ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 45  May 2023 CPA Licensure Examination AT-17

AUDITING (Auditing Theory) J. IRENEO  E. ARAÑAS  F. TUGAS  C. ALLAUIGAN

MODIFICATION TO THE AUDITOR’S REPORT

PSA 705 deals with the auditor’s responsibility to issue an appropriate report in circumstances when,
in forming an opinion in accordance with PSA 700, the auditor concludes that a modification to the
auditor’s opinion on the financial statements is necessary. It also deals with how the form and content
of the auditor’s report is affected when the auditor expresses a modified opinion.

PSA 705 establishes three types of modified opinions, namely, a qualified opinion, an adverse opinion,
and a disclaimer of opinion. The decision regarding which type of modified opinion is appropriate
depends upon:
▪ the nature of the matter giving rise to the modification, that is, whether the financial statements
are materially misstated or, in the case of an inability to obtain sufficient appropriate audit
evidence, may be materially misstated; and
▪ the auditor’s judgment about the pervasiveness of the effects or possible effects of the matter
on the financial statements.

Pervasive – a term used, in the context of misstatements, to describe the effects on the financial
statements of misstatements or the possible effects on the financial statements of misstatements, if
any, that are undetected due to an inability to obtain sufficient appropriate audit evidence. Pervasive
effects on the financial statements are those that, in the auditor’s judgment:
▪ are not confined to specific elements, accounts or items of the financial statements;
▪ if so confined, represent or could represent a substantial proportion of the financial statements;
or
▪ in relation to disclosures, are fundamental to users’ understanding of the financial statements.

DETERMINING THE TYPE OF MODIFICATION TO THE AUDITOR’S OPINION

▪ Qualified Opinion – The auditor shall express a qualified opinion when:
o the auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are material, but not pervasive, to the
financial statements; or
o the auditor is unable to obtain sufficient appropriate audit evidence on which to base
the opinion, but the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be material but not pervasive.
▪ Adverse Opinion – The auditor shall express an adverse opinion when the auditor, having
obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in
the aggregate, are both material and pervasive to the financial statements.
▪ Disclaimer of Opinion - The auditor shall disclaim an opinion when the auditor is unable to
obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor
concludes that the possible effects on the financial statements of undetected misstatements, if
any, could be both material and pervasive. The auditor shall disclaim an opinion when, in
extremely rare circumstances involving multiple uncertainties, the auditor concludes that,
notwithstanding having obtained sufficient appropriate audit evidence regarding each of the
individual uncertainties, it is not possible to form an opinion on the financial statements due to
the potential interaction of the uncertainties and their possible cumulative effect on the financial
statements.

OTHER CONSIDERATIONS
▪ When the auditor considers it necessary to express an adverse opinion or disclaim an opinion
on the financial statements as a whole, the auditor’s report shall not also include an unmodified
opinion with respect to the same financial reporting framework on a single financial statement
or one or more specific elements, accounts or items of a financial statement. To include such
an unmodified opinion in the same report in these circumstances would contradict the auditor’s
adverse opinion or disclaimer of opinion on the financial statements as a whole.
▪ When the auditor modifies the audit opinion, the auditor shall use the heading “Qualified
Opinion,” “Adverse Opinion,” or “Disclaimer of Opinion,” as appropriate, for the Opinion section.
▪ PSA 600 – Special Considerations – Audits of Group Financial Statements (including the Work
of Component Auditors)
▪ PSA 620 (Revised and Redrafted) – Using the Work of an Auditor’s Expert
▪ PSA 706 (Revised and Redrafted) – Emphasis of Matter Paragraphs and Other Matter
Paragraphs in the Independent Auditor’s Report

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MODIFICATION to the AUDITOR’S REPORT AT-17
1. The auditor shall modify the opinion in the auditor’s report when:
I - The auditor concludes that, based on the audit evidence obtained, 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. Both I and II D. Neither I nor II

2. The phrase “The financial statements do not present fairly in all material respects the financial
position, results of operations, and cash flows in conformity with GAAP” indicates:
A. An unqualified opinion C. A qualified opinion
B. An adverse opinion D. A disclaimer of opinion

3. The phrase “Except for the possible effects of the matters… the financial statements present fairly
in all material respects the financial position, results of operations, and cash flows in conformity
with GAAP” indicates:
A. An unqualified opinion C. A qualified opinion
B. An adverse opinion D. A disclaimer of opinion

4. The phrase “Accordingly, we do not express an opinion on the financial statements…” indicates
A. An unqualified opinion C. A qualified opinion
C. An adverse opinion D. A disclaimer of opinion

5. Under which of the following circumstances would a disclaimer of opinion not be appropriate?
A. The auditor is unable to determine the amounts associated with an employee fraud scheme.
B. Management does not provide reasonable justification for a change in accounting principles.
C. The client refuses to permit the auditor to con rm certain accounts receivable or apply
alternative procedures to verify their balances.
D. The chief executive officer is unwilling to sign the management representation letter.

6. An auditor has concluded that fraud or error has a material effect on the financial statements. The
fraud/ error has not been corrected and reflected in the financial statements. In this case, the
pervasiveness of the effect of fraud and error will determine the opinion. Accordingly, the auditor
should issue a(n):
A. Unqualified opinion with emphasis of matter.
B. Adverse or disclaimer of opinion.
C. Qualified or disclaimer of opinion.
D. Qualified or adverse opinion.

7. Cole, CPA, was engaged to audit the financial statements of Nat Company after its fiscal year had
ended. The timing of Cole’ appointment as auditor and the start of field work made confirmation
of accounts receivable by direct communication with the debtors ineffective. However, Cole applied
other audit procedures and was satisfied as to the reasonableness of the account balances. Cole’
auditor’s report most likely contained a(n):
A. Unqualified opinion.
B. Unqualified opinion with an emphasis of a matter paragraph.
C. Qualified opinion because of inability to obtain sufficient appropriate audit evidence.
D. Qualified opinion because of a departure from PSAs.

8. Suppose that in number 8, Cole was unable to obtain sufficient appropriate audit evidence, since
he is unable to perform alternative procedures. Accordingly (select the correct statement):
A. If Cole concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be material but not pervasive, Cole shall disclaim an opinion.
B. If Cole concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive so that a qualification of the opinion
would be inadequate to communicate the gravity of the situation, Cole shall give an adverse
opinion.
C. If Cole concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive so that a qualification of the opinion
would be inadequate to communicate the gravity of the situation, Cole shall resign from the
audit, where practicable and not prohibited by law or regulation.
D. If Cole concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be material but not pervasive, Cole shall give an adverse opinion.

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MODIFICATION to the AUDITOR’S REPORT AT-17
9. An auditor may not express a qualified opinion when
A. Circumstances prevent the auditor from completing an important audit procedure.
B. The auditor’s report refers to the work of a specialist.
C. An accounting principle at variance with generally accepted accounting principles is
used.
D. The auditor lacks independence with respect to the audited entity.

10. In which of the following situations would the auditor appropriately issue an unmodified opinion
with no emphasis of a matter 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.

11. If management fails to provide adequate justification for a change from one generally accepted
accounting principle to another, the auditor should:
A. Add a basis for modification paragraph and express a qualified or an adverse opinion
for lack of conformity with the applicable financial reporting framework.
B. Disclaim an opinion because of uncertainty.
C. Disclose the matter in a separate emphasis of a matter paragraph(s) but not modify
the opinion paragraph.
D. Neither modify the opinion nor disclose the matter because both principles are generally
accepted.

12. An auditor who concludes that a material (but not pervasive) uncertainty is not adequately
disclosed in the financial statements should issue a(n):
A. An unqualified opinion C. An adverse opinion
B. A qualified opinion D. A disclaimer of opinion

13. Which of the following statements indicates a qualified opinion?

A. The financial statements do not present fairly in all material respects the financial
position, results of operations, and cash flows in conformity with PFRS.
B. The auditor does not express an opinion on the financial statements.
C. The financial statements present fairly in all material respects the financial position,
results of operations, and cash flows in conformity with PFRS.
D. Except for the effects of a matter, the financial statements present fairly in all material
respects the financial position, results of operations, and cash flows in conformity with
PFRS.
14. 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 emphasis of a matter 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.

15. 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 explanatory paragraph.
C. Adverse opinion.
D. Disclaimer of opinion.
16. S1: When the auditor expresses a qualified or adverse opinion, communicating other key audit
matters is not anymore relevant to enhancing intended users’ understanding of the audit, and
therefore the requirements to determine key audit matters do not apply.
S2: A matter giving rise to a modified opinion in accordance with PSA 705 (Revised), or a material
uncertainty related to events or conditions that may cast significant doubt on the entity’s ability
to continue as a going concern in accordance with PSA 570 (Revised), are by their nature key
audit matters.
A. True, True B. True, False C. False, False D. False, True

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MODIFICATION to the AUDITOR’S REPORT AT-17
17. The partner or other person in the firm who is responsible for the group audit engagement and its
performance, and for the auditor’s report on the group financial statements that is issued on behalf
of the firm.
A. Lead partner C. Group engagement partner
B. Managing partner D. Joint engagement partner

18. Which of the following is not a consideration when the group engagement team plans to request a
component auditor to perform work on the financial information of a component?
A. Whether the component auditor understands and will comply with the ethical
requirements that are relevant to the group audit and, in particular, is independent.
B. The component auditor’s professional sanity.
C. Whether the group engagement team will be able to be involved in the work of the
component auditor to the extent necessary to obtain sufficient appropriate audit
evidence.
D. Whether the component auditor operates in a regulatory environment that actively
oversees auditors.
19. A group engagement partner decides not to refer to the audit of another CPA who audited a
component of the overall group financial statements. After making inquiries about the other CPA’s
professional reputation and independence, the principal auditor most likely would
A. Add an emphasis-of-matter paragraph to the auditor’s report indicating that the
subsidiary’s financial statements are not material to the consolidated financial
statements.
B. Document in the engagement letter that the principal auditor assumes no responsibility
for the other CPA’s work and opinion.
C. Obtain written permission from the other CPA to omit the reference in the principal
auditor’s report.
D. Perform additional audit procedures based on the significance of the subsidiary.
20. An auditor used the services of an expert during the audit of a client’s financial statements. When
issuing an unmodified auditor’s report, the auditor should:
A. Mention the expert and justify the use of the expert’s services.
B. Not mention the expert in the opinion and instead disclose the expert in the notes.
C. Not mention the expert as this might mislead financial statement users.
D. Mention the expert in both the auditor’s report and the notes to the financial
statements.
21. Aljon, CPA, has audited Bona Semiconductors, Inc. During the course of the audit, Aljon enlisted
the services of Shirley, an expert on electronics. As a result of Shirley’s services, Aljon issued a
modified report. While drafting the basis for modification paragraph, Aljon decided that reference
to the expert is required. In these circumstances,
A. Aljon should obtain the permission of Shirley before making such a reference.
B. Aljon may refer to Shirley without permission, but Shirley’s identity must be concealed.
C. Aljon should seek legal advice on whether to reference to the Shirley.
D. Aljon cannot refer to Shirley under any circumstance.
22. An auditor may issue the standard audit report when the:
A. Group engagement partner assumes responsibility for the work of a component auditor.
B. Financial statements are prepared on the cash receipts and disbursements basis of
accounting.
C. Financial statements are derived and summarized from complete audited financial
statements that are filed with a regulatory agency.
D. Auditor refers to the findings of a specialist.
23. Which statement is incorrect regarding PSA 710, Comparatives?
A. The auditor is 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 comparative financial statements framework, the comparative financial
statements for the prior period(s) are considered separate financial statements.
D. Under the corresponding figures framework, the corresponding figures for the prior
period(s) are not an integral part of the current period financial statements and may
be read without reference to amounts and other disclosures relating to the current
period.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
MODIFICATION to the AUDITOR’S REPORT AT-17
24. The following statement relate to the auditor’s reporting responsibilities regarding comparatives.
Which is correct?
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

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

26. Financial and non-financial information (other than the financial statements and the auditor’s
report thereon) which is included, either by law, regulation or custom, in a document containing
audited financial statements and the auditor’s report thereon.
A. Supplementals C. Other information
B. Other matter paragraph D. Auxiliary disclosures

27. 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. Revise the auditor’s report to include a separate emphasis-of-matter paragraph
describing the material inconsistency.
B. Issue an “except for” qualified opinion after discussing the matter with the client’s board
of directors.
C. Consider the matter closed since the other information is not in the audited financial
statements.
D. Disclaim an opinion on the financial statements after explaining the material
inconsistency in a separate basis for disclaimer paragraph.

28. All of the following would require an emphasis of matter paragraph except for:
A. the existence of material related party transactions.
B. material uncertainties disclosed in the footnotes.
C. the lack of auditor independence.
D. important events occurring subsequent to the statement of financial position date.

29. This exists when the other information is incorrectly stated or otherwise misleading.
A. Misstatement of the financial statements
B. Misstatement of appearance
C. Misstatement of fact
D. Misstatement of the other information

30. 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. Unqualified opinion with an ‘other matter’ paragraph.
B. Adverse or disclaimer of opinion.
C. Qualified or disclaimer of opinion.
D. Qualified or adverse opinion.

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