CPA REVIEW SCHOOL OF THE PHILIPPINES AT-9012

Manila

AUDITING THEORY CPA Review

FORMING AN OPINION AND REPORTING ON FINANCIAL STATEMENTS

INDEPENDENT AUDITOR’S REPORT

To the Shareholders of ABC Company [or Other Appropriate Addressee]

Report on the Audit of the Financial Statements

[This sub-title is unnecessary in circumstances when the second sub-title “Report on Other Legal and Regulatory
Requirements” is not applicable.]

Opinion
We have audited the financial statements of ABC Company (the Company), which comprise the statement
of financial position as at December 31, 20X1, and the statement of comprehensive income, statement of
changes in equity and statement of cash flows for the year then ended, and notes to the financial statements,
including a summary of significant accounting policies.
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial
position of the Company as at December 31, 20X1, and its financial performance and its cash flows for the
year then ended in accordance with Philippine Financial Reporting Standards (PFRSs).

Basis for Opinion

We conducted our audit in accordance with Philippine Standards on Auditing (PSAs). Our responsibilities
under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial
Statements section of our report. We are independent of the Company in accordance with the ethical
requirements that are relevant to our audit of the financial statements in the Philippines, the Code of Ethics
for Professional Accountants in the Philippines, and we have fulfilled our other ethical responsibilities in
accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our
audit of the financial statements of the current period. These matters were addressed in the context of our
audit of the financial statements as a whole, and in forming an opinion thereon, and we do not provide a
separate opinion on these matters.
[Description of each key audit matter in accordance with PSA 701]

Responsibilities of Management and Those Charged with Governance for the Financial
Statements
Management is responsible for the preparation and fair presentation of the financial statements in
accordance with PFRSs and for such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Company’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the going
concern basis of accounting unless management ether intends to liquidate the Company or to cease
operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our
opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted
Page 1 of 16 Pages
CPAR - MANILA AT-9012

in accordance with PSAs will always detect a material misstatement when it exists. Misstatements can
arise from fraud or error and are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis of these financial
statements.

[Paragraph 40(b) of PSA 700 (Revised) explains that the following statements relating to the auditor’s
responsibilities can be located in an Appendix to the auditor’s report. Paragraph 40(c) explains that when
law, regulation or national auditing standards expressly permit, reference can be made to a website of an
appropriate authority that contains the description of the auditor’s responsibilities, provided that the
description on the website addresses, and is not inconsistent with, the description the auditor’s
responsibilities below.]
As part of an audit in accordance with PSAs, we exercise professional judgment and maintain professional
skepticism throughout the audit. We also:
• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud
or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that
is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
• Conclude on the appropriateness of management’s use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If
we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report
to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify
our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s
report. However, future events or conditions may cause the Company to cease to continue as a going
concern.
• Evaluate the overall presentation, structure and content of the financial statements, including the
disclosures, and whether the financial statements represent the underlying transactions and events in a
manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope
and timing of the audit and significant audit findings, including any significant deficiencies in internal
control that we identify during our audit.
We also provided those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and to communicate with them all relationships and other
matters that may reasonably be thought to bear on our independence, and where applicable, related
safeguards.
From the matters communicated with those charged with governance, we determine those matters that were
of most significance in the audit of the financial statements of the current period and are therefore the key
audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public
disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should
not be communicated in our report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.

Report on Other Legal and Regulatory Requirements

[The form and content of this section of the auditor’s report would vary depending on the nature of the auditor’s other
reporting responsibilities.]

The engagement partner on the audit resulting in this independent auditor’s report is [name].

[Signature in the name of the audit firm, the personal name of the auditor, or both, as appropriate for the
particular jurisdiction.]
[Auditor’s Address]
[Date]

Source: PSA 700 (Revised)

Page 2 of 16 Pages
CPAR - MANILA AT-9012

MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

(PSA 705 – Revised)

TYPES OF MODIFIED OPINIONS

QUALIFIED OPINION – expressed when:

• 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
• The auditor is unable to obtain sufficient appropriate audit evidence on which to the base
the opinion, but the auditor concludes that the possible effects on the financial statements
of undetected misstatement, if any, could be material but not pervasive.

ADVERSE OPINION – expressed 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.
• 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.

COMMUNICATING KEY AUDIT MATTERS IN THE INDEPENDENT AUDITOR’S REPORT

(PSA 701)

KEY AUDIT MATTERS

1. 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.

2. Key audit matters are selected from matters communicated with those charged with
governance.

3. The auditor shall describe each key audit matter, using an appropriate subheading, in a
separate section of the auditor’s report under the heading “Key Audit Matters.”

4. The auditor shall not communicate a matter in the Key Audit Matters section of the auditor’s
report when the auditor would be required to modify the opinion in accordance with PSA 705
(Revised) as a result of the matter.

EMPHASIS OF MATTER PARAGRAPHS AND OTHER MATTER PARAGRAPHS IN THE

INDEPENDENT AUDITOR’S REPORT
(PSA 706 – Revised)

Emphasis of Matter paragraph refers to a matter appropriately presented or disclosed in the

financial statements that, in the auditor’s judgment, is of such importance that it is fundamental
to users’ understanding of the financial statements.

Circumstances in which an Emphasis of Matter paragraph may be necessary include:

• An uncertainty relating to the future outcome of exceptional litigation or regulatory action.

Page 3 of 16 Pages
CPAR - MANILA AT-9012

• Early application (where permitted) of a new accounting standard that has a pervasive effect on
the financial statements in advance of its effective date.
• A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial
position.
• A significant subsequent event that occurs between the date of the financial statements and the
date of the auditor’s report.

When the auditor includes an Emphasis of Matter paragraph in the auditor’s report, the auditor
shall:
1. include the paragraph within a separate section of the auditor’s report with an appropriate
heading the includes the term “Emphasis of Matter”;
2. include in the paragraph a clear reference to the matter being emphasized and to where
relevant disclosures that fully describe the matter can be found in the financial statements.
The paragraph shall refer only to information presented or disclosed in the financial
statements; and
3. indicate that the auditor’s opinion is not modified in respect of the matter
emphasized.

Other Matter paragraph refers to a matter other than those presented or disclosed in the
financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the
audit, the auditor’s responsibilities or the auditor’s report.

When the auditor includes an Other Matter paragraph in the auditor’s report, the auditor shall
include the paragraph within a separate section with the heading “Other Matter,” or other
appropriate heading.

COMPARATIVE INFORMATION – CORRESPONDING FIGURES AND COMPARATIVE

FINANCIAL STATEMENTS (PSA 710)

COMPARATIVE INFORMATION – The amounts or disclosures included in the financial

statements in respect of one or more prior periods in accordance with the applicable financial
reporting framework.

CORRESPONDING FIGURES

1. The auditor’s opinion does not refer to the corresponding figures because the auditor’s
opinion is on the current period financial statements as a whole including the
corresponding figures.

2. If the auditor’s report on the prior period, as previously issued, included a qualified
opinion, a disclaimer of opinion, or an adverse opinion and the matter which gave rise to
the modification is:
• UNRESOLVED – the auditor shall modify the auditor’s opinion on the current period’s financial
statements.
• RESOLVED and properly accounted for or disclosed in the financial statements in accordance
with the applicable financial reporting framework – the auditor’s opinion on the current period
need not refer to the previous modification.

3. If the auditor obtains evidence that a material misstatement exists in the prior period
financial statements on which an unmodified opinion has been previously issued, and the
corresponding figures have not been properly restated or appropriate disclosures
have not been made, the auditor shall express a qualified opinion or an adverse opinion
in the auditor’s report on the current period financial statements, modified with respect to
the corresponding figures included therein.

4. When the prior period financial statements that are misstated have not been amended
and an auditor’s report has not been reissued, but the corresponding figures have been
properly restated or appropriate disclosures have been made in the current period
Page 4 of 16 Pages
CPAR - MANILA AT-9012

financial statements, the auditor’s report may include an Emphasis of Matter paragraph
describing the circumstances and referring to, where relevant, disclosures that fully
describe the matter that can be found in the financial statements.

5. If the financial statements of the prior period were audited by a predecessor auditor and
the auditor is permitted by law or regulation to refer to the predecessor auditor’s report
on the corresponding figures and decides to do so, the auditor shall state in an Other
Matter paragraph in the auditor’s report:
• That the financial statements of the prior period were audited by the predecessor auditor;
• The type of opinion expressed by the predecessor auditor and, if the opinion was modified, the
reasons therefore; and
• The date of that report.

6. If the prior period financial statements were not audited, the auditor shall state in an
Other Matter paragraph in the auditor’s report that the corresponding figures are
unaudited.

COMPARATIVE FINANCIAL STATEMENTS

1. When comparative financial statements are presented, the auditor’s opinion shall refer to each
period for which financial statements are presented and on which an audit opinion is
expressed.

2. When reporting on prior period financial statements in connection with the current period’s
audit, if the auditor’s opinion on such prior period financial statements differs from the opinion
the auditor previously expressed, the auditor shall disclose the substantive reasons for the
different opinion in an Other Matter paragraph.

3. If the financial statements of the prior period were audited by a predecessor auditor, in
addition to expressing an opinion on the current period’s financial statements, the auditor
shall state in an Other Matter paragraph:
• That the financial statements of the prior period were audited by the predecessor auditor;
• The type of opinion expressed by the predecessor auditor and, if the opinion was modified, the
reasons therefore; and
• The date of that report.

4. If the prior period financial statements were not audited, the auditor shall state in an Other
Matter paragraph that the comparative financial statements are unaudited.

THE AUDITOR’S RESPONSIBILITY IN RELATION TO OTHER INFORMATION IN

DOCUMENTS CONTAINING AUDITED FINANCIAL STATEMENTS
(PSA 720 – Revised)

OTHER INFORMATION – Financial and non-financial information (other than the financial
statements and the auditor’s report thereon) included in an entity’s annual report.

1. The auditor shall read the other information and, in doing so shall:
a) Consider whether there is a material inconsistency between the other information and
the financial statements.
b) Consider whether there is a material inconsistency between the other information and
the auditor’s knowledge obtained in the audit, in the context of audit evidence obtained
and conclusions reached in the audit.

2. If the auditor identifies that a material inconsistency appears to exist (or becomes aware that
the other information appears to be materially misstated), the auditor shall discuss the matter
with management and, if necessary, perform other procedures to conclude whether:
a) A material misstatement of the other information exists;
b) A material misstatement of the financial statements exists; or
c) The auditor’s understanding of the entity and its environment needs to be updated.
Page 5 of 16 Pages
CPAR - MANILA AT-9012

3. The auditor’s report shall include a separate section with a heading “Other Information”, or
other appropriate heading, when, at the date of the auditor’s report:
a) For an audit of financial statements of a listed entity, the auditor has obtained, or expects
to obtain, the other information; or
b) For an audit of financial statements of an entity other than a listed entity, the auditor has
obtained some or all of the other information.

4. When the auditor’s report is required to include an Other Information section, this section
shall include:
a) A statement that management is responsible for the other information;
b) An identification of:
i. Other information, if any, obtained by the auditor prior to the date of the auditor’s
report; and
ii. For an audit of financial statements of a listed entity, other information, if any,
expected to be obtained after the date of the auditor’s report.
c) A statement that the auditor’s opinion does not cover the other information and,
accordingly, that the auditor does not express (or will not express) an audit opinion or
any form of assurance conclusion thereon;
d) A description of the auditor’s responsibilities relating to reading, considering and reporting
on other information; and
e) When other information has been obtained prior to the date of the auditor’s report, either:
i. A statement that the auditor has nothing to report; or
ii. If the auditor has concluded that there is an uncorrected material misstatement of the
other information, a statement that describes the uncorrected material misstatement
of the other information.

SUBSEQUENT EVENTS
(PSA 560)

1. SUBSEQUENT EVENTS – Events occurring between the date of the financial statements and
the date of the auditor’s report, and facts that become known to the auditor after the date of
the auditor’s report.

Events occurring between the date of the financial statements and date of the
auditor’s report

2. The auditor shall perform procedures designed to obtain sufficient appropriate audit evidence
that all events occurring between the date of the financial statements and the date of the
auditor’s report that require adjustment of, or disclosure in, the financial statements have
been identified.

3. When the auditor identifies events that require adjustment of, or disclosure in, the financial
statements, the auditor shall determine whether each such event is appropriately reflected in
those financial statements.

4. The auditor shall request management and, where appropriate, those charged with
governance, to provide a written representation in accordance with PSA 580 (Revised and
Redrafted), “Written Representations,” that all events occurring subsequent to the date of the
financial statements and for which applicable financial reporting framework requires
adjustment or disclosure have been adjusted or disclosed.

Facts which become known to the auditor after the date of the auditor’s report but
before the date the financial statements are issued

5. During the period from the date of the auditor’s report to the date the financial statements
are issued:
• The responsibility to inform the auditor of facts which may affect the financial statements rests
with management.
Page 6 of 16 Pages
CPAR - MANILA AT-9012

• When the auditor becomes aware of a fact which may materially affect the financial statements,
the auditor should:
▪ Discuss the matter with management and, where appropriate, those charged with governance.
▪ Determine whether the financial statements need amendment and, if so,
▪ Inquire how management intends to address the matter in the financial statements.

6. When management amends the financial statements, the auditor would carry out the
procedures necessary in the circumstances and would provide management with a new
report on the amended financial statements.

7. The new auditor’s report would be dated not earlier than the date the amended financial
statements are signed or approved and, accordingly, the procedures to identify subsequent
events would be extended to the date of the new auditor’s report.

8. When law, regulation or the financial reporting framework does not prohibit management
from restricting the amendment of the financial statements to the effects of the subsequent
event or events causing that amendment and those responsible for approving the financial
statements are not prohibited from restricting their approval to that amendment, the auditor
is permitted to restrict the audit procedures on subsequent events to that amendment. In
such cases, the auditor shall either:
a) Amend the auditor’s report to include an additional date restricted to that amendment that
thereby indicates that the auditor’s procedures on subsequent events are restricted solely to the
amendment of the financial statements described in the relevant note to the financial statements;
or
b) Provide a new or amended auditor’s report that includes a statement in an Emphasis of Matter
paragraph or Other Matter(s) paragraph that conveys that the auditor’s procedures on
subsequent events are restricted solely to the amendment of the financial statements as
described in the relevant note to the financial statements.

9. When management does not amend the financial statements but the auditor believes they
need to be amended, then:
a) If the auditor’s report has not yet been provided to the entity, the auditor shall modify the
opinion and then provide the auditor’s report; or
b) If the auditor’s report has already been provided to the entity, the auditor shall notify
management and those charged with governance not to issue the financial statements to third
parties before the necessary amendments have been made. If the financial statements are
nevertheless subsequently issued without the necessary amendments, the auditor shall take
appropriate action, to seek to prevent reliance on the auditor’s report.

Facts which become known to the auditor after the financial statements have been
issued

10. After the financial statements have been issued, the auditor has no obligation to make any
inquiry regarding such financial statements.

11. When, after the financial statements have been issued, the auditor becomes aware of a fact
which existed at the date of the auditor’s report and which, if known at that date, may have
caused the auditor to modify the auditor’s report, the auditor shall:
▪ Discuss the matter with management and, where appropriate, those charged with governance.
▪ Determine whether the financial statements need amendment and, if so,
▪ Inquire how management intends to address the matter in the financial statements.

12. If management amends the financial statements, the auditor shall:

• Carry out the audit procedures necessary in the circumstances on the amendment.
• Review the steps taken by management to ensure that anyone in receipt of the previously issued
financial statements together with the auditor’s report thereon is informed of the situation.
• Issue a new report on the amended financial statements.
▪ The new auditor’s report should include an Emphasis of Matter paragraph or Other Matter(s)
paragraph referring to a note to the financial statements that more extensively discusses the

Page 7 of 16 Pages
CPAR - MANILA AT-9012

reason for the revision of the previously issued financial statements and to the earlier report
issued by the auditor.
▪ The new auditor’s report would be dated not earlier than the date the amended financial
statements are approved, and accordingly, the audit procedures to identify subsequent events
would be extended to the date of the new auditor’s report.

13. When law, regulation or the financial reporting framework does not prohibit management
from restricting the amendment of the financial statements to the effects of the subsequent
event or events causing that amendment and those responsible for approving the financial
statements are not prohibited from restricting their approval to that amendment, the auditor
is permitted to restrict the audit procedures on subsequent events to that amendment. In
such cases, the auditor shall either:
a) Amend the auditor’s report to include an additional date restricted to that amendment that
thereby indicates that the auditor’s procedures on subsequent events are restricted solely to the
amendment of the financial statements described in the relevant note to the financial statements;
or
b) Provide a new or amended auditor’s that includes a statement in an Emphasis of Matter
paragraph or Other Matter(s) paragraph that conveys that the auditor’s procedures on
subsequent events are restricted solely to the amendment of the financial statements as
described in the relevant note to the financial statements.

14. It may not be necessary to revise the financial statements and issue a new auditor’s report
when issue of the financial statements for the following period is imminent, provided
appropriate disclosures are to be made in such statements.

SPECIAL CONSIDERATIONS—AUDITS OF FINANCIAL STATEMENTS PREPARED IN

ACCORDANCE WITH SPECIAL PURPOSE FRAMEWORKS
(PSA 800)

1. Examples of special purpose frameworks are:

• A tax basis of accounting for a set of financial statements that accompany an entity’s tax return.
• The cash receipts and disbursements basis of accounting for cash flow information that an entity
may be requested to prepare for creditors.
• The financial reporting provisions established by a regulator to meet the requirements of that
regulator.
• The financial reporting provisions of a contract, such as a bond indenture, a loan agreement, or a
project grant.

2. When forming an opinion and reporting on special purpose financial statements, the auditor
shall apply the requirements in PSA 700 (Revised) – Forming an Opinion and Reporting on
Financial Statements.

3. The auditor’s report shall describe the purpose for which the financial statements are prepared
and, if necessary, the intended users, or refer to a note in the special purpose financial
statements that contains that information.

4. If management has a choice of financial reporting frameworks in the preparation of special

purpose financial statements, the explanation of management’s responsibility for the financial
statements shall also make reference to its responsibility for determining that the applicable
financial reporting framework is acceptable in the circumstances.

5. The auditor’s report on special purpose financial statements shall include an Emphasis of
Matter paragraph alerting users of the auditor’s report that the financial statements are
prepared in accordance with a special purpose framework and that, as a result, the financial
statements may not be suitable for another purpose.

Page 8 of 16 Pages
CPAR - MANILA AT-9012

SPECIAL CONSIDERATIONS—AUDITS OF SINGLE FINANCIAL STATEMENTS AND

SPECIFIC ELEMENTS, ACCOUNTS OR ITEMS OF A FINANCIAL STATEMENT
(PSA 805)

1. When forming an opinion and reporting on a single financial statement or on a specific

element of a financial statement, the auditor shall apply the requirements in PSA 700
(Revised), adapted as necessary in the circumstances of the engagement.

2. If the auditor undertakes an engagement to report on a single financial statement or on a

specific element of a financial statement in conjunction with an engagement to audit the
entity’s complete set of financial statements, the auditor shall express a separate opinion
for each engagement.

3. An audited single financial statement or an audited specific element of a financial statement

may be published together with the entity’s complete set of financial statements.

4. If the auditor concludes that it is necessary to express an adverse opinion or disclaim an

opinion on the entity’s complete set of financial statements as a whole, the auditor is not
permitted to include in the same auditor’s report an unmodified opinion on a single financial
statement that forms part of those financial statements or on a specific element that forms
part of those financial statements.

5. If the auditor concludes that it is necessary to express an adverse opinion or disclaim an

opinion on the entity’s complete set of financial statements as a whole, but in the context of
a separate audit of a specific element that is included in those financial statements, the
auditor nevertheless considers it appropriate to express an unmodified opinion on that
element, the auditor shall only do so if:
a) The auditor is not prohibited by law or regulation from doing so;
b) That opinion is expressed in an auditor’s report that is not published together with auditor’s
report containing the adverse opinion or disclaimer of opinion; and
c) The specific element does not constitute a major portion of the entity’s complete set of financial
statements.

ENGAGEMENTS TO REPORT ON SUMMARY FINANCIAL STATEMENTS

(PSA 810)

1. PSA 810 (Revised and Redrafted), deals with the auditor’s responsibilities when undertaking
an engagement to report on summary financial statements derived from financial statements
audited in accordance with PSAs by that same auditor.

2. The auditor’s report on the summary financial statements may be dated later than the date
of the auditor’s report on the audited financial statements.

3. The auditor shall date the auditor’s report on the summary financial statements no earlier
than:
a) The date on which the auditor has obtained sufficient appropriate evidence on which to base the
opinion, including evidence that the summary financial statements have been prepared and those
with the recognized authority have asserted that they have taken responsibility for them; and
b) The date of the auditor’s report on the audited financial statements.

4. When the auditor’s report on the audited financial statements contains a qualified opinion, an
Emphasis of Matter paragraph, or an Other Matter paragraph, but the auditor is satisfied that
the summary financial statements are consistent, in all material respects, with or are a fair
summary of the audited financial statements, in accordance with the applied criteria, the
auditor’s report on the summary financial statements shall:
a) State that the auditor’s report on the audited financial statements contains a qualified opinion, an
Emphasis of Matter paragraph, or an Other Matter paragraph; and

Page 9 of 16 Pages
CPAR - MANILA AT-9012

b) Describe:
i. The basis for the qualified opinion on the audited financial statements, and that qualified
opinion; or the Emphasis of Matter paragraph or the Other Matter paragraph in the auditor’s
report on the audited financial statements; and
ii. The effect thereof on the summary financial statements, if any.

5. When the auditor’s report on the audited financial statements contains an adverse opinion or
a disclaimer of opinion, the auditor’s report on the summary financial statements shall:
a) State that the auditor’s report on the audited financial statements contains an adverse opinion or
disclaimer of opinion;
b) Describe the basis for that adverse opinion or disclaimer of opinion; and
c) State that, as a result of the adverse opinion or disclaimer of opinion, it is inappropriate to
express an opinion on the summary financial statements.

6. If the summary financial statements are not consistent, in all material respects, with or are
not a fair summary of the audited financial statements, in accordance with the applied criteria,
and management does not agree to make the necessary changes, the auditor shall express
an adverse opinion on the summary financial statements.

7. When distribution or use of the auditor’s report on the audited financial statements is
restricted, or the auditor’s report on the audited financial statements alerts the readers that
the audited financial statements are prepared in accordance with a special purpose
framework, the auditor shall include a similar restriction or alert in the auditor’s report on the
summary financial statements.

MULTIPLE CHOICE QUESTIONS

1. A major purpose of the auditor’s report on financial statements is to
A. Assure investors of the complete accuracy of the financial statements.
B. Enhance the degree of confidence of intended users in the financial statements.
C. Deter creditors from extending loans in high-risk situations.
D. Describe the specific auditing procedures undertaken to gather evidence for the opinion.

2. To distinguish it from report that might be issued by others, such as by officers of the entity,
the board of directors, or from the reports of other auditors who may not have to abide by
the same ethical requirements as the independent auditor, the auditor’s report should have
an appropriate
A. Addresses C. Signature
B. Title D. Opinion

3. The auditor’s report should be addressed

A. Only to the shareholders of the entity whose financial statements are being audited
B. Only to the board of directors of the entity whose financial statements are being audited
C. Either to the shareholders or the board of directors of the entity whose financial statement
are being audited
D. Either to the shareholders or the board of directors, or both, of the entity whose
statements are being audited

4. The first section of the auditor’s report shall have the heading
A. Responsibilities for the Financial Statements.
B. Opinion.
C. Auditor’s Responsibilities for the Audit of the Financial Statements.
D. Basis for Opinion.

5. Which of the following sections in the auditor’s report shall be placed immediately after the
Opinion section?
A. Management’s Responsibilities for the Financial Statements.
B. Auditor’s Responsibilities for the Audit of the Financial Statements.
C. Basis for Opinion.
D. Other Reporting Responsibilities.
Page 10 of 16 Pages
CPAR - MANILA AT-9012

6. The Basis for Opinion section of the auditor’s report shall

A. State that the financial statements have been audited.
B. State that the objective of the auditor is to issue an auditor’s report that includes the
auditor’s opinion.
C. Describe management’s responsibility for preparing the financial statements in accordance
with the applicable financial reporting framework.
D. State that the audit was conducted in accordance with Philippine Standards on Auditing
(PSAs).

7. Which of the following management’s responsibilities shall be described in the Responsibilities

for the Financial Statements section the auditor’s report?
A. Responsibility for preparing the financial statements in accordance with the applicable
financial reporting framework.
B. Responsibility for obtaining reasonable assurance about whether the financial statements
as a whole are free from material misstatement.
C. Responsibility to exercise professional judgment and maintain professional skepticism
throughout the audit.
D. Responsibility to identify and assess the risks of material misstatement of the financial
statements.

8. The description of the auditor’s responsibilities for the audit of the financial statements shall
be included
I. Within the body of the auditor’s report.
II. Within an appendix to the auditor’s report.
III. By a specific reference within the auditor’s report to the location of such a description on
a website of an appropriate authority.
A. I only. C. I or II only.
B. II only. D. I, II, or III.

9. An auditor should disclose the substantive reasons for expressing an adverse opinion in the
Basis for Adverse Opinion section
A. Following the opinion section.
B. Preceding the opinion section.
C. Following the Auditor’s Responsibility section.
D. Within the notes to the financial statements.

10. What is the appropriate opinion to express when the auditor concludes that the financial
statements are prepared, in all material respects, in accordance with the applicable financial
reporting framework?
A. Unmodified opinion. C. Adverse opinion.
B. Qualified opinion. D. Disclaimer of opinion.

11. PSA 705 (Revised), Modification to the Opinion in the Independent Auditor’s Report, prohibits
the auditor from communicating key audit matters when the auditor expresses a/an
A. Unmodified opinion. C. Adverse opinion.
B. Qualified opinion. D. Disclaimer of opinion.

12. 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).

13. An independent auditor discovers that a payroll supervisor of the company being audited has
misappropriated P50,000. The company’s total assets and income before tax are P70 million
and P15 million, respectively. Assuming no other issues affect the report, the auditor’s report
will most likely contain a/an

Page 11 of 16 Pages
CPAR - MANILA AT-9012

A. Unmodified opinion C. Adverse opinion

B. Disclaimer of opinion D. Scope qualification

14. 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

15. Which of the following terms is used in the standard to describe the effects on the financial
statements of misstatements or the possible effects on the financial statements, if any, that
are undetected due to an inability to obtain sufficient appropriate audit evidence?
A. Persuasive C. Material
B. Pervasive D. Extensive

16. A limitation on the scope of the audit may arise from

I. Circumstances beyond the control of the entity.
II. Circumstances relating to the nature and timing of the auditor’s work.
III. Limitations imposed by management.
A. I and II only C. I and III only
B. II and III only D. I, II, and III

17. An auditor may express a qualified opinion under which of the following circumstances?
Lack of sufficient Restriction on the
appropriate evidence scope of the audit
A. No No
B. No Yes
C. Yes No
D. Yes Yes

18. Which of the following should be included in the Qualified Opinion section when an auditor
expresses a qualified opinion?

When read in
conjunction with With the foregoing
with Note X explanation
A. Yes No
B. No Yes
C. No No
D. Yes Yes

19. In which of the following situations would an auditor ordinarily choose between expressing a
qualified opinion or an adverse opinion?
A. The auditor wishes to emphasize an unusually important subsequent event.
B. The financial statements fail to disclose information that is required by Philippine Financial
Reporting Standards.
C. Events disclosed in the financial statements cause the auditor to have substantial doubt
about the entity’s ability to continue as a going concern.
D. The auditor did not observe the entity’s physical inventory and is unable to become
satisfied as to its balance by other auditing procedures.

Page 12 of 16 Pages
CPAR - MANILA AT-9012

20. Which of the following phrases would an auditor most likely include in the auditor’s report
when expressing a qualified opinion because of inadequate disclosure?
A. Do not present fairly in all material respects.
B. Except for the omission of the information included in the Basis for Qualified Opinion
paragraph.
C. With the foregoing explanation of these omitted procedures.
D. Subject to the departure from generally accepted accounting principles, as described
above.

21. Which of the following best describes key audit matters (KAM):
I. 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. Selected from matters communicated with those charged with governance.
III. A substitute for disclosure, expressing a modified opinion, material uncertainty reporting
requirements (PSA 570) and includes a separate opinion for the KAM
A. I only C. Both I and II
B. II only D. I, II, and III

22. Which of the following statements concerning communication of key audit matters in the
auditor’s report is incorrect?
A. Communicating key audit matters in the auditor’s report enhances the communicative
value of the auditor’s report by providing greater transparency about the audit that was
performed.
B. Communicating key audit matters provides additional information to intended users of the
financial statements to assist them in understanding those matters that, in the auditor’s
professional judgment, were of most significance in the audit of the financial statements
of the current and prior period/s.
C. Communicating key audit matters may assist intended users in understanding the entity
and areas of significant management judgment in the audited financial statements.
D. The auditor’s determination of key audit matters is limited to those matters of most
significance in the audit of the financial statements of the current period, even when
comparative financial statements are presented.

23. Communicating key audit matters in the auditor’s report is

A B C D
A substitute for disclosures in the financial statements. Yes Yes No No
A substitute for the auditor’s expression of a modified opinion. Yes No No No
A substitute for reporting in accordance with PSA 570 (Revised)
when a material uncertainty exists relating to the
entity’s ability to continue as a going concern No Yes yes No
A separate opinion on individual matters. Yes Yes No No

24. 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.

25. PSA 720 states, “If, on reading the other information, the auditor identifies a material
inconsistency, the auditor should determine whether the audited financial statement or the
other information needs to be amended”. What type of opinion should be expressed if the
client refuses to make the necessary amendment in the financial statements?
A. Disclaimer of opinion
B. Qualified opinion or disclaimer of opinion
C. Unqualified opinion with an emphasis of matter paragraph describing the material
inconsistency

Page 13 of 16 Pages
CPAR - MANILA AT-9012

D. Qualified or adverse opinion

26. There are two broad financial reporting frameworks for comparatives: the corresponding
figures and the comparative financial statements. Which of the following statements is correct
concerning these reporting frameworks?
A. Under the corresponding figures framework, the corresponding figures for the prior
period(s) are integral part of the current period financial statements.
B. Under the corresponding figures framework, the corresponding figures for the prior
period(s) are considered separate financial statements.
C. Under the comparative financial statements framework, the comparative financial
statements for the prior period(s) are intended to be read in conjunction with the amounts
and other disclosures relating to the current period.
D. Under the comparative financial statements framework, the amounts and other
disclosures for the prior period(s) form part of the current period financial statements.

27. The following statements relate to the auditor’s reporting responsibilities regarding
comparatives. Which is incorrect?
I. For corresponding figures, the auditor’s report only refers to the financial statements of
the current period.
II. For comparative financial statements, the auditor’s report refers to each period that
financial statements are presented.
A. I only C. Both I and II
B. II only D. Neither I nor II

28. According to PSA 710, the incoming auditor may refer to the predecessor auditor’s report on
the corresponding figures in the incoming auditor’s report for the current period. The
incoming auditor’s report should indicate
I. That the financial statements of the prior period were audited by another auditor.
II. The type of report issued by the predecessor auditor.
III. The date of the predecessor auditor’s report.
A. I and II only. C. I and III only.
B. II and III only. D. I, II, and III.

29. J, CPA, audited JST Company’s prior-year financial statements. These statements are
presented with those of the current year for comparative purposes without J’s auditor’s report,
which expressed a qualified opinion. In drafting the current year’s auditor’s report, S, CPA,
the incoming auditor, should
I. Not name J as the predecessor auditor.
II. Indicate the type of report issued by J.
III. Indicate the substantive reasons for J’s qualification.
IV. Indicate the date of J’s auditor’s report.
A. I, II, and IV only. C. I, II, and III only.
B. II, III, and IV only. D. I, II, III, and IV.

30. 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. Refers to the report of the incoming auditor only in the scope paragraphs
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

31. Financial statements prepared in accordance with a financial reporting framework designed
to meet the financial information needs of specific users are referred to as
A. Special purpose financial statements C. General purpose financial statements
B. Special purpose framework D. Specific purpose financial statements

Page 14 of 16 Pages
CPAR - MANILA AT-9012

32. An auditor’s report on financial statements prepared in accordance with the financial reporting
provisions of a contract (that is, a special purpose framework) to comply with the provisions
of that contract should include all of the following, except
A. An opinion as to whether the financial statements are presented fairly, in all material
respects, in accordance with the financial reporting provisions of the contract.
B. A statement that indicates the basis of accounting used.
C. An opinion as to whether the basis of accounting used is appropriate under the
circumstances.
D. Reference to the note to the financial statements that describes the basis of presentation.

33. A CPA is permitted to accept a separate engagement (not in conjunction with an audit of
financial statements) to audit an entity’s
Schedule of Schedule of
Accounts Receivable Profit Participation
A. Yes No
B. No Yes
C. Yes Yes
D. Yes No

34. An auditor may express an opinion on an entity’s accounts receivable balance even if the
auditor has disclaimed an opinion on the financial statements taken as a whole provided the
A. Report on the accounts receivable is presented separately from the disclaimer of opinion
on the financial statements.
B. Auditor also reports on the current asset portion of the entity’s statement of financial
position.
C. Use of the report on the accounts receivable is restricted.
D. Report on the accounts receivable discloses the reason for the disclaimer of opinion on
the financial statements.

35. In the auditor’s report on summary financial statements that are derived from an entity’s
audited financial statements, a CPA should indicate that the
A. CPA has audited and expressed an opinion on the complete financial statements.
B. CPA expresses limited assurance that the financial statements are presented in accordance
with PFRS.
C. Summary financial statements are not fairly presented in all material respects.
D. Summary financial statements are prepared in accordance with special purpose financial
reporting framework.

36. The following are special purpose audit engagements, except:

A. Compilation of financial statements.
B. Audits involving statements prepared in accordance with a comprehensive basis of
accounting other than generally accepted accounting principles in the Philippines.
C. Audits of specified accounts, elements of accounts, or items in a financial statement.
D. Audits of compliance with contractual agreements.

37. Other comprehensive financial reporting frameworks may include the following, except:
A. The Philippine Financial Reporting Framework
B. That used by an entity to prepare its income tax return
C. The cash receipts and disbursements basis of accounting
D. The financial reporting provisions of a government regulatory agency

38. RIEL Company prepared its financial statements on an accounting basis prescribed by a
government agency solely for filing with that agency. The practitioner believes that the
financial statements are not presented fairly in conformity with the prescribed basis. The
practitioner should issue a(n)
A. Unqualified report C. Disclaimer of opinion
B. Standard audit report D. Adverse opinion

39. Audits of components of financial statements:

A. Must be undertaken as a separate, stand-alone engagement.

Page 15 of 16 Pages
CPAR - MANILA AT-9012

B. Must be performed in conjunction with an audit of the entity’s financial statements.

C. May be undertaken as a separate engagement or in conjunction with an audit of the
entity’s financial statements.
D. Are not allowed since it is tantamount to expressing a piecemeal opinion on the accounts
subjected to the audit.

40. The following statements relates to audit of specific components of financial statements.
Which is incorrect?
A. This type of engagement may be undertaken as a separate engagement or in conjunction
with an audit of the entity’s financial statements.
B. The auditor needs to consider financial statement items that are interrelated and which
could materially affect the information on which the audit opinion is to be expressed.
C. The auditor’s examination will ordinarily be less extensive than if the same component
were to be audited in connection with a report on the entire financial statements.
D. When an adverse opinion or disclaimer of opinion on the entire financial statements has
been expressed, the auditor may report on components of the financial statements only
if those components are not so extensive as to constitute a major portion of the financial
statements.

---END---

Page 16 of 16 Pages