Integrated Auditing Theory

M8: Audit Reports

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

1. PSA 701 provides guidance on the:

A. auditor's report issued as a result
statements
B. auditor's report issued as a result of
C. communicating key audit matters in
D. auditor's report issued as a result of
of an audit of a complete set of general-purpose financial
performing a special-purpose audit engagement
the independent auditor's report
an audit of a single statement or specified account(s)

2. The auditor's judgment regarding whether the financial statements give a "true and fair view" or "are
presented fairly", in all material respects, is made in the context of:
A. generally accepted auditing standards·
B. standards of reporting of generally accepted auditing standards
C. applicable financial reporting framework
D. applicable Philippine Standards on Auditing (PSAs)

3. In forming an opinion on the financial statements,

A. the auditor should evaluate the conclusions drawn from the audit evidence obtained during the
course of the audit
B. the auditor evaluates whether there is a reasonable assurance about whether the financial
statements are free from any misstatements
C. the auditor evaluates whether sufficiently appropriate audit evidence has been obtained to
eliminate the risk of material misstatements
D. the auditor verifies that all errors that misstate the financial statements have been corrected by
the client

4. In evaluating whether the financial statements have been prepared and presented in accordance with
the specific requirements of the applicable financial reporting framework for particular classes of
transactions, account balances and disclosures, the auditor should consider:
A. that the accounting estimates made by the management are reasonable in the circumstances
B. that the information presented in the financial statements, including accounting policies, is
relevant, reliable, comparable and understandable
C. that the accounting policies selected and applied are consistent with the financial reporting
framework
D. All of the choices given are to be considered.

5. Which of the following is least likely considered by the auditor when he has to evaluate the fair
presentation of the financial statements?
A. Whether the financial statements, after any adjustments made by the management as a result of
audit process, are consistent with the auditor's understanding of the entity and its environment.
B. Whether the financial statements, including the disclosures, faithfully represent the underlying
transactions and events in a manner that gives a true and fair view of, in all material respects, the
information conveyed in the financial statements within the context of the financial reporting
framework.
C. Whether the results of analytical procedures performed at or near the end of the audit help to
corroborate conclusion formed during the audit.
D. Whether the financial statements are approved by the client's board of directors.
6. The auditor's report may be addressed to any of the following, except the client's
A. Stockholders
B. Chief executive officer
C. Board of directors
D. Partners

7. The first section of the auditor's report shall include the auditor's opinion, and shall have the heading
"Opinion" and shall also (choose the incorrect one):
A. Identify the entity whose financial statements have been audited and state that the financial
statements have been audited.
B. Identify the title of each statement comprising the financial statements and refer to the notes,
including the summary of significant accounting policies.
C. Specify the date of, or period covered by, each financial statement comprising the financial
statements.
D. State that the audit was conducted in accordance with Philippine Standards on Auditing.

8. When an entity presents, together with the financial statements, supplementary information that cannot
be clearly differentiated from the financial statements because of its nature and how it is presented,
such supplementary information
A. must be specifically referred to in the introductory paragraph of the auditor's report
B. is covered by the auditor's opinion
C. is referred by adding an emphasis of matter paragraph
D. is not covered by the auditor's opinion

9. In accordance with PSA 700 (Revised), Forming an Opinion and Reporting on Financial Statements
(effective for audits of financial statements for periods ending on or after December 15, 2016), an
independent auditor's report shall contain the following section(s):
Opinion Basis of Opinion
A. Always Always
B. Always Sometimes
C. Sometimes Sometimes
D. Never Never

10. For audits of complete sets of general-purpose financial statements of listed entities, the auditor shall
communicate key audit matters in the auditor's report in accordance with PSA 701.

When the auditor is otherwise required by law or regulation or decides to communicate key audit matters
in the auditor's report, the auditor shall do so in accordance with PSA 701.
A. First Statement is correct; Second Statement is incorrect
B. First Statement is incorrect; Second Statement is correct
C. Both statements are correct
D. Both statements are incorrect

11. In determining the items that the auditor shall consider as key audit matters, the auditor takes into
account (choose the incorrect one):
A. Areas which were considered to be susceptible to higher risks of material misstatement or which
were deemed to be 'significant risks' in accordance with PSA 315
B. Significant auditor judgments in relation to areas of the financial statements that involved
significant management judgment.
C. The effect on the audit of significant events or transactions that have taken place during the period.
D. Those that refers to a matter other than those presented or disclosed in the financial statements
that, in the auditor's judgment, is relevant to user's understanding of the audit, the auditor's
 responsibilities or the auditor's report.

12. Which of the following. statements are true regarding Key Audit Matters?
I. Key Audit Matters are those matters that, in the auditor's professional judgment, were of most
significance in the audit of the financial statements of the current period.
II. Key Audit Matters are those matters that are selected from matters communicated by the auditor to
those charged with governance, which include significant findings from the audit of the financial
statements of the current period.
III. Key Audit Matters are required to be reported by auditors in all entities that they audit.
A. I only
B. I and II only
C. I and III only
D. I, II and III

13. Which of the following statements is incorrect regarding the relationship between Emphasis of Matter
Paragraphs and Key Audit Matters in the Auditor's Report?
A. Matters that are determined to be key audit matters in accordance with PSA 701 may also be, in
the auditor's judgment, fundamental to users' understanding of the financial statements.
B. In communication a matter as a key audit matter in accordance with PSA 701, the auditor may wish
to highlight or draw further attention to its relative importance like presenting the matter more
prominently than other matters in Key Audit Matters section or by including additional information
in the description of the key audit matter.
C. There may be a matter that is not permitted to be a key audit matter in accordance with PSA 701,
but which in the auditor's judgment, is fundamental to users' understanding of the financial
statements.
D. All matters that in the auditor's judgment is fundamental to the users' understanding of the financial
statements may be considered as key audit matter.

14. The auditor's report shall be dated no earlier than the date on which the auditor has obtained sufficient,
appropriate audit evidence on which to base the auditor's opinion on the financial statements, including
evidence that:
A. All the statements that comprise the financial statements, including the related notes, have been
prepared.
B. Those with the recognized authority have asserted that they have taken responsibility for those
financial statements.
C. Both A and B
D. Neither A nor B

15. The independent auditor's report explains that a financial audit includes all of the following except
A. Examining support for the amounts and disclosures in the financial statements.
B. Assessing the level of control risk.
C. Assessing the accounting principles used· and significant estimates made by management.
D. Evaluating the overall financial statement presentation.

16. How are other reporting responsibilities addressed within the auditor's report?
A. They should be addressed in a separate section that follows the auditor's responsibility paragraph.
B. They should be addressed within the opinion paragraph.
C. They should be addressed within the scope paragraph.
D. They should be addressed within the scope paragraph and separately described in a separate
paragraph.

17. Which of the following is incorrect regarding the auditor's signature?

A. The auditor's signature is either in the name of the audit firm, the personal name of the auditor,
or both, as appropriate.
B. The auditor's signature is either in the name of the audit firm or the personal name of the auditor,
but not both.
 C. In addition to the auditor's signature, the auditor may be required to declare the auditor's
professional accountancy designation.
D. The auditor's report filed with the Securities and Exchange Commission (SEC) must be manually
signed.

18. The auditor's address is indicated in the auditor's report by:

A. naming the location in the country where the auditor practices his profession.
B. including the complete mailing address of the auditor.
C. identifying the country from where the auditor had secured his professional license.
D. the auditor's address is omitted in the report.

19. Which of the following is ordinarily true of a modification of the audit report by adding an emphasis of
matter paragraph?
A. The modification by adding an emphasis of matter paragraph is an "except for" qualification of
opinion.
B. The emphasis of matter paragraph is a "subject to" qualification of" opinion.
C. The emphasis of matter paragraph would ordinarily refer to the fact that the auditor's opinion is
not qualified.
D. The emphasis of matter paragraph is presented before the opinion paragraph.

20. Which of the following statements is not true?

A. A one-paragraph report is generally used when the auditor is not independent.
B. A modification of the audit report that involves modified wordings may contain an unqualified
opinion.
C. An addition of another paragraph to an otherwise standard audit report always requires a
modification of an unqualified opinion.
D. An unqualified opinion may be issued though the audit report requires an additional explanatory
paragraph.

21. An explanatory paragraph that describes an uncertainty is as 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. Disclaimer
C. Qualified
D. Adverse
22. The audit report issued by BTS and Co., CPAs, included the following paragraph:

Without qualifying our opinion we draw attention to Note 11 to the financial statements. The Company
IS the defendant in a lawsuit alleging infringement of certain patent rights…

This paragraph is considered:

A. an inappropriate reporting practice

B. an additional information to be a part of the notes to financial statements.
C. an emphasis of matter regarding uncertainty which is considered an acceptable reporting
practice
D. inappropriate because it contradicts the unqualified opinion issued by the auditor

23. In extreme cases such as situations involving multiple uncertainties that are significant to the financial
statements, the auditor
A. may consider to express a disclaimer of opinion
 B. may qualify his opinion instead of issuing an unqualified opinion with emphasis of matter
paragraph
C. may issue an adverse opinion because of their significance
D. may issue a "subject to" opinion because the situations related to uncertainties

24. A client company has issues that cause substantial doubt regarding the entity’s ability to continue
as a going concern. If this is the only major audit Issue, which type of opinion will the auditor usually
refrain from issuing?
A. Adverse
B. Unqualified with explanatory language
C. Clean opinion
D. Disclaimer of opinion

25. Which of the following situations, the effect of which is significant, least likely require a decision of
whether to issue a qualified or adverse opinion?
A. Any disagreement with entity management regarding the acceptability of the accounting policies
selected by the management.
B. Limitation on the scope of the auditor's work.
C. Inadequate disclosures of financial information.
D. Unjustified changes in accounting policies.

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

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

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

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

30. If an auditor is engaged to audit a client's financial statements after the

annual physical inventory count was made and the accounting records
 are not sufficiently reliable to enable the auditor to become satisfied as to the year-end inventory
balances, the opinion to be expressed is
A. either an "except for" qualified opinion or an adverse opinion.
B. either a disclaimer or opinion or an "except for" qualified opinion.
C. either an adverse opinion or disclaimer of opinion.
D. an unqualified opinion.

31. An adverse opinion is issued when the auditor believes

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

32. If the scope of the auditors procedures in conducting an audit is significantly restricted by the client
management, the audit opinion will most likely be a(n):
A. Adverse opinion.
B. Qualified opinion.
C. Unqualified with explanatory paragraph.
D. Disclaimer of opinion.

33. The auditor would most likely disclaim his opinion because of
A. the client's failure to present supplementary information required by the FRSC.
B. inadequate disclosure of material information.
C. the qualification of an opinion by the other auditor of a subsidiary where there is a division of
responsibility.
D. a client-imposed scope limitation.

34. The most common case in which conditions beyond the client's and auditor's control cause a scope
restriction is an engagement
A. agreed upon after the client's statement of financial position date.
B. where client will not allow the auditor to confirm receivables for fear of offending its customers
C. where auditor does not have enough staff to audit all of client's foreign subsidiaries
satisfactorily.
D. where client is going through a bankruptcy.

35. An audit report contains the following paragraph: "Because of the inadequacies in the company's
accounting records during the year ended June 30, 2021, 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 1he consolidated statements of operations. "
This paragraph most likely describes
A. A material departure from PFRS requiring a qualified audit opinion.
B. An uncertainty that should not lead to a qualified opinion.
C. A matter that the auditor wishes to emphasize and that does not lead to a qualified audit
opinion.
D. A material scope restriction requiring a qualification of the audit opinion.

36. Which of the following circumstances least likely result to either a qualified opinion or an auditor
disclaiming his opinion?
 A. The auditor is unable to carry out an audit procedure believed to be desirable; the auditor carried
out alternative audit procedures to support the management's assertion
B. The auditor believed the client's accounting records are inadequate.
C. A client-imposed scope limitation with respect to the audit of inventory.
D. Circumstances did not permit the auditor to perform certain required audit procedure.

37. When the scope of the auditor's work has been limited, the audit report should contain a(n):
A. unqualified opinion if the scope limitation was unavoidable
B. indication that the financial statements are materially misstated because of a departure from
PFRS.
C. estimate of the financial impact of the scope limitation on the financial statements.
D. emphasis of matter paragraph that refers to the particular note to the financial statements.

38. When there is a limitation on the scope of the auditor's work that requires a modification of the audit
report:
A. The auditor's report should either contain a qualified or adverse opinion.
B. The auditor's report may contain an unqualified opinion with an emphasis of matter paragraph
that follows the opinion paragraph
C. The auditor's report should describe the limitation and indicate the possible adjustments to the
financial statements that might have been determined to be necessary had the limitation not
existed.
D. Should always contain a disclaimer of opinion.

39. Which of the following least likely requires an expression of unqualified opinion with modified wordings
or an emphasis of matter paragraph?
A. The financial statements of prior period, which are presented for comparative purposes, were
audited by another CPAs.
B. The auditors have substantial doubt about the ability of the entity to continue as a going concern.
C. The entity changed the measurement of certain significant transaction from one GAAP to another
GAAP.
D. The auditors failed to observe physical inventory count; however, the auditor was satisfied that
the inventory amount was fairly presented by doing alternative audit procedures.
40. When the client is not following PFRS, and the auditor believes that adherence to PFRS would result
to misleading statements, the opinion paragraph of the audit report.
A. Must express an adverse opinion
B. Must express a qualified opinion
C. Should be unqualified with a required explanatory paragraph
D. Should be the standard unqualified opinion

41. In which of the following conditions is an unqualified audit opinion least likely issued?
A. The auditor believes that a substantial doubt about the entity s ability to continue as going
concern exists.
B. The auditor believes that inventory is valued at market values that accurately reflect market
conditions and materially exceed cost.
C. The audit is conducted with no circumstance or imposed scope limitations
D. PFRS are not consistently applied from year to year.

42. Once the auditor has determined that an exception is material enough to warrant a qualification of his
auditor's report, he must then determine if the exception is sufficiently material to negate an overall
opinion. If the auditor is applying this decision process to an exception base on a departure from
Philippine financial reporting standards, he is deciding
 A. Whether to issue an adverse opinion rather than a disclaimer of opinion.
B. Whether to issue a disclaimer of opinion rather than a qualified opinion.
C. Whether to issue an adverse opinion rather than a qualified opinion.
D. Nothing because such a decision process is not applicable to this type of exception

43. If the auditor believes that a required material disclosure is omitted from the financial statements, the
auditor should decide between issuing a(n)
A. qualified opinion or an adverse opinion.
B. disclaimer of opinion or a qualified opinion
C. adverse opinion or a disclaimer of opinion
D. unqualified opinion or a qualified opinion.

44. 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 Philippine financial
reporting standards, 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.

45. In which of the following situation would a decision of selecting between a qualified or adverse opinion
be inappropriate?
A. A limitation in the scope of the audit.
B. The financial statements are significantly misleading.
C. A disagreement between the auditor and the client arose because of capitalization of research
and development costs.
D. A required disclosure that is significant is omitted from the financial statements.

46. Which of the following circumstances requires the modification of both the auditor's responsibility and
the auditor's opinion paragraphs of the auditor's report?
A. Limitation on the scope of audit that results to qualified opinion.
B. Auditor's disagreement with the client management on accounting policies that requires
qualified opinion.
C. Inadequate disclosures that require qualified opinion:
D. Disagreement with the client management regarding accounting policies that requires adverse
opinion.

47. In which of the following situations would an auditor ordinarily choose between expressing a qualified
opinion or an adverse opinion?
A. The auditor did not observe the entity's physical inventory and is unable to be satisfied about
its balance by other auditing procedures.
B. Conditions that cause the auditor to have substantial doubt about the entity's ability to
continue as a going concern are not disclosed.
C. There has been a change in accounting principles. the material effect on the comparability of
the entity's financial statements has been properly disclosed in the financial statements.
D. The auditor is unable to apply necessary procedures concerning an investor's share on an
investee's earnings recognized on the equity method
48. How should the auditor address the comparatives that are presented as corresponding figures?
A. The comparatives are specifically identified in the audit report because the auditor’s opinion
on the current period financial statements applies also to the corresponding figures.
B. The comparatives are specifically identified in the introductory paragraph and in the opinion
 paragraph.
C. The comparatives are not specifically identified because the auditor’s opinion applies to the
current period financial statements as a whole, including the corresponding figures.
D. The comparatives are referred to in the opinion paragraph as the auditor applies to both the
current year’s financial statements and the corresponding figures.

49. Which of the following circumstances requires an issuance of unqualified opinion with modified
wordings?
A. A significant uncertainty that may affect the financial statements of the future period is
adequately disclosed in the financial statements.
B. The auditor agrees with client for a change in accounting policy that significantly affects the
financial statements.
C. An insignificant scope limitation in the work of the auditor.
D. The successor auditor reports on the current year’s financial statements. The prior-year's
financial statements that were presented as comparatives were audited by another CPA.

50. If an amendment is necessary in the other information and the entity refuses to make the amendment,
the auditor, depending on particular circumstance, may do any of the following, except:
A. Describe the material inconsistency as an emphasis of matter in a paragraph following the
opinion paragraph.
B. The auditor may not issue the auditor's report.
C. The auditor may withdraw from the engagement.
D. The auditor to issue either a qualified or adverse opinion.

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