AUDITING THEORY, ACCOUNTING LAWS AND ETHICS

REPORTS
May 19, 2018
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. Only to the president 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 . Which of the following is included in the introductory or opening paragraph of the auditor’s report?
a. Identification of the financial statements audited, including the date of and period covered by the
financial statements.
b. A statement that the financial statements are the responsibility 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.

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 related to the date of the auditor’s report. Which is false?
a. The auditor should date the report as 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 . 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.

7 . An auditor’s responsibility to express an opinion on the financial statements is

a. Implicitly represented in the auditor’s report.
b. Explicitly represented in the “Auditor’s Responsibility” paragraph of the auditor’s report.
c. Explicitly represented in the “Management’s Responsibility” paragraph of the auditor’s report.
d. Explicitly represented in the opinion paragraph of the auditor’s report

8 . Which paragraphs of an auditor’s report on financial statements should refer to the Philippine Financial
Reporting Standards?
a. Introductory and Opinion
b. Auditor’s Responsibility and Management’s Responsibility
c. Introductory and Auditor’s Responsibility
d. Management’s Responsibility and Opinion

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 9 . An independent auditor discovers that a payroll supervisor of the company being audited has misappropriated
P50,000. The company’s total assets and income before tax are P70 million and P15 million, respectively.
Assuming no other issues affect the report, the auditor’s report will almost likely contain a/an
a. A qualified opinion
b. An unmodified opinion
c. An adverse opinion
d. Scope qualification

1 0 . 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 unmodified opinion
c. An adverse opinion
d. A “subject to” opinion

1 1 . An auditor who uses the work of an expert may refer to the expert in the auditor’s report if the
a. Expert is employed by the entity
b. Expert’s work provides the auditor greater assurance of reliability
c. Auditor expresses a qualified opinion or an adverse opinion related to the work of the expert
d. Auditor indicates a division of responsibility related to the work of the expert.

1 2 . When would the auditor refer to the work of an appraiser in the auditor’s report?
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 qualified opinion is expressed because of a matter unrelated to the work of the appraiser.
d. An unqualified opinion is expressed and an emphasis of matter paragraph is added to disclose the use
of the appraiser’s work.

1 3 . A modified opinion on the financial statements is necessary when

I. The auditor concludes, based on the audit evidence obtained, that the financial statements as a whole
are not free from material misstatement.
II. The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement.
a. I only
b. II only
c. Either I or II
d. Neither I nor II

1 4 . Which of the following terms is used in the standard to describe the effects on the financial statements of
misstatements or the possible effects on the financial statements, if any, that are undetected due to an
inability to obtain sufficient appropriate audit evidence?
a. Persuasive
b. Pervasive
c. Material
d. Extensive

1 5 . 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

1 6 . When audited financial statements are presented in a document (e.g., annual report) containing other
information, the auditor
a. Should read the other information to consider whether it is inconsistent with the audited financial
statements.
b. Has no responsibility for the other information because it is not part of the basic financial statements.
c. Has an obligation to perform auditing procedures to corroborate the other information.
d. Is required to express qualified opinion if the other information has a material misstatement of fact.

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 1 7 . An auditor concludes that there is a material inconsistency in the other information in an annual report to
shareholders containing audited financial statements. If the auditor concludes that the financial statements do
not require revision, but the client refuses to revise or eliminate the material inconsistency, the auditor may
a. Disclaim an opinion on the financial statements after explaining 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.
d. Consider the matter closed because the other information is not in the audited statements.

1 8 . If, on reading the other information, the auditor identifies a material inconsistency, the auditor shall
determine whether the audited financial statements or the other information needs to be amended. What type
of opinion should be expressed of the client refuses to make the necessary amendment in the financial
statements?
a. Disclaimer of opinion
b. Qualified opinion or disclaimer of opinion
c. Unmodified opinion with an emphasis of matter paragraph describing the material inconsistency.
d. Qualified or adverse opinion.

1 9 . An auditor may express a qualified opinion under which of the following circumstances?
Lack of Sufficient Appropriate Evidence Restriction on the Scope of the Audit
a. No No
b. No Yes
c. Yes No
d. Yes Yes

2 0 . Which of the following should be included in the opinion paragraph when an auditor expresses a qualified
opinion?
When Read in Conjunction with Note X With the Foregoing Explanation
a. Yes No
b. No Yes
c. No No
d. Yes Yes

2 1 . 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.

2 2 . 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 procedures.
d. Subject to the departure from generally accepted accounting principles, as described above.

2 3 . An auditor’s report includes the following statements: “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, 2018, and of its performance and
its cash flows for the year ended in accordance with Philippine Financial Reporting Standards.” This auditor’s
report contains a/an
a. Qualified opinion
b. Unmodified opinion
c. Disclaimer of opinion
d. Adverse opinion

2 4 . An auditor should disclose the substantive reasons for expressing 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

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 2 5 . There are two broad financial reporting frameworks for comparatives: the corresponding figures and the
comparative financial statements. Which of the following statements is correct concerning these reporting
frameworks?
a. Under the corresponding figures framework, the corresponding figures for the prior period(s) are
integral part of the current period financial statements.
b. Under the corresponding figures framework, the corresponding 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 period(s) are intended to be read in conjunction with the amounts and other disclosure relating to
the current period.
d. Under the comparative financial statements framework, the amounts and other disclosures for the
prior period(s) for part of the current period financial statements.

2 6 . The following statements relate to the auditor’s reporting responsibilities regarding comparatives. Which is
incorrect?
I. For corresponding figures, the auditor’s report only refers to the financial statements of the current
period.
II. For comparative financial statements, the auditor’s report 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

2 7 . PSA 710 states that the extent of audit procedures performed on the corresponding figures is significantly less
than for the audit of the current period figures. The auditor’s procedures are ordinarily limited to ensuring that
the corresponding figures have been correctly reported and are appropriately classified. The auditor should
assess whether
I. Accounting policies used for the corresponding figures 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 other 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

2 8 . In which of the following circumstances would an auditor’s report least likely include specific reference to the
corresponding figures?
a. When the auditor’s report on the prior period, as previously issued, issued, included a modified opinion
and the matter which have 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 previously 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 previously 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 have not been revised and reissued,
and the corresponding figures have not been properly restated and/or appropriate disclosures have not
been made.

2 9 . According to PSA 710, the incoming auditor may refer to the predecessor auditor’s report on the corresponding
figures in the incoming auditor’s report for the current period. The incoming auditor’s report should indicate
I. That the financial statements of the prior period were audited by another auditor.
II. The type of report issued by the predecessor auditor.
III. The date of the predecessor auditor’s report.
a. I and II only
b. II and III only
c. I and III only
d. I, II and III

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 3 0 . When the prior period financial statements are not audited, the incoming auditor should state the auditor’s
report that
I. The corresponding figures are unaudited.
II. The incoming auditor is not required to perform procedures regarding opening balances of the current
period.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

3 1 . Twolok, CPA, audited Bessywap Company’s prior-year financial statements. These statements are presented
with those of the current year for comparative purposes without Twolok’s auditor’s report, which expressed a
qualified opinion. In drafting the current year’s auditors’ report, Haroot, CPA, the incoming auditor, should
I. Not name Twolok as the predecessor auditor.
II. Indicate the type of report issued by Twolok.
III. Indicate the substantive reasons for Twolok’s qualification.
IV. Indicate the date of Twolok’s auditor’s report.
a. I, II and IV only.
b. II, III and IV only.
c. I, II and III only
d. I, II, III and IV

3 2 . When comparative financial statements are presented, the auditor’s opinion on the financial statements
“Taken as a whole” should be considered to apply to the financial statements of the
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

3 3 . Comparative financial statements include the financial statements of the prior year that were audited by a
predecessor auditor whose report is not presented. If the predecessor’s report was qualified, the incoming
auditor should
a. Express an opinion on the current year’s statements and make no reference to the prior year’s
statements.
b. 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.

3 4 . The predecessor auditor, who is satisfied after properly communicating with the incoming auditor, has reissued
his/her auditor’s report on prior year financial statements. The predecessor auditor’s report should
a. Refer to the work of the incoming auditor in the scope and opinion paragraphs/
b. Refer to the report of the incoming auditor only in the scope paragraph.
c. Refer to both the work and the report of the incoming auditor only in the opinion paragraph.
d. Not refer to the report or the work of the incoming auditor.

3 5 . The following statements relate to unaudited prior year financial statements that are presented in comparative
form with audited current year financial statements. Which is incorrect?
a. The incoming auditor should state in the auditor’s report that the comparative financial statements are
unaudited.
b. 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
encouraged.
d. In situations where the incoming auditor identifies 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.

-END-

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