5° FloorCMFFBusding ReSA 813.Cor R Papa and S. Loyla Sis 5 7 ‘Sampaloe, Manila The ReviewSchool of Accountancy 18735-9807 / 734-3989 / (0910) 439-1320 '=sresareview@notmail com AUDITING THEORY IMI+ FDY + MBN + FCT AT-19: SPECIAL CONSIDERATIONS, REQUIRED READINGS + Chaptersi4 and 15, Auditing and Assurance Prnciples, 2018 {.dtion PSA 200 (Revised and Redrafted) - Overall Objectives of the Independent Auditor and the Conduct of an Audit in ‘Accordance with Philippine Standards on Auditing ‘= PSA 800 (Revised and Redrafted): Special Considerations ~ Audits of Finarcial Statements Prepared in Accordance ‘wath Special-purpose Frameworks + PSA 805 (Revised and Redrafted): Special Considerations - Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement + PSAE_3400 The Examination of Prospective Financial Information PSA Glossary of Terms 1. Si: Special-purpose financial statements refers to the financial statements prepared in accordance with a special purpose framework 52: General-purpose framework refers to the financial reporting framework designed to meet the financial information needs of spe-ific users which may be a fair presentation framework or a compliance framework A. True, true B. False, faise C. True, false D. False, true’ 2. Examples of special-purpose frameworks are: A Bp ¢ oD +A tax basis of accounting for a set of FS that accompany an entity's tax return Yes Yes Yes Yes * The cash receipts and disbursements basis of accounting for cash flow information that an eriity may . be requested to prepare for creditors No Yes No Yes * The financial reporting provisions establisnes by a regulator to meet the requirements of that regulator. Yes_- «Yes «No No « The financial reporting provisions of a contract, such as a bond indenture, a loan agreement, or 2 project grant. No Yes Yes No 3. The auditor should determine the acceptability of the financial reporting framework applied in the preparation of FS. In an audit of special-purpose FS, the auditor shall obtain an understanding of: A. 8& c D The purpose for which the FS are prepared Yes Yes Yes Yes The intended users No Yes No Yes The steps taken by management to determine that the applicable financial reporting framework is acceptable in Yes Yes No No the circumstances 4. In determining the acceptability of the special-purpose financial reporting framework applied, the key factor is: ‘A. Cost-benefit considerations in applying the framework. B. Global acceptance of the special-purpose framework. C._ Ease in auditing the FS produced under the spec: D. ‘The financial information needs of the intended user 5. Select the incorrect statement: ‘A. In planning and performing an audit of special purpose FS, the auditor shall determine whether application of the PSAs requires specia! consideration in the circumstances of the engagement. B. In the case of FS prepared in accordance with the provisions of a contract, the auditor shall obtain an understanding of any significant interpretations of the contract that management made in the preparation of those FS. C. An interpretation is insignificant when adoption of another reasonable interpretation would have produced a material difference in the information: presented in the FS. D. All of these statements are incorrect. urpase framework. 6. $4 When forming an opinion and reporting on special purpose FS, the auditor shall apply the requirements in PSA 700 (Revised). $2 in the case of FS prepared in accordance with the provisions of a contract, the auditor shall evaluate whether the FS adequately describe any significant interpretations of the contract on which the FS are based, A. True, true B. True, false C. False, true D. False, false ReSA ~ The ReviewSchoo! of Accountancy Page 1 of 6RSA: The ReviewSchoo of Accountancy Adting Theory: Special Considerations AT-19 7. PSA 700 (Revised) deals with the form and content of the auditor's report. In the case of an auditor's report on special-purpose FS, which of the following are additional reporting requirements mentioned by PSA 800? I. The auditor’s report shall also describe the purpose for which the FS are prepared and, if necessary, the intended users, or refer to a note in the special purpose FS that contains that information. II, If management has a choice of financial reporting frameworks in the preparation of such FS, the explanation of management's responsibility for the FS shall also make reference to its responsibility for determining that the applicable financial reporting framework is acceptable in the circumstances. Ill, The auditor's report on special purpose FS shall include an Other Matter paragraph alerting users of the auditor's report that the FS are prepared in accordance with @ special purpose framework and that, as a result, the financial statements may not be suitable for another purpose. A. Land If only B. Mand tI only —C. Tand Ill only ©. 1, Hand 1m 8. If the special-purpose FS is not suitably titled or the basis of accounting is not adequately disclosed, the auditor should: A. Withdraw from the engagement. B. Issue an appropriately modified report. C. Reword the title of the financial statements. D. Request for an additional representation in the management representation letter. 9. PSA 800 (Redrafted) requires that the auditor's report should include an alert on the special- Purpose for which the FS have been prepared. In addition to this alert, the auditor may consider it appropriate to indicate that the auditor's report is intended solely for the specific users. Depending on the law or regulation of the particular jurisdiction, how is this normally achieved? A. By restricting the distribution or use of the auditor's report. 8. By issuing a qualified opinion or adverse opinion on the financial statements. C. By requiring the entity to add a paragraph in the notes to the financial statements to D. indicate the restriction. By modifying the title of the auditor’s report, such as "Restricted Report of Independent Auditor” 10. This refers to an element, account, or item of a financial statement. A. Element of FSB. Component C. Part of FS D. FS Category 11, Which of the following are specific elements, accounts, or items of a financial statement? (1) Accounts receivable, allowance for doubtful accounts receivable, inventory, the liability for accrued benefits of a private pension plan, the recorded value of identified intangible assets, or the liability for “incurred but not reported” claims in an insurance portfolio, including related notes (2) A schedule of externally managed assets and income of a private pension pian, including related notes. (3) A schedule of net tangible assets, including related notes. (4) A schedule of disbursements in relation to a lease property, including explanatory notes. (5) A schedule of profit participation or employee bonuses, including explanatory notes. A. (1), (2), 3) €. (1), (3), (4), (5) B. (1), (3), (4) D. (1), (2), (3), (4), (5) 12,The following statements relate to PSA 805. Select the incorrect statement: ‘An auditor may be engaged to audit the entity's complete set of FS, as well as the audit of a single financial statement or of a specific element of the FS. B. If the auditor is not also engaged to audit the entity's complete set of FS, the auditor shall determine whether the audit of a single FS or of a specific element of those FS in accordance with PSAs is practicable. CC. In the case of an audit of a single FS or of a specific element of FS, the auditor shall consider whether application of the financial reporting framework will result in a presentation that provides adequate disclosures to enable the intended users to understand the information conveyed in the FS or the element, and the effect of material transactions and events on the information conveyed in the FS or the element. D. All of these are correct statements. ReSA735-9807 / 734-3989 / (0910) 439-1320 resareview@notmal Page 2 of 6ReSA: The ReviewSchool of Accountancy . Acting Theory: Special Considerations AT-19 13.84: An audit of single FS or an element of FS may be undertaken as a separate engagement or in conjunction with an audit of the entity's financial statements. §2: An audit of single FS or an element of FS will ordinarily be less extensive than if the ‘same component were to be audited in cormection with a report on the entire financial statements. 53:When auditing a single FS or an element of FS, it is not necessary to examine evidence pertaining accounts that are related to the single FS or element of FS being audited. ‘he materiality determined for a single FS or an element of FS may be lower than the ‘materiality determined for the entity's complete set of FS. Ss A. True, true, false, true C. False, false, false, false B. True, false, false, true D False, false, false, true 14. When audited single FS or audited specific elernent of FS are presented together with the audited complete set of FS, the following niust de different-ated: A 8 c oD The single FS or specific element of FS must be differentiated from the complete set of FS Yes Yes No No The opinion for the single FS or specific element of FS must be differentiated from the opinion on the complete set of FS No Yes No Yes 15.Jade, CPA, was asked by Isabelle Company to audit the company’s Loans and Receivables account, in conjunction with the audit of Isaac's complete FS. Jade issued @ report with unqualified opinion and with emphasis of a matter paragraph on the complete set of FS of Isabelle Company. Accordingly, Jade shall: ‘A. Issue a qualified opinion on the Loans and Receivables account. 8. Issue a disclaimer of opinion on the Loans and Receivables account, C. Consider the effect of the emphasis of 2 matter on the auditor's report for Loans and Receivables. D. Issue also an unqualified opinion with emphasis of a matter paragraph for Loans and Receivables. 16.Jade, CPA, was asked by Isabelle Company to audit the company's Loans and Receivables account, in conjunction with the audit of Isazc’s complete FS. Jade issued a report with modified opinion on the complete sel of FS of Isehelie Company. Accordingly, Jade shall ‘A. Issue a qualified opinion on the Loans and Receivables account. B. Issue a disclaimer of opinion on the Loans and Receivables account, C. Consider the effect of the modified opinion on the auditor’s report for Loans and D. Receivables. Issue an unqualified opinion with emphasis of a matter paragraph for Loans and Receivables. 17.If the auditor concludes that it is necessary to express en adverse opinion or disclaim an ‘opinion on the entity’s complete set of FS as a whole but, in the context of a separate audit Of 2 specific element that is included in those FS, the auditor nevertheless considers it appropriate to express an unmodified opinion on that element, the auditor shail 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 the auditor's report containing the adverse opinion or disclaimer of opinion C. The specific element does not constitute a major portion of the entity's complete set of FS D. All of these. 18,1 The auditor shail not express an unmodified opinion on a single FS of a complete set of FS if the auditor has expressed an adverse opinion or disclaimed an opinion on the complete set of FS as a whole. $2 Expressing an unmodified opinion on a single FS which came from a complete set of FS that was given adverse opinion cr disclaimer of opinion, is allowed only if such unmodified opinion is published separately from the auditor's report containing the adverse opinion or disclaimer of opinion. $3 A single FS is always deemed to constitute a major portion of a complete set of FS. * A. Correct, correct, incorrect. C. Correct, incorrect, incorrect. B. Correct, incorrect, correct. ©, Incorrect, incorrect, correct. 19. The criteria applied by management in the preparation of the summary FS is known as: A. Applied criteria Financial reporting framework 8. Summary criteria 3D. Summary reporting standards ReSAB735-9807 / 734-3989 / (0910) 439-1320» s Page 3 of 6ReSA: The ReviewSchoo! of Accountancy Acting Theory: Special Considerations AT-19 20. These are FS audited by the auditor in accordance with PSAs, and from which the summary FS are derived: ‘A. Source financial statements C. Original financial statements B. Audited financial statements D. Uncut financial statements 21. Historical financial information that is derived from FS but that contains less detail than the FS, while still providing a structured representation consistent with that provided by the FS of the entity's economic resources or obligations at a point in time or the changes therein for a period of time, are known as: A. Simplified financial statements. C. Summary financial statements 8. Compressed financial statements. D. Abridged financial statements 22. Dorothy, CPA, is requested to report on summary FS of Lock Books, Inc. Dorothy has not expressed an audit opinion on the FS from which the summary FS were derived. Based solely on this information, should Dorothy accept the engagement? A. Yes, because a report on summary FS is a separate engagement. B. No, because PSA 810 (Redrafted) mandates that the auditor should only accept an engagement to report on summary FS only when the auditor has been engaged to conduct an audit of the FS from which the summary FS are derived. C. Yes, because an audit of summary FS is comparable to the audit of FS from which such summary FS are derived. D. None of the above choices can be selected because of lack of information. 23. Before accepting an engagement to audit summary FS, the autor shall: A. Determine whether the applied criteria are acceptable. 8. Obtain the agreement of management that it acknowledges and understands its responsibilities regarding the summary FS. C. Agree with management the form of opinion to be expressed on the summary FS. D. All of the choices. 24.1n the context of PSA 810 (Redrafted), management should agree with the auditor and acknowledge its responsibilities: ‘A. For the preparation of the summary FS in accordance with the applied criteria. B. To make the audited FS available to the intended users of the summary FS without undue difficulty €. To include the auditor's report on the summary FS in any document that contains the summary FS and that indicates that the auditor has reported on them + D. All of the choices. 25.Which of the following procedures are most likely to be performed in relation to an engagement to report on summary FS? ‘A. Evaluate whether the summary FS are prepared in accordance with the applied criteria 8. Evaluate, in view of the purpose of the summary FS, whether the summary FS contain the information necessary, and are at an appropriate level of aggregation, so as not to be misleading in the circumstances C. Evaluate whether the audited FS are available to the intended users of the summary FS without undue difficulty, unless law or regulation provides that they need not be made available and establishes the criteria for the preparation of the summary FS. ©. All of the choices. 26. Which of the following phrases are acceptable forms of unmodified opinion on summary FS? 1. The summary FS are consistent, in all material respects, with the audited FS, in accordance with [the applied criteria] I. The summary FS are a fair summary of the audited FS, in accordance with [the applied criteria] A. Tonly B. Ionly C. Both I and 11 D. Neither I nor 11 27.1f law or regulation prescribes the wording of the opinion on summary FS in terms that are different from those described in PSA 810 (Redrafted), the auditor shall: BoC Apply the procedures necessary to enable the auditor to express the prescribed opinion; and Yes Yes No No Evaluate whether users of the summary FS might misunderstand the auditor's opinion on the summary FS and, if so, whether additional explanation in the auditor’s report on the summary FS can mitigate possible No Yes» No Yes misunderstanding, ReSA®735-9807 / 734-3989 / (0910) 439-1320 | ariarewiew srolnie Page 4 of 61esA: The ReviewScheo! of Accountancy acing ‘Theory ‘Special Considerations AT- 19 28,51 If the date of the auditor's report on the summary FS is later than the date of the Siditor's report on the audited FS, the auditor's report should state that the summary FS snd the audited FS do not reflect the effects of events that occurred subsequent to the date of the auditor's report on the audited FS. $2 Summary FS do not contain all the disclosures required by the financial reporting framework applied in the preparation of the audited FS $3 If done correctly, reading the summary FS is 4 substitute for reading the audited FS. A. True, true, false C. False, true, false B. False, true, true D. True, true, true 29.The auditor shall date the auditor's report on the summary financial statements no earlier than 1. The date on which the auditor has obtained sufficient appropriate evidence on which to base the opinion, including evidence that the summary FS have been prepared and those with the recognized authority have asserted that they have taken responsibility for them Il. The dave of the auditor's report on th» audited FS. A. Lonly B. Ionly C. Both Land IT D. Neither I nor IT 30. when the auditor's report on the audited FS contains a’qualified opinion, an Emphasis of Matter paragraph, or an Other Matter paragraph, but the auditor is satisfied that the summary FS are consistent, in all material respects, with or are a fair summary of the audited FS, in accordance with the applied criteria, the auditor's report on the summary FS shall: 4 B ¢ 2B State that tHe auditor’s report on the audited FS contains a qualified opinion, an Emphasis of Matter varagraph, o1 an Other Matter paragraph Yes Yes No No Describe the basis for the qualified opinion on the audited FS, and that qualified opinion; or the Emphasis of Matter or the Other Matter paragraph in the auditor's No Yes Yes No report on the audited FS Describe the effect thereof on the summary ES, if any, of the reasons for qualified opinion, or emphasis of a matter, or other matter paragraph in the auditor’s report No Yes Yes No on the audited FS. 31, When the auditor's report on the audited 7S contains 2n adverse opinion or a disclaimer of opinion, the auditor's report on the summary FS shall c o State that the auditor's report on the audited FS contains an adverse opinion or disclaimer of opinion Yes Yes No No Describe the basis for that adverse opinion or disclaimer ‘of opinion No Yes Yes No State that, as a result of the adverse opin’on or disclaimer of opinion, it is inappropriate to express an ‘opinion on the summary FS No Yes Yes. No 32.1f the summary FS are not consistent, in all material respects, with or are not a fair summary of the audited FS, in accordance with the applied criteria, and management does not agree to make the necessary changes, the auditor shall: "A. Express an unqualified opinion on the summary FS, with an emphasis of a matter paragraph describing the lack of consistency. B. Express a qualified opinion on the summary FS, with a basis for modification paragraph describing the lack of consistency. C. Express an adverse opinion on the sumrnary FS D. withdraw from the engagement since management sefuses to make amendments to the summary FS. 33, These refer to prospective financial information prepared on the basis of assumptions as to future events which management expects to take place and the actions management expects to take as of the date the information is prepared (best-estimate assumptions) Forecast. Projection. Prospective financial statements. Budget com> ReGAR735-9807 / 734-3989 / (0910) 439-1320 "res - Page 5 of 6ReSA: The ReviewSchool of Accountar Acting Theory: Special Considerations" AT-19 34. These refer to prospective financial information prepared on the basis of hypothetical assumptions about future events and management actions which are not necessarily expected to take place; and a mixture of best-estimate and hypothetical assumptions. A. Forecast. B. Projection. C. Prospective financial statements. D. Budget. 35, Prospective financial information can include financial statements or one or more elements of financial statements and may be prepared for distribution to third parties in A. A prospectus to provide potential investors with information about future expectations. 5. An annual report to provide information to shareholders, regulatory bodies and other interested parties. C._A document for the information of lenders which may include, for example, cash flow forecasts. D. All of these are examples of external uses of prospective financial information. 36. $2 Assumptions become more speculative as the length of the period covered increases. S2 The ability of management to make best-estimate assumptions decreases as the length of the period covered increases. A. True, true 8. True, false C. False, true D. False, false 37. The following are some of the factors that are relevant to the auditor's consideration of the Period of time covered by prospective financial information, except: Operating cycle. The degree of reliability of assumptions. The needs of users. Management's competence regarding the preparation of prospective financial information. power 38.51 Although evidence supporting hypothetical assumptions need not be obtained, the auditor would need to be satisfied that they are consistent with the purpose of the Prospective financial information and that there is no reason to believe that they are clearly unrealistic. S2The auditor would assess the source and reliability of the evidence supporting management's best estimate assumptions. A. True, true B. True, false C. False, true D. False, false 39. Written representations on prospective financial statements must be obtained regarding: A. The intended use of the prospective financial information. 8. The completeness of significant management assumptions. C. Management's acceptance of its responsibility for the prospective financial information. D. Each of these representations must be obtained in writing from management. 40. An auditor should not issue a report on A. The achievability of forecasts. C. Internal control. B. Quarterly financial information. D. Management performance. 41.When the auditor believes that the presentation and disclosure of prospective financial information is not adequate, the auditor may choose to withdraw from the engagement. As an alternative, what type of opinion may be expressed by the auditor? ‘A. Qualified or adverse opinion. C. Qualified opinion or disclaimer of opinion. B. Disclaimer of opinion. D. Negative assurance. 42.When the auditor believes that one or more significant assumptions do not provide a reasonable basis for the prospective financial information prepared on the basis of best. estimate assumptions or hypothetical assumptions, what are the steps to be taken by the auditor? ‘A. Withdraw from the engagement. 8. Express an adverse opinion in the report or withdraw from the engagement. C. Express a qualified opinion on the report or withdraw from the engagement. D. Disclaim an opinion. -end of AT-19- ReSA%735-9607 / 734-3989 / (0910) 439-1320 ve a bet mal Page 6 of 6