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CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
AUDITING THEORY
AUDIT REPORT
Related PSAs: PSA 700, 710, 720, 560, 570, 600 and 620
1. When an independent auditor expresses an unqualified opinion he asserts that:
(1) He performed the audit in accordance with generally accepted auditing standards.
(2) The company is a profitable and viable entity.
(3) The financial statements examined are in conformity with GAAP.
(4) The financial statements are accurate and free of errors.
a. All of the above statements are true.
b. Only statements (1) and (3) are true.
c. Only statements (2) and (4) are true.
d. All of the above statements are false.
2. An audit report should be dated as of the
a. date the report is delivered to the entity audited.
b. date the financial statements were approved by the client management.
c. balance sheet date of the latest period reported on.
d. date a letter of audit inquiry is received from the entity’s attorney of record.
3. If a company’s external auditor expresses an unqualified opinion as a result of the audit of the
company’s financial statements, readers of the audit report can assume that
a. The external auditor found no fraud.
b. The company is financial sound and the financial statements are accurate.
c. Internal control is effective.
d. All material disagreements between the company and external auditor about the application
of accounting principles were resolved in the satisfaction of the external auditor.
4. A statement that the auditor’s responsibility is to express an opinion on the financial statements
is contained in the:
a. Opening paragraph c. Opening and scope paragraph
b. Scope paragraph d. Opinion paragraph
5. The description of an audit in the scope paragraph of the standard audit report includes all of
the following except:
a. Evaluating the overall financial statement presentation.
b. Assessing control risk.
c. Examining, on a test basis, evidence supporting the amount and disclosures in the financial
statements.
d. Assessing the accounting principles used and significant estimates made by management.
6. The audit report is normally addressed to the:
Board of directors Stockholders Chair of the Audit Committee
a. No Yes No
b. Yes Yes No
c. Yes Yes Yes
d. Yes No Yes

7. If comparative financial statements are presented and the present auditor has audited both
years, the auditor should:
a. Reissue the report c. Redate the report
b. Dual date the report d. Update the report
8. In which of the following situations would the auditor appropriately issue a standard unqualified
report with no explanatory paragraph concerning consistency?
a. A change in the method of accounting for specific subsidiaries that comprise the group of
companies for which consolidated statements are presented.
b. A change from an accounting principle that is not generally accepted to one that is
generally accepted.
c. A change in the percentage used to calculate the provision for warranty expense.
d. Correction of a mistake in the application of a generally accepted accounting principle.

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9. An auditor’s report contains the following sentences:

We did not audit the financial statements of B Company, a consolidated subsidiary,
whose statements reflect total assets and revenues constituting 20 percent and 22
percent, respectively, of the related consolidated totals. These statements were audited
by other auditors, whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for B Company, is based solely upon the report of the
other auditors.
These sentences
a. disclaim an opinion c. divide responsibility
b. qualify the opinion d. should not be part of the audit report
10. The management of a client company believes that the statement of cash flow is not a useful
document and refuses to include one in the annual report to stockholders. As a result, the
auditor’s opinion should be
a. qualified due to inadequate disclosure c. adverse
b. qualified due to a scope limitation d. unqualified
11. An auditor’s opinion reads as follows: “In our opinion, except for the above-mentioned
limitation on the scope of our audit…” This is an example of a(n)
a. review opinion c. qualified opinion
b. emphasis on a matter d. unacceptable reporting practice
12. Eagle Company’s financial statements contain a departure from generally accepted accounting
principles because, due to unusual circumstances, the statements would otherwise be
misleading. The auditor should express an opinion that is
a. Qualified and describe the departure in a separate paragraph.
b. Unqualified but not mention the departure in the auditor’s report.
c. Qualified or adverse, depending on materiality, and describe the departure in a separate
paragraph.
d. Unqualified and describe the departure in a separate paragraph.
13. 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 opinion or an adverse opinion.
d. A disclaimer of opinion.
14. The objective of the consistency standard is to provide assurance that
a. There are no variations in the format and presentation of financial statements.
b. Substantially different transactions and events are not accounted for on an identical basis.
c. The auditor is consulted before material changes are made in the application of accounting
principles.
d. The comparability of financial statements between periods is not materially affected by
changes in accounting principles without disclosure.
15. If management fails to provide adequate justification for a change from one generally accepted
accounting principle to another, the auditor should
a. Add an explanatory paragraph and express a qualified or an adverse opinion for lack of
conformity with generally accepted accounting principles.
b. Disclaim an opinion because of uncertainty.
c. Disclose the matter in a separate explanatory paragraph(s) but not modify the opinion
paragraph.
d. Neither modify the opinion nor disclose the matter because both principles are generally
accepted.
16. When an auditor qualifies an opinion because of inadequate disclosure, the auditor should
describe the nature of the omission in a separate explanatory paragraph and modify the
Introductory paragraph Scope paragraph Opinion paragraph
a. Yes No No
b. Yes Yes No
c. No Yes Yes
d. No No Yes
17. An auditor may not express a qualified opinion when
a. A scope limitation prevents the auditor from completing an important audit procedure.
b. The auditor’s report refers to the work of a specialist.
c. An accounting principles at variance with generally accepted accounting principles is used.

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d. The auditor lacks independence with respect to the audited entity.

18. 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. The possible effects on the financial statements.
d. Inadequate disclosure of necessary information.
19. Totoy, CPA, was engaged to audit the financial statements of Bibo Co., a new client, for the
year ended December 31, 2004. Totoy obtained sufficient audit evidence for all of Bibo’s
financial statement items except Bibo’s opening inventory. Due to inadequate financial
records, Totoy could not verify Bibo’s January 1, 2004 inventory balances. Totoy’s opinion on
Bibo’s 2004 financial statements most likely will be
Balance Sheet Income Statement
a. Disclaimer Disclaimer
b. Unqualified Disclaimer
c. Disclaimer Adverse
d. Unqualified Adverse
20. When management prepares financial statements on the basis of a going concern and the
auditor believes the company may not continue as a going concern, the auditor should issue
a(n)
a. qualified opinion
b. unqualified opinion with an explanatory paragraph
c. disclaimer of opinion
d. adverse opinion
21. A dual dated report contains the dates of a subsequent event and the date the:
a. Auditor completed work in the client’s office c. Subsequent event was resolved
b. Financial statements were prepared d. Audit report was delivered
22. If the principal auditor decides to take responsibility for the work of other auditors, the principal
auditor should:
a. Modify the opening paragraph c. Modify all three paragraphs
b. Modify the opening and opinion paragraphs d. Issue a standard report
23. An auditor who concludes that an uncertainty is not adequately disclosed in the financial
statements should issue a:
a. Disclaimer of opinion. c. Special report.
b. Unqualified report with an explanatory paragraph. d. Qualified report.
24. An auditor may wish to emphasize a matter included in the financial statements by adding an
explanatory paragraph to the audit report. In this case the following paragraphs of the audit
report should be modified:
a. Introductory paragraph c. Opinion paragraph
b. Scope paragraph d. None
25. In the case of a client imposed scope limitation, the auditor must consider issuing a:
a. Qualified opinion or disclaimer of opinion c. Disclaimer of opinion or adverse opinion
b. Qualified opinion or adverse opinion d. Disclaimer of opinion
26. Which of the following modifications of the standard auditor’s report does not require an
explanatory paragraph.
a. Reference to other auditors c. Scope limitation
b. Inconsistency d. Adverse opinion
27. Pamela, CPA, was engaged to audit the financial statements of One Co. after its fiscal year
had ended. The timing of Pamela’s appointment as auditor and the start of field work made
confirmation of accounts receivable by direct communication with the debtors ineffective.
However, Pamela applied other procedures and was satisfied as to the reasonableness of the
account balances. Pamela’s auditor’s report most likely contained a(n)
a. Unqualified opinion.
b. Unqualified opinion with an explanatory paragraph.
c. Qualified opinion because of a scope limitation.
d. Qualified opinion because of a departure from GAAS.

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28. 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.
c. Refuses to furnish a management representation letter to the auditor.
d. Prevents the auditor from reviewing the working papers of the predecessor auditor.
29. When an auditor expresses an opinion other than unqualified opinion, a clear description of all
substantive reasons for the modification of the opinion should be included in the report. This
explanation should be presented:
a. As a separate paragraph that precedes the opinion paragraph of the audit report.
b. As a separate paragraph, preferably after the opinion paragraph, of the audit report.
c. In the opinion paragraph
d. As a separate paragraph in the notes to financial statements.
30. Where a limitation on the scope of the auditor’s work requires modification of an unqualified
opinion, the auditor’s report should describe the limitation and:
a. Indicate that the auditor is no longer responsible to his opinion.
b. Indicate the possible adjustments to the financial statements that might have been
determined to be necessary had the limitation not existed.
c. Refer the users to the particular note to financial statements that adequately discusses the
limitation
d. Indicate that the auditor is not satisfied of the results of the alternative procedures that he
had performed.
31. What is the purpose of the following paragraph in a particular audit report:
“…We draw attention to note X in the financial statements which discusses that the
company incurred a net loss of P6.4 million during the year ended December 31, 2004
and as of that date, the Company’s liabilities exceeded its total assets by P2,500,000...”
a. A standard reporting requirement.
b. Emphasis of matter about the going concern problems of the entity.
c. Inadequate disclosure qualification.
d. An inappropriate reporting.
32. An explanatory paragraph following an opinion paragraph that describes an uncertainty follows:
As discussed in Note X to the financial statements, the company is a defendant in a
lawsuit alleging infringement of certain patent rights and claiming damages. Discovery
proceedings are in progress. The ultimate outcome of the litigation cannot presently be
determined. Accordingly, no provision for any liability that may result upon adjudication
has been made in the accompanying financial statements.
What type of opinion should the auditor express in this circumstance?
a. unqualified b. qualified c. disclaimer d. adverse
33. If an amendment to other information in a document containing audited financial statements is
necessary and the entity refuses to make the amendment, the auditor would consider issuing:
a. Qualified or adverse opinion c. Unqualified opinion with explanatory paragraph
b. Qualified or disclaimer of opinion d. Unqualified opinion.
34. When management does not amend the financial statements in circumstances where the
auditor believes they need to be amended and the auditor’s report has not been released to the
entity, the auditor should express
a. Qualified or adverse opinion c. Unqualified opinion with explanatory paragraph
b. Qualified or disclaimer of opinion d. Unqualified opinion.
35. If subsequent to the issuance of the audited financial statements, the auditor becomes aware of
material misstatements in the financial statements that exist prior to the date of the audit report,
the auditor should
a. Notify the parties who currently relying on the financial statements.
b. Discuss the matter with management, and should take the action appropriate in the
circumstances.
c. Document such information in the audit plan for succeeding audit.
d. Submit revised copies of the financial statements and audit report to the stockholders.

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QUIZZERS
1. Which of the following is not explicitly included in the opening paragraph of an audit report?
a. Identification of the financial statements that have been audited.
b. A statement by the auditor that the audit provides a reasonable basis for the opinion.
c. Statement that the financial statements are the responsibility of the entity’s management.
d. Statement that the responsibility of the auditor is to express an opinion on the financial
statements based on his audit.
2. A measure of uniformity in the form and content of the auditor’s report is desirable because
a. It helps the auditors avoid legal liability.
b. It helps the readers understand the report.
c. It helps the auditor identify the usual circumstances that are expected to occur.
d. It makes the auditors more informed of their responsibilities with respect to audit report.
3. The most common type of audit report contains a(n):
a. Adverse opinion. c. Disclaimer of opinion.
b. Qualified opinion. d. Unqualified
4. If an auditor is certain an illegal act has a material effect on financial statements and the clients
agrees to adjust the statements accordingly, the auditor should:
a. Withdraw from the engagement.
b. Disclaim an opinion on the financial statements taken as a whole.
c. Issue a qualified opinion.
d. Issue an unqualified opinion.
5. It exists when other information contradicts information contained in the audited financial
statements.
a. Material misstatement of fact c. Material inconsistency
b. Material error d. Material deviation
6. After issuing a report, a auditor has no longer obligation to make continuing inquiries or perform
other procedures concerning the audited financial statements, unless
a. Management of the entity requests the auditor to reissue the auditor’s report.
b. Information about an event that occurred after the end of fieldwork comes to the auditor’s
attention.
c. Information, which existed at the report date and may affect the report, comes to the
auditor’s attention.
d. Final determinations or resolutions are made of contingencies that had been disclosed in
the financial statements.
7. Which of the following events occurring after the issuance of an auditor’s report most likely
would cause the auditor to make further inquiries about the previously issued financial
statements?
a. A technological development that could affect the entity’s future ability to continue as a
going concern.
b. The entity’s sale of a subsidiary that accounts for 30 percent of the entity’s consolidated
sales.
c. The discovery of information regarding a contingency that existed before the financial
statements were issued.
d. The final resolution of a lawsuit explained in a separate paragraph of the auditor’s report
8. An auditor would issue an adverse opinion if
a. The audit was begun by other independent auditors who withdrew from the engagement.
b. The statements taken as a whole do not fairly present the financial condition and results of
operations of the company.
c. A qualified opinion cannot be given because the auditor lacks independence.
d. The restriction on the scope of the audit was significant.
9. An audit report contains the following paragraph:
"Because of the inadequacies in the company's accounting records during the year ended June
30, 2005, it was not practicable to extend our auditing procedures to the extent necessary to
enable us to obtain certain evidential matter as it relates to classification of certain items in the
consolidated statements of operations."
This paragraph most likely describes

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a. A material departure from GAAP requiring a qualified audit opinion.

b. An uncertainty that should not lead to a qualified opinion.
c. A material scope restriction requiring a qualification of the audit opinion.
d. A matter that the auditor wishes to emphasize and that does not lead to a qualified audit
opinion.
10. The auditor issued a qualified opinion covering the financial statements of Client A for the year
ended December 31, 2004. The reason for the qualification was a departure from GAAP. In
presenting comparative statements for the years ended December 31, 2004 and 2005, the
client revised the 2004 financial statements to correct the previous departure from GAAP. The
auditor's 2005 report on the 12/31/04 and 12/31/05 comparative financial statements will
a. Express unqualified opinions on both the 2004 and 2005 financial statements.
b. Express a qualified opinion on the 2004 financial statements and an unqualified opinion on
the 2005 statements.
c. Retain the qualified opinion covering the 2004 statements, but add an explanatory
paragraph describing the correction of the prior departure from GAAP.
d. Render qualified audit opinions for both 2004 and 2005 financial statements given the 2005
carryover effect of the 2004 error.
11. An auditor may reasonably issue an "except for" qualified opinion for
Inadequate disclosure Scope limitation
a. Yes Yes
b. Yes No
c. No Yes
d. No No
12. Soon after Boyd's audit report was issued, Boyd learned of certain related party transactions
that occurred during the year under audit. These transactions were not disclosed in the notes
to the financial statements. Boyd should
a. Plan to audit the transactions during the next engagement.
b. Recall all copies of the audited financial statements.
c. Ask the client to disclose the transactions in subsequent interim statements.
d. Determine whether the lack of disclosure would affect the auditor's report.
13. An auditor includes an explanatory paragraph in an otherwise unqualified report in order to
emphasize that the entity being reported on is a subsidiary of another business enterprise. The
inclusion of this paragraph
a. Is appropriate and would not negate the unqualified opinion.
b. Is a qualification.
c. Is a violation of generally accepted reporting standards if this information is disclosed in
footnotes to the financial statements.
d. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing
explanation."
14. Which of the following best describes the auditor's responsibility for "other information" included
in the annual report to stockholders which contains financial statements and the auditor's
report?
a. The auditor has no obligation to read the "other information."
b. The auditor has no obligation to corroborate the "other information," but should read the
"other information" to determine whether it is materially inconsistent with the financial
statements.
c. The auditor should extend the examination to the extent necessary to verify the "other
information."
d. The auditor must modify the auditor's report to state that the "other information is
unaudited" or "not covered by the auditor's report."
15. In which of the following circumstances would an auditor be most likely to express an adverse
opinion?
a. The statements are not in conformity with the ASC Statements regarding the capitalization
of leases.
b. Information comes to the auditor's attention that raises substantial doubt about the entity's
ability to continue in existence.
c. The chief executive officer refuses the auditor access to minutes of board of directors'
meetings.
d. Control tests show that the entity's internal control is so poor that the financial records
cannot be relied upon.
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16. When a principal auditor decides to make reference to another auditor's examination, the
principal auditor's report should always indicate clearly, in the introductory, scope, and opinion
paragraphs, the
a. Magnitude of the portion of the financial statements examined by the other auditor.
b. Division of responsibility.
c. Disclaimer of responsibility concerning the portion of the financial statements examined by
the other auditor.
d. Name of the other auditor.
17. The independent auditor refers to both GAAP and GAAS when writing the standard audit report.
These terms are mentioned as follows:
a b c d
Scope Paragraph GAAP GAAS GAAP GAAS
Opinion Paragraph GAAS GAAP GAAP GAAS
18. Which of the following best describes the reference to the expression “taken as a whole” in the
fourth generally accepted auditing standard of reporting?
a. It applies equally to a complete set of financial statements and to an individual financial
statement.
b. It applies only to a complete set of financial statements.
c. It applies equally to each item in each financial statement.
d. It applies equally to each material item in each financial statement.
19. If an accounting change has no material effect on the financial statements in the current year
but the change is reasonably certain to have a material effect in later years, the change should
be
a. Treated as a consistency modification in the auditor’s report for the current year.
b. Disclosed in the notes to the financial statements of the current year.
c. Disclosed in the notes to the financial statements and referred to in the auditor’s report for
the current year.
d. Treated as a subsequent event.
20. An auditor’s standard report expressed an unqualified opinion and includes an explanatory
paragraph that emphasizes a matter included in the notes to the financial statements. The
auditor’s report would be deficient if the explanatory paragraph states that the entity
a. Is a component of a larger business enterprise.
b. Has changed form the completed contract method to the percentage of completion method
to account for long-term construction contracts.
c. Has had a significant subsequent event.
d. Has accounting reclassifications that enhance the comparability between years.
21. In which of the following circumstances would an adverse opinion be appropriate?
a. The auditor is not independent with respect to the enterprise being audited
b. An uncertainty prevents the issuance of an unqualified report
c. The statements are not in conformity with authoritative statements regarding accounting for
pension plans
d. A client-imposed scope limitation prevents the auditor from complying with generally
accepted auditing standards
22. An auditor is confronted with an exception sufficiently material to warrant departing from the
standard wording of an unqualified report. If the exception relates to a departure from the
generally accepted accounting principles, the auditor must decide between a(n)
a. adverse opinion and an unqualified opinion
b. adverse opinion and a qualified opinion
c. adverse opinion and a disclaimer of opinion
d. disclaimer of opinion and a qualified opinion
23. An auditor had expressed a qualified opinion on the financial statements of a prior period
because the client’s financial statements departed from generally accepted accounting
principles. The prior period statements are restated in the current period to conform with
generally accepted accounting principles. The auditor’s updated report on the prior period
statements should
a. express an unqualified opinion about the restated financial statements
b. be accompanied by the auditor’s original report on the prior period
c. bear the same date as the auditor’s original report on the prior period

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d. qualify the opinion concerning the restated financial statements because of a change in
accounting principles
24. A successor auditor should refer to a predecessor auditor’s report in the
a. Opening paragraph c. Opinion paragraph
b. Scope paragraph d. Opening and opinion paragraph
25. Because of inadequate records the auditor is uncertain as to whether property and equipment
is stated at cost. The auditor should issue a (n):
a. Qualified opinion c. Adverse opinion
b. Unqualified opinion d. Standard opinion
26. The auditor’s report contains a paragraph explaining that the entity changed from the straight-
line to the declining balance method of depreciation. The auditor expressed an:
a. Adverse opinion c. Qualified opinion
b. Unqualified opinion d. Disclaimer of opinion
27. The following circumstances result in a modified, but unqualified report, except:
a. Inconsistent application of accounting principles.
b. Emphasis of a related party transaction that is disclosed in a footnote.
c. Lack of disclosure of a restriction on payment of dividends.
d. Other auditors perform work for which the principal auditor does not assume responsibility.
28. Under which of the following sets of circumstances might an auditor disclaim an opinion?
a. The financial statements contain a departure from GAAP, the effect of which is material.
b. The principal auditor decides to make reference to the report of another auditor who audited
a subsidiary.
c. There has been a material change between periods in the method of the application of
accounting principles.
d. There were significant limitations on the scope of the audit.
29. Which of the following description is not included in the scope paragraph of the auditor’s
report?
a. Examining, on a test basis, evidence to support the financial statement amounts and
disclosures.
b. Determining the accounting principles used in the preparation of the financial statements.
c. Assessing the significant estimates made by management in the preparation of the financial
statement.
d. Evaluating the overall financial statement presentation.
30. Which of the following statements is best described in the scope paragraph of the independent
auditor’s report?
a. The audit was planned and performed to obtain reliable assurance about whether the
financial statements are free of material misstatements.
b. The audit was conducted in accordance with financial reporting framework.
c. The auditor makes the significant estimates in the preparation of the financial statements.
d. A statement by the auditor that the audit provides a reasonable basis for the opinion.
31. When there is an assessed substantial doubt about the ability of the entity to continue as a
going concern and such information is adequately disclosed in the notes to financial
statements, the auditor should express a(n):
a. Standard unqualified opinion. c. Qualified opinion
b. Unqualified opinion with explanatory paragraph. d. Adverse opinion
32. If adequate disclosure is not made by the entity regarding substantial doubt about its ability to
continue as a going concern, the auditor should include in his report specific reference to the
substantial doubt as to ability of the company to continue as a going concern and should
express:
a. Unqualified opinion with explanatory paragraph
b. A subject to qualified opinion or adverse opinion.
c. Either an “except for” qualified opinion or an adverse opinion.
d. A disclaimer of opinion.
33. Which of the following factors, by itself, would not cause uncertainty about the ability of a
company to continue as a going concern?
a. A significant net loss.
b. Inability to pay its obligations as they come due.

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c. The occurrence of uninsured catastrophe.

d. Legal proceedings that might jeopardize the entity’s ability to operate.
34. If the auditor concludes that the fraud or error has a material effect on the financial statements
and has not been properly corrected in the financial statements, the auditor should issue a:
a. Unqualified opinion with explanatory paragraph. c. Qualified or disclaimer of opinion.
b. Qualified or adverse opinion. d. Adverse or disclaimer of opinion.

35. If the auditor is precluded by the entity from obtaining evidence to evaluate whether fraud or
error that may be material to the financial statements has, or is likely to have, occurred, the
auditor should issue a (n):
a. Unqualified opinion with explanatory paragraph.
b. Qualified or adverse opinion.
c. Qualified or disclaimer of opinion.
d. Adverse or disclaimer of opinion.

36. 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. Inadequate disclosure of accounting policies
c. Inability to obtain sufficient competent evidential matter
d. Unreasonable justification for a change in accounting principle

PSA 700 – The Auditor’s Report on Financial Statements

37. The element of the auditor’s report that distinguishes it from reports that might be issued by
others is
a. Title c. Auditor’s signature
b. Addressee d. Opinion paragraph

38. The financial statements audited by the auditor are identified in the
a. Opening paragraph c. Opinion paragraph
b. Scope paragraph d. All of the above.

39. Which of the following statements can be found on the scope paragraph of the standard audit
report?
a. The financial statements are the responsibility of the Company’s management.
b. Our responsibility is to express an opinion on these financial statements based on our audit.
c. We believe that our audit provides a reasonable basis for our opinion.
d. The financial statements ‘present fairly, in all material respects’.

40. Which statement is incorrect regarding the date of the auditor’s report?
a. The auditor should date the report as of the completion date of the audit.
b. The date of the report informs the reader that the auditor has considered the effect on the
financial statements and on the report of events and transactions of which the auditor
became aware and that occurred up to that date.
c. The auditor should not date the report earlier than the date on which the financial
statements are signed or approved by management.
d. The auditor should date the report as of date the report is delivered to the entity audited.

41. The following will usually result in a modified report but will not affect the auditor’s opinion,
except
a. Existence of going concern problem.
b. There is a significant uncertainty (other than a going concern problem), the resolution of
which is dependent upon future events and which may affect the financial statements.
c. Emphasis of a matter.
d. There is a disagreement with management regarding the acceptability of the accounting
policies selected.

42. 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
a. Qualified or adverse opinion c. Unqualified opinion with explanatory paragraph
b. Disclaimer of opinion d. Unqualified opinion.

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PSA 710 – Comparatives

43. Which statement is incorrect regarding comparatives?
a. The auditor is not required to determine whether the comparatives comply in all material
respects with GAAP relevant to the financial statements being audited.
b. There are two broad financial reporting frameworks for comparatives: the corresponding
figures and the comparative financial statements.
c. Under the corresponding figures framework, the corresponding figures for the prior
period(s) are an integral part of the current period financial statements and have to be read
in conjunction with the amounts and other disclosures relating to the current period.
d. Under the comparative financial statements framework, the comparative financial
statements for the prior period(s) are considered separate financial statements.

44. Which statement is incorrect regarding corresponding figures?

a. The corresponding figures are not presented as complete financial statements capable of
standing alone.
b. The level of detail presented in the corresponding amounts and disclosures is dictated
primarily by its relevance to the current period figures.
c. The auditor’s report refers only to the financial statements of the current period.
d. The auditor’s report refers to each period that financial statements are presented.

45. When the comparatives in which the prior audit report is unmodified, the auditor should issue
an audit report in which:
a. The comparatives are specifically identified in the opening paragraph but not referred to in
the opinion paragraph of the auditor’s report.
b. The comparatives are specifically identified in the opening paragraph and are referred to in
the opinion paragraph.
c. The comparatives are not specifically identified in the audit report.
d. The comparatives are described in the emphasis of matter paragraph of the auditor’s report.

46. In case the prior period financial statements were audited by another auditor and the incoming
auditor decides to refer to another auditor, the incoming auditor’s report should indicate:
a. That the financial statements of the prior period were audited by another auditor.
b. The type of report issued by the predecessor auditor and, if the report was modified, the
reasons therefore.
c. The date of that report.
d. All of the above.

47. In relation to comparatives as corresponding figures, which of the following is incorrect?

a. When the prior period financial statements are not audited, the incoming auditor should
state in the auditor’s report that the corresponding figures are unaudited.
b. The incoming auditor must refer to the predecessor auditor’s report on the corresponding
figures in the incoming auditor’s report for the current period.
c. When the financial statements of the prior period were audited by another auditor, the
incoming auditor’s report should state that the prior period was audited by another auditor.
d. In situations were the incoming auditor identified that the corresponding figures are
materially misstated, the auditor should request management to revise the corresponding
figures or if management refuses to do so, appropriately modify the report.

48. When the financial statements of the prior period were not audited, the incoming auditor
should:
a. Insist that an audit of prior year’s financial statements must be made.
b. Not allow the inclusion of the corresponding figures in the financial statements of the
current period.
c. Disclaim his opinion and treat the unaudited corresponding figures as basis of scope
limitation.
d. Obtain sufficient appropriate audit evidence that the corresponding figures meet the
requirements of the relevant financial reporting framework.’

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120. The completion of the assembly of the final audit file after the date of the auditor ’s report
does not ordinarily involve
A. The performance of new audit procedures or the drawing of new conclusions.
B. Sorting, collating and cross-referencing working papers.
C. Deleting or discarding superseded documentation.
D. Signing off on completion checklists relating to the file assembly process.

AUDIT SAMPLING

121. Audit sampling involves the

A. Selection of all items over a certain amount.

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B. Application of audit procedures to less than 100% of items within a class of
transactions or an account balance such that all items have a chance of selection.
C. Application of audit procedures to all items that comprise a class of transactions or an
account balance.
D. Application of audit procedures to all items over a certain amount and those that are
unusual or have a history of error.

122. Population, as defined in PSA 530, means the entire set of data from which a sample is
selected and about which the auditor wishes to draw conclusions. It is important for the
auditor to ensure that the population is
I. Appropriate to the objective of the audit procedure.
II. Complete.
A. I only C. Both I and II
B. II only D. Neither I nor II

123. An advantage of statistical over nonstatistical sampling methods in tests of controls is that
the statistical methods
A. Afford greater assurance than a nonstatistical sample of equal size.
B. Provide an objective basis for quantitatively evaluating sampling risks.
C. Can more easily convert the sample into a dual-purpose test useful for substantive
testing.
D. Eliminate the need to use judgment in determining appropriate sample sizes.

124. Which of the following best illustrates the concept of sampling risk?
A. A randomly chosen sample may not be representative of the population as a whole on
the characteristic of interest.
B. An auditor may select audit procedures that are not appropriate to achieve the specific
objective.
C. An auditor may fail to recognize errors in the documents examined for the chosen
sample.
D. The documents related to the chosen sample may not be available for inspection.

125. Which of the following statistical selection techniques is least desirable for use by an
auditor?
A. Systematic selection C. Block selection
B. Stratified selection D. Sequential selection

COMPLETING THE AUDIT AND POST-AUDIT RESPONSIBILITIES

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126. Analytical procedures used in the overall review stage of the audit generally include
A. Retesting controls that appeared to be ineffective during the assessment of control
risk.
B. Considering unusual or unexpected account balances that were not previously
identified.
C. Gathering evidence concerning account balances that have not changed from the prior
year.
D. Performing tests of transactions to corroborate management ’s financial statement
assertions.

127. Analytical procedures performed in the overall review stage of an audit suggest that
several accounts have unexpected relationships. The results of these procedures most
likely indicate that
A. The communication with the audit committee should be revised.
B. Irregularities exist among the relevant account balances.
C. Additional substantive tests of details are required.
D. Internal control activities are not operating effectively.

128. Which of the following events most likely indicates the existence of related parties?
A. Making a loan without scheduled terms for repayment of the funds.
B. Discussing merger terms with a company that is a major competitor.
C. Selling real estate at a price that differs significantly from its book value.
D. Borrowing a large sum of money at a variable rate of interest.

129. An auditor searching for related party transactions should obtain an understanding of each
subsidiary’s relationship to the total entity because
A. This may permit the audit of intercompany account balances to be performed as of
concurrent dates.
B. This may reveal whether particular transactions would have taken place if the parties
had not been related.
C. The business structure may be deliberately designed to obscure related party
transactions.
D. Intercompany transactions may have been consummated on terms equivalent to
arm’s-length transactions.

130. After determining that a related party transaction has, in fact, occurred, an auditor should
A. Obtain an understanding of the business purpose of the transaction.
B. Substantiate that the transaction was consummated on terms equivalent to an arm ’s-
length transaction.
C. Add a separate paragraph to the auditor’s report to explain the transaction.
D. Perform analytical procedures to verify whether similar transactions occurred, but were
not recorded.

131. Which of the following statements best describes the “date of the financial statements? ”
A. The date on which those with the recognized authority assert that they have prepared
the entity’s complete set of financial statements, including the related notes, and that
they have taken responsibility for them.
B. The date that the auditor’s report and audited financial statements are made available
to third parties.
C. The date of the end of the latest period covered by the financial statements, which is
normally the date of the most recent balance sheet in the financial statements subject
to audit.
D. The date on which the auditor has obtained sufficient appropriate audit evidence on
which to base the opinion on the financial statements.

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132. Which of the following procedures would an auditor most likely perform to obtain evidence
about the occurrence of subsequent events?
A. Inquiring as to whether any unusual adjustments were made after the date of the
financial statements.
B. Confirming a sample of material accounts receivable established after the date of the
financial statements.
C. Comparing the financial statements being reported on with those of the prior period.
D. Investigating personnel changes in the accounting department occurring after the date
of the financial statements.

133. Which of the following statements best expresses the auditor ’s responsibility with respect
to facts discovered after the date of the auditor ’s report but before the date the financial
statements are issued?
A. The auditor should amend the financial statements.
B. If the facts discovered will materially affect the financial statements, the auditor
should issue a new report which contains either a qualified opinion or an adverse
opinion.
C. The auditor should consider whether the financial statements need amendment,
discuss the matter with management, and consider taking actions appropriate in the
circumstances.
D. The auditor should withdraw from the engagement.

134. After issuing a report, an auditor has no obligation to make continuing inquiries or
perform other procedures concerning the audited financial statements, unless
A. Final determinations or resolutions are made of contingencies that had been disclosed
in the financial statements.
B. Information about an event that occurred after the date of the auditor ’s report comes
to the auditor’s attention.
C. The control environment changes after issuance of the report.
D. Information, which existed at the report date and may affect the report, comes to the
auditor’s attention.

135. Which of the following events occurring after the issuance of an auditor ’s report most
likely would cause the auditor to make further inquiries about the previously issued
financial statements?
A. A technological development that could affect the entity ’s future ability to continue as
a going concern.
B. The entity’s sale of a subsidiary that accounts for 30% of the entity ’s consolidated
sales.
C. The discovery of information regarding a contingency that existed before the financial
statements were issued.
D. The final resolution of a lawsuit disclosed in the notes to the financial statements.

136. Which of the following statements best describes the auditor ’s responsibility concerning
the appropriateness of the going concern assumption in the preparation of the financial
statements?
A. The auditor’s responsibility is to make a specific assessment of the entity ’s ability to
continue as a going concern.
B. The auditor’s responsibility is to predict future events or conditions that may cause the
entity to cease to continue as a going concern.
C. The auditor’s responsibility is to consider the appropriateness of management ’s use of
the going concern assumption and consider whether there are material uncertainties
about the entity’s ability to continue as a going concern that need to be disclosed in
the financial statements.
D. The auditor’s responsibility is to give a guarantee in the audit report that the entity
has the ability to continue as a going concern.

137. Which of the following conditions or events most likely would cause an auditor to have
substantial doubt about an entity’s ability to continue as a going concern?
A. Cash flows from operating activities are negative.

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B. Stock dividends replace annual cash dividends.
C. Significant related party transactions are pervasive.
D. Research and development projects are postponed.

138. Which of the following conditions or events most likely would cause an auditor to have
substantial doubt about an entity’s ability to continue as a going concern?
A. Restrictions on the disposal of principal assets are present.
B. Usual trade credit from suppliers is denied.
C. Significant related party transactions are pervasive.
D. Arrearages in principal stock dividends are paid.

139. Which of the following audit procedures would most likely assist an auditor in identifying
conditions and events that may indicate there could be substantial doubt about an entity ’s
ability to continue as a going concern?
A. Confirmation of bank balances.
B. Confirmation of accounts receivable from major customers.
C. Reconciliation of interest expense with debt outstanding.
D. Review of compliance with terms of debt agreements.

140. When an auditor concludes that there is substantial doubt about a continuing audit client ’s
ability to continue as a going concern for a reasonable period of time, the auditor ’s
responsibility is to
A. Consider the adequacy of disclosure about the client ’s possible inability to continue as
a going concern.
B. Issue a qualified or adverse opinion, depending upon materiality, due to the possible
effects on the financial statements.
C. Report to the client’s audit committee that management ’s accounting estimates may
need to be adjusted.
D. Reissue the prior year’s auditor’s report and add an emphasis of matter paragraph that
specifically refers to “substantial doubt” and “going concern.”

141. When an audit is made in accordance with generally accepted auditing standards, the
auditor should always
A. Observe the taking of physical inventory on the balance sheet date.
B. Obtain certain written representations from management.
C. Employ analytical procedures as substantive tests to obtain evidence about specific
assertions related to account balances.
D. Document the understanding of the client’s internal control and the basis for all
conclusions about the assessed level of control risk for financial statement assertions.

142. When considering the use of management’s written representations as audit evidence
about the completeness assertion, an auditor should understand that such representations
A. Constitute sufficient appropriate audit evidence to support the assertion when
considered in combination with a sufficiently low assessed level of control risk.
B. Are not part of the audit evidence considered to support the assertion.
C. Replace a low assessed level of control risk as audit evidence to support the assertion.
D. Complement, but do not replace, substantive tests designed to support the assertion.

143. A written representation from a client ’s management that, among other matters,
acknowledges responsibility for the fair presentation of financial statements, should
normally be signed by the
A. Chief financial officer and the chair of the board of directors.
B. Chief executive officer and the chief financial officer.
C. Chief executive officer, the chair of the board of directors, and the client ’s lawyer.
D. Chair of the audit committee of the board of directors.

144. The date of the management representation letter should coincide with the date of the
A. Statement of Financial Position
B. Latest related party transaction
C. Auditor’s report
D. Latest interim financial information

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145. Which of the following statements concerning management representations is incorrect?

A. Representations by management can be a substitute for other audit evidence that the
auditor could reasonably expect to be available.
B. If the auditor is unable to obtain sufficient appropriate audit evidence regarding a
matter, which has, or may have, a material effect on the financial statements and such
audit evidence is expected to be available, this will constitute a limitation in the scope
of the audit, even if a representation from management has been received on the
matter.
C. If a representation by management is contradicted by other audit evidence, the
auditor should investigate the circumstances and, when necessary, reconsider the
reliability of other representations by management.
D. The auditor’s working papers would ordinarily include a summary of oral discussions
with management or written representations from management.

146. What type of opinion should be expressed if the client ’s management refuses to provide a
representation that the auditor considers necessary?
A. Qualified opinion or a disclaimer of opinion.
B. Qualified opinion or an adverse opinion.
C. Adverse opinion or a disclaimer of opinion.
D. Unqualified opinion.

147. The primary reason an auditor requests that letters of inquiry be sent to a client ’s
attorneys is to provide the auditor with
A. A description and evaluation of litigation, claims, and assessments that existed at the
balance sheet date.
B. The attorneys’ opinions of the client’s historical experiences in recent similar litigation.
C. Corroboration of the information furnished by management about litigation, claims,
and assessments.
D. The probable outcome of asserted claims and pending or threatened litigation.

148. The letter of audit inquiry should be

A. Prepared and sent by the auditor.
B. Prepared by management and sent by the auditor.
C. Prepared and sent by management.
D. Prepared by the auditor and sent by management.

149. The refusal of a client’s lawyer to provide a representation on the legality of a particular
act committed by the client is ordinarily
A. Proper grounds to withdraw from the engagement.
B. Insufficient reason to modify the auditor’s report because of the lawyer ’s obligation of
confidentiality.
C. Considered to be a scope limitation.
D. Sufficient reason to issue a “subject to” opinion.

150. Management’s refusal to give the auditor permission to communicate with the entity ’s
legal counsel is most likely to lead to
A. An adverse opinion.
B. A qualified opinion or an adverse opinion.
C. An unqualified opinion.
D. A qualified opinion or a disclaimer of opinion.

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THE AUDITOR’ S REPORT ON FINANCIAL STATEMENTS

151. 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).

152. 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.

153. 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 C. An adverse opinion
B. An unmodified opinion D. A “subject to” opinion

154. 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.

155. 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 a qualified opinion if the other information has a material
misstatement of fact.

156. 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

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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.

157. 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.

158. 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.

159. 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.

160. 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.

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OTHER REPORTING RESPONSIBILITIES

161. Financial statements of an entity that have been reviewed by an accountant should be
accompanied by a report stating that a review
A. Provides only limited assurance that the financial statements are fairly presented.
B. Includes examining, on a test basis, information that is the representation of
management.
C. Consists principally of inquiries of company personnel and analytical procedures
applied to financial data.
D. Does not contemplate obtaining corroborating evidential matter or applying certain
other procedures ordinarily performed during an audit.

162. An accountant’s report on a review of the financial statements of an entity should state
that the accountant
A. Does not express an opinion or any form of limited assurance on the financial
statements.
B. Conducted the review in accordance with the Philippine Standard on Review
Engagements.
C. Obtained reasonable assurance about whether the financial statements are free of
material misstatements.
D. Examined evidence, on a test basis, supporting the amounts and disclosures in the
financial statements.

163. Financial statements of an entity that have been reviewed by an accountant should be
accompanied by a report stating that
A. The scope of the inquiry and analytical procedures performed by the accountant has
not been restricted.
B. The financial statements are the responsibility of the company ’s management.
C. A review includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.
D. A review is greater in scope than a compilation, the objective of which is to present
financial statements that are free of material misstatements.

164. When compiling the financial statements of an entity, an accountant should

A. Review agreements with financial institutions for restrictions on cash balances.
B. Understand the accounting principles and practices of the entity ’s industry.
C. Inquire of key personnel concerning related parties and subsequent events.
D. Perform ratio analyses of the financial data of comparable prior periods.

165. When compiling an entity’s financial statements, an accountant would be least likely to
A. Perform analytical procedures designed to identify relationships that appear to be
unusual.
B. Read the compiled financial statements and consider whether they appear to include
adequate disclosure.
C. Obtain an acknowledgment from management of its responsibility for the financial
statements.

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D. Plan the work so that an effective engagement will be performed.

166. Which of the following should not be included in an accountant ’s report based upon the
compilation of an entity’s financial statements?
A. A statement that a compilation of the company ’s financial statements was made in
accordance with the Philippine Standard on Related Services applicable to compilation
engagements.
B. A statement that management is responsible for the financial statements.
C. A statement that the accountant has not audited or reviewed the statements.
D. A statement that the accountant does not express an opinion but provides only
negative assurance on the statements.

167. An accountant may accept an engagement to apply agreed-upon procedures that are not
sufficient to express an opinion on one or more specified accounts or items of a financial
statement provided that
A. The accountant’s report does not enumerate the procedures performed.
B. The financial statements are prepared in accordance with a comprehensive basis of
accounting other than generally accepted accounting principles.
C. Distribution of the accountant’s report is restricted.
D. The accountant is also the entity’s continuing auditor.

168. When an accountant examines prospective financial statements, the accountant ’s report
should include a separate paragraph that
A. Contains an opinion as to whether the prospective financial statements are properly
prepared on the basis of the assumptions and are presented in accordance with
generally accepted accounting principles in the Philippines.
B. Provides an explanation of the differences between an examination and an audit.
C. States that the accountant is responsible for events and circumstances up to 1 year
after the report’s date.
D. Disclaims an opinion on whether the assumptions provide a reasonable basis for the
prospective financial statements.

169. The following statements relate to the examination of prospective financial information.
Which is false?
A. The auditor should express an opinion as to whether the results shown in the
prospective financial information will be achieved.
B. Before accepting an engagement to examine prospective financial information, the
auditor should consider the intended use of the information.
C. The auditor should not accept, or should withdraw from, an engagement to examine
prospective financial information when the assumptions are clearly unrealistic.
D. When in the auditor’s judgment an appropriate level of satisfaction has been obtained,
the auditor is not precluded from expressing positive assurance regarding the
assumptions.

170. Which of the following is a prospective financial information for general use upon which an
accountant may appropriately report?
A. Financial projection
B. Partial presentation
C. Pro forma financial statement
D. Financial forecast

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