the preparation and
presentation of financial statements.
b. Making accounting estimates that are reasonable in the circumstances.
c. Selecting and applying appropriate accounting policies.
d. Assessing the risks of material misstatement of the financial statements.

4. 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

5. 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 balance sheet date).

6. Which of the following statements best expresses the objective of the traditional audit of financial
statements?
a. To express an opinion on the fairness with which the statements present financial position,
financial performance and cash flows in accordance with Philippine Financial Reporting
Standards.
b. To express an opinion on the accuracy with which the statements present financial position,
financial performance, and cash flows in accordance with Philippine Financial Reporting
Standards.
c. To make suggestions as to the form or content of the financial statements or to draft them in
whole or in part.
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d. To assure adoption of sound accounting policies and the establishment and maintenance of
internal control.

7. Which of the following best describes why an independent auditor is asked to express an opinion
on the fair presentation 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 performance, and cash flows without the expertise of an independent auditor.
d. It is management’s responsibility to seek available independent aid in the appraisal of the
financial information shown in its financial statements.

8. In which of the following circumstances would an auditor most likely add an emphasis of matter
paragraph to the auditor’s report while expressing an unqualified opinion?
a. There is a substantial 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.
d. Certain transactions cannot be tested because of management’s records retention policy.

9. An emphasis of matter paragraph of an auditor’s report describes an uncertainty as follows:

Without qualifying our opinion, we draw attention to Note X to the financial statements.
The Company is the defendant in a lawsuit alleging infringement of certain patent rights
and claiming royalties and punitive damages. The Company has filed a counter action
and preliminary hearings and discovery proceedings on both actions are in progress. The
ultimate outcome of the matter cannot presently 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. Unqualified
b. “Except for” qualified
c. “Subject to” qualified
d. Disclaimer

10. 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 aggregate, are important while other
matters are not important.
c. Obtains reasonable assurance about whether the financial statements are free of material
misstatement.
d. Assesses the accounting principles used and also evaluates the overall financial statements
presentation.

11. 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 financial statements.
d. The disclosures provide reasonable assurance that the financial statements are free of
material misstatement.

12. 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 client’s
procedures. In reporting on the results of the audit, the auditor
a. Must qualify the opinion if the inventories were material.
b. Can express an unqualified 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.
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13. A note to the financial statements of the Prudent Bank indicates that all of the records relating to
the bank’s business operations are stored on magnetic disks, and that no emergency backup
systems or duplicate disks are stored because the bank and its auditors consider the occurrence
of a catastrophe to be remote. Based upon this note, the auditor’s report should express
a. A qualified opinion
b. An unqualified opinion
c. An adverse opinion
d. A “subject to” opinion

14. An auditor may express a qualified opinion under which of the following circumstances?
Lack of Sufficient Restriction on the
Appropriate Evidence Scope of the Audit
a. No No
b. No Yes
c. Yes No
d. Yes Yes

15. Which of the following should be included in the opinion paragraph when an auditor expresses a
qualified opinion?
When Read In With the Foregoing
Conjunction with Note X Explanation
a. Yes No
b. No Yes
c. No No
d. Yes Yes

16. In which of the following circumstances would an auditor usually choose between expressing a
qualified opinion or disclaiming an opinion?
a. Departure from generally accepted accounting principles.
b. Unreasonable justification for a change in accounting principle.
c. Inability to obtain sufficient appropriate audit evidence.
d. Inadequate disclosure of accounting policies.

17. An auditor decides to express a qualified opinion on an entity’s financial statements because a
major inadequacy in its computerized accounting records prevents the auditor from applying
necessary procedures. The opinion paragraph of the auditor’s report should state that the
qualification pertains to
a. A client-imposed scope limitation.
b. A departure from generally accepted auditing standards.
c. Inadequate disclosure of necessary information.
d. The possible effects on the financial statements.

18. Mark, CPA, was engaged to audit the financial statements of Apollo Corp. after its fiscal year had
ended. The timing of Mark’s appointment as auditor and the start of field work made confirmation
of accounts receivable by direct communication with the debtors ineffective. However, Mark
applied other procedures and was satisfied as to the reasonableness of the account balances.
Mark’s auditor’s report most likely contained a/an
a. Qualified opinion because of a scope limitation.
b. Qualified opinion because of a departure from GAAS.
c. Unqualified opinion.
d. Unqualified opinion with an emphasis of matter paragraph.

19. In which of the following situations would an auditor ordinarily 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 ability to continue as a going concern.
d. The auditor did not observe the entity’s physical inventory and is unable to become satisfied
as to its balance by other auditing procedures.
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20. Under which of the following circumstances would a disclaimer of opinion not be appropriate?
a. The financial statements fail to contain adequate disclosure concerning related party
transactions.
b. The auditor is engaged after fiscal year-end and is unable to observe the physical inventories
or apply alternative procedures to verify their balances.
c. The auditor is unable to determine the amounts associated with fraud committed by the client’s
management.
d. The client refuses to permit its attorney to furnish information requested in a letter of audi t
inquiry.

21. The existence of audit risk is recognized by the statement in the auditor’s standard report that the
auditor
a. Obtains reasonable assurance about whether the financial statements are free of material
misstatement.
b. Assesses the accounting principles used and also evaluates the overall financial statement
presentation.
c. Realizes some matters, either individually or in the aggregate, are important while other
matters are not important.
d. Is responsible for expressing an opinion on the financial statements that are the responsibility
of management.

22. An auditor may reasonably issue a qualified opinion for

Scope Unjustified
Limitation accounting change
a. Yes No
b. No Yes
c. Yes Yes
d. No No

23. An auditor was unable to obtain sufficient competent evidential matter concerning certain
transactions due to an inadequacy in the entity’s accounting records. The auditor would choose
between issuing a(n)
a. Qualified opinion and an unqualified opinion with an explanatory paragraph.
b. Unqualified opinion with an explanatory paragraph and an adverse opinion.
c. Adverse opinion and a disclaimer of opinion.
d. Disclaimer of opinion and a qualified opinion.

24. For an entity’s financial statements to be presented fairly in conformity with generally accepted
accounting principles, the principles selected should
a. Be applied on a basis consistent with those followed in the prior year.
b. Be approved by the Auditing and Assurance Standards Council or the appropriate industry
subcommittee.
c. Reflect transactions in a manner that presents the financial statements within a range of
acceptable limits.
d. Match the principles used by most other entities within the entity’s particular industry.

25. An auditor concludes that there is a substantial doubt about an entity’s ability to continue as going
concern for a reasonable period of time. If the entity’s disclosures concerning that matter are
adequate, the audit report may include a(n)
Disclaimer Qualified
of opinion opinion
a. Yes Yes
b. No No
c. No Yes
d. Yes No

26. Henry, CPA, was engaged to audit the financial statements of Rechelen Co. after its fiscal year
had ended. The timing of Henry’s appointment as auditor and the start of field work made
confirmation of accounts receivable by direct communication with the debtors ineffective. However,
Henry applied other procedures and was satisfied as to the reasonableness of the account
balances. Henry’s auditor’s report most likely contained a(n)
a. Unqualified opinion.
b. Unqualified opinion with an explanatory paragraph.
c. Qualified opinion due to scope limitation.
 AT Quizzer 12 “ Reports on Audited FS & Reporting Issues” Page 5

d. Qualified opinion due to a departure from generally accepted accounting principles.

27. A limitation on the scope of an audit sufficient to preclude an unqualified opinion will usually result
when management
a. Is unable to obtain audited financial statements supporting the entity’s investment in a foreign
subsidiary.
b. Refuses to disclose in the notes to the financial statements related-party transactions
authorized by the board of directors.
c. Does not sign an engagement letter specifying the responsibilities of both the entity and the
auditor.
d. Fails to correct a reportable condition communicated to the audit committee after the prior
year’s audit.

28. An auditor decides to issue a qualified opinion on an entity’s financial statements because a major
inadequacy in its computerized accounting record prevents the auditor from applying necessary
procedures. The opinion paragraph of the auditor’s report should state that the qualification
pertains to
a. Client-imposed scope limitation
b. A departure from generally accepted auditing standards
c. The possible effects on the financial statements
d. Inadequate disclosure of the necessary information

29. The auditor’s report should be dated as of the date the

a. Report is delivered to the client.
b. Field work is completed.
c. Fiscal period under audit ends.
d. Review of the working papers is completed.

30. When restrictions that significantly limit the scope of the audit are imposed by the client, the
auditor should generally issue which of the following opinions
a. Qualified
b. Disclaimer
c. Adverse
d. Unqualified

31. If a company’s financial statements violate PFRS for an immaterial item which is expected to
become material in the future, the auditor is likely to issue:
a. Unqualified standard report
b. Unqualified with explanatory language
c. Qualified
d. Adverse

32. In performing an audit, an auditor found that the client had changed the estimated useful life of its
assets. The auditor believed that the change in useful lives of the assets is realistic. The
appropriate report is
a. Unqualified standard report
b. Unqualified with explanatory paragraph
c. Qualified
d. Disclaimer

33. In which of the following circumstances would the auditor most likely issue an unqualified opinion?
a. Client company’s financial statements show a significant net loss for each of the last three
years, including the current fiscal period
b. The financial statements have not been prepared in accordance with Philippine Financial
Reporting Standards
c. The auditor is not independent during the fiscal period under audit
d. The scope of the auditor’s examination has been restricted due to circumstances which are
beyond the control of either the auditor of the client

34. A client company has issued that cause substantial doubt regarding the entity’s ability to continue
as a going concern. If this is the only major audit issue, which type of opinion will the auditor
usually refrain from issuing?
a. Adverse
b. Unqualified with explanatory language
c. Clean opinion
d. Disclaimer of opinion
 AT Quizzer 12 “ Reports on Audited FS & Reporting Issues” Page 6

35. Which of the following situation, the effect of which is significant, least likely require a decision of
whether to issue a qualified or adverse opinion?
a. Any disagreement with entity management regarding the acceptability of the accounting
policies selected by the management
b. Limitation on the scope of the auditor’s work
c. Inadequate disclosures of financial information
d. Unjustified changes in accounting policies

36. The auditor may continue to express unqualified opinion though there are modifications made in
the audit report. Which of the following situations would the auditor likely modify his opinion?
a. The existence of multiple uncertainties that are adequately described in the notes to financial
statements
b. The prior year’s financial statements were audited by other CPAs
c. An important subsidiary whose financial statements were included in the consolidated financial
statements were audited by other CPAs
d. A substantial doubt about the client’s ability to continue as a going concern that is adequately
disclosed in the financial statements

37. In which of the following situations would qualified opinion be inappropriate?

a. Financial statements are materially misstated
b. A doubt that is more than substantial doubt about the ability of the company to continue as a
going concern
c. A significant scope limitation
d. The management insisted of not attaching the statement of cash flows

38. Which of the following is not a reason to issue a modified audit report with opinion other than
unqualified opinion?
a. The scope of the auditor’s work is restricted by the client
b. The amount of inventories at cost as presented in the balance sheet significantly exceeded
their market values
c. Certain significant matter is omitted from either the financial statements or notes to financial
statements
d. An adequately disclosed significant uncertainty, the resolution of which is dependent upon
future events and which may affect the financial statements

39. The auditor’s address is indicated in the auditor’s report by:

a. naming the location in the country where the auditor practices
b. including the complete mailing address of the auditor
c. identifying the country from where the auditor had secured his professional license
d. the auditor’s address is omitted in the report

40. Which of the following is ordinarily true of a modification of audit report by adding an emphasis of
matter paragraph?
a. The modification by adding an emphasis of matter paragraph is an “except for” qualification of
opinion
b. The emphasis of matter paragraph is a “subject to” qualification of opinion
c. The emphasis of matter paragraph would ordinarily refer to the fact that the auditor’s opinion is
not qualified
d. The emphasis of matter paragraph is presented before the opinion paragraph

41. Which of the following situations may likely require a modified audit report with modified wordings
or an emphasis of matter paragraph?
a. A significant uncertainty, not adequately disclosed in the financial statements
b. An audit of inventory is restricted by the client. The auditor was satisfied about the balance of
the inventory by doing alternative audit procedures
c. A change in the application of generally accepted accounting principle that is justified
d. A less than substantial doubt regarding the ability of the entity to continue as a going concern
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42. Which of the following circumstances may not result to a disclaimer of opinion?
a. A significant scope limitation in auditing the existence of inventories. The inventory amount
comprised 75% of the total assets of the client
b. The auditor believes there are multiple uncertainties that are significant to the financial
statements
c. The accounts receivable of the client comprised 80% of the total assets. The auditor was
instructed by the client not to confirm account balances. The auditor, however, was satisfied
by the results of alternative audit procedures
d. The auditor’s wife own very few numbers of common shares of the client

43. An auditor may express a qualified opinion because of:

Departure from PFRS Lack of Consistency Scope Limitation
a. Yes Yes Yes
b. No Yes No
c. Yes No No
d. No Yes Yes

44. Whenever an auditor issues a qualified report, he or she

a. must use the term “subject to” in the opinion paragraph
b. must use either the terms “subject to” or “except for” in the opinion paragraph, depending on
the nature of the qualification
c. must use the term “except for” in the opinion paragraph
d. must not use the terms “subject to” or “except for” in the opinion paragraph

45. The audit report date is important to users because it indicates

a. the last day of the fiscal period.
b. the date on which the financial statements were filed with the Securities and Exchange
Commission.
c. the last date on which users may institute a lawsuit against either client or auditor.
d. the last day of the auditor’s responsibility for the review of significant events that occurred
after the date of the financial statements.

46. Most auditors believe that financial statements are “presented fairly” when the statements are in
accordance with financial reporting standards, but that it is also necessary to
a. determine that they are not in violation of PASs.
b. examine the substance of transactions and balances for possible misinformation.
c. review the statements using the accounting principles promulgated by the Securities and
Exchange Commission.
d. assure investors that the net income reported this year will be equaled or exceeded in the
future.

47. The auditor’s responsibilities for audit of fs paragraph of the standard unqualified report
states that the audit is designed to
a. discover all errors and/or irregularities.
b. discover material errors and/or irregularities.
c. obtain reasonable assurance whether the statements are free of material misstatement.
d. conform to financial reporting standards.

48. In the auditor’s responsibilities for audit of fs paragraph of the audit report, the use of the
term “reasonable assurance” is intended to indicate that
a. no misstatements exist in the financial statements.
b. no material misstatements exist in the statements.
c. there is a possibility that material misstatements still exist in the financial statements.
d. there is a possibility that immaterial misstatements still exist in the financial statements.

49. In the auditor’s responsibilities for audit of fs paragraph of the audit report, the use of the term
“material misstatements” conveys that auditors are responsible to search for
a. minor misstatements
b. significant misstatements
c. fraudulent misstatements
d. all misstatements
 AT Quizzer 12 “ Reports on Audited FS & Reporting Issues” Page 8

50. If an auditor is engaged to audit a client’s financial statements after the annual physical inventory
count was made and the accounting records are not sufficiently reliable to enable the auditor to
become satisfied as to the year-end inventory balances, the opinion to be expressed is:
a. either an “except for” qualified opinion or an adverse opinion
b. either a disclaimer or opinion or an “except for” qualified opinion
c. either an adverse opinion or disclaimer of opinion
d. an unqualified opinion

51. An adverse opinion is issued when the auditor believes:

a. Some parts of the financial statements are materially misstated or misleading
b. The financial statements will be found to be misleading or misstated, if an adequate
investigation is performed
c. The overall financial statements are so materially misstated or misleading as a whole that they
do not present fairly the financial position or results of operations, changes in cash and
stockholders’ equity in conformity with PFRS
d. The audit firm is not independent

52. If the scope of the auditor’s procedures in conducting an audit is significantly restricted by the
client management, the audit opinion will most likely be a(n):
a. Adverse opinion
b. Qualified opinion
c. Unqualified with explanatory paragraph
d. Disclaimer of opinion

53. The auditor would most likely disclaim his opinion because of:
a. The client’s failure to present supplementary information required by the FRSC
b. Inadequate disclosure of material information
c. The qualification of an opinion by the other auditor of a subsidiary where there is a division of
responsibility
d. A client-imposed scope limitation

54. Addition of an “emphasis of a matter” paragraph to what remains an unqualified opinion is least
likely fro which of the following situations?
a. Related party transactions
b. Scope limitation
c. A significant subsequent event
d. An uncertainty

55. Three of the following conditions would, by themselves, require the auditor to issue a report other
than an unqualified report. Which one would not require such a departure?
a. Client company’s financial statements show a significant net loss for each of the last three
years, including the current fiscal period.
b. The financial statements have not been prepared in accordance with financial reporting
standards.
c. The auditor is not independent during the fiscal period under audit.
d. The scope of the auditor’s examination has been restricted, although the cause of the
restriction was not the client’s fault.

56. A report other than an unqualified report must be issued whenever any of the three conditions
requiring a departure from an unqualified report
a. exists
b. exists and is material
c. exists, is material, and is within management’s control
d. exists, is material, and is within either management’s or the auditor’s control

57. The necessity to issue a disclaimer of opinion may arise because of

a. a severe limitation on the scope of the auditor examination.
b. a non-independent relationship between auditor and client.
c. either a or b above.
d. none of the above.
 AT Quizzer 12 “ Reports on Audited FS & Reporting Issues” Page 9

58. An adverse opinion issued when the auditor believes

a. some parts of the financial statements are materially misstated or misleading.
b. the financial statements will be found to be misleading or misstated, if an adequate
investigation is performed.
c. the overall financial statements are so materially misstated or misleading as a whole that they
do not present fairly the financial position or results of operations and cash flows in conformity
with FRS.
d. the audit firm is not independent.

59. The adverse opinion report will be issued by the independent auditor when he/she
a. suspects that client has not followed financial reporting standards (FRS).
b. suspects that client’s financial statements are not in conformity with financial reporting
standards (FRS).
c. has knowledge that the financial statements are not in conformity with financial reporting
standards (FRS).
d. has knowledge that Philippine Standards on Auditing (PSAs) were not followed.

60. A disclaimer is issued whenever the auditor

a. has been unable to satisfy him/herself that the overall financial statements are presented
fairly.
b. believes that the overall financial statements are not presented fairly.
c. believes that some material part(s) of the financial statements are not presented fairly.
d. has determined that the financial statements are presented fairly.

61. Which of the following statements is true?

a. The auditor is required to issue a disclaimer of opinion in the event of a material uncertainty.
b. The auditor is required to issue a disclaimer of opinion in the event of a going concern
problem.
c. The auditor is required to issue a disclaimer of opinion for a material uncertainty and for a
going concern problem.
d. The auditor has the option, but if is not required, to issue a disclaimer of opinion for a material
uncertainty or for a going concern problem.

62. Whenever an auditor issues a qualified report, he or she

a. must use the term “subject to” in the opinion paragraph.
b. may use either the terms “subject to” or “except for” in the opinion paragraph, depending on
the nature of the qualification.
c. must use the term “except for” in the opinion paragraph.
d. must not use the terms “subject to” or “except for” in the opinion paragraph.

63. Both disclaimers and adverse opinions are used

a. only when the condition is highly material.
b. whether the condition is material or not.
c. regardless of the auditor’s independence.
d. regardless of client’s choice of a non-FRS accounting method.

64. A qualified opinion report can be used only when the auditor believes that the overall financial
statements are
a. fairly stated
b. not fairly stated
c. materially misstated
d. materially misleading

65. An auditor is unable to determine the amounts associated with illegal acts committed by a client.
The auditor would most likely issue:
a. Either a qualified opinion or a disclaimer of opinion
b. An adverse opinion
c. Either a qualified or an adverse opinion
d. A disclaimer of opinion

66. A limitation on the scope of an audit sufficient to preclude an unqualified opinion will always result
when management:
a. Engages the auditor after the year-end physical inventory count is completed
b. Fails to correct a material internal control weakness that had been identified during the prior
year’s audit
 AT Quizzer 12 “ Reports on Audited FS & Reporting Issues” Page 10

c. Refuses to furnish a management representation letter to the auditor

d. Prevents the auditor from reviewing the working papers of the predecessor auditor

67. The expression of a qualified opinion means that the financial statements, taken as a whole, in all
material respects, are:
a. materially misstated
b. materially misleading
c. presented fairly
d. do not present fairly

68. The qualified opinion report will be issued by the independent auditor when, in the auditor’s
judgment, the effects or possible effects of the item under consideration are:
a. Material and pervasive
b. Material but not pervasive
c. Pervasive but not material
d. Not material and not pervasive

69. An auditor was unable to obtain audited financial statements or other evidence supporting an entity’s
investment in a large subsidiary. Between which of the following opinions should the entity’s
auditor choose?
a. Adverse and unmodified opinion
b. Disclaimer and unmodified opinion with emphasis of matter paragraph
c. Qualified and adverse opinion
d. Qualified and disclaimer of opinion

70. In extreme cases, such as situations involving multiple uncertainties that are significant to the
financial statements, the auditor may consider it appropriate to express a(n)
a. Qualified opinion
b. Report with Emphasis of a Matter Paragraph
c. Disclaimer of Opinion
d. Adverse Opinion

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