AUDITING THEORY

Asst. Prof. Jude Caponpon, CPA, MBA, CTT

AUDIT REPORT

1. PSA 700 (Redrafted). The Independent Auditor’s Report on a Complete Set of General Purpose Financial
Statements, provides the following basic element of the auditor’s report, except
a. Introductory paragraph
b. Management’s responsibility for the financial statements
c. Auditor’s opinion paragraph
d. Starting and completion dates of the audit
2. The opening or introductory paragraph in the auditor’s report would normally include the following, except
a. Identification of the financial statements audited
b. Should refer to the summary of significant accounting policies and other explanatory notes
c. Date and period covered by the financial statements
d. A description of the work to be performed by the auditor
3. The auditor’s responsibility paragraph in the auditor’s report would normally include the following, except
a. Statement that the audit was conducted in accordance with PSAs
b. Statements that the audit was planned and performed to obtain reasonable assurance about whether
financial statements are free of material misstatement
c. Statement by the auditor that the audit provides a basis for the opinion
d. Statement that the audit includes examining on a detailed basis evidence supporting the amounts and
disclosures in the financial statements
4. Which of the following should not be the basis of dating the audit report?
a. When the audit fee is collected
b. As of the completion date of the audit
c. As of any date earlier than the date on which the financial statements are signed or approved by
management
d. Upon completion of the field work
5. The auditor’s inability to obtain sufficient appropriate audit evidence may arise from the following, except
a. Circumstances beyond the control of the entity
b. Circumstances relating to the nature or timing of the auditor’s work
c. Limitations imposed by management
d. Circumstances relating to difficulty in performing audit procedures
6. A financial reporting framework designed to meet the common financial information needs of a wide range of
users
a. Financial reporting rules and regulations
b. Philippine standards in auditing
c. General-purpose framework
d. Fair presentation framework
7. Under this financial reporting framework, the comparative financial statements for the prior periods are
considered separate financial statements
a. Corresponding figures framework
b. Generally accepted accounting principles
c. Consolidated financial statement framework
d. Comparative financial statements framework
8. Under the corresponding figures framework, the corresponding figures for the prior period (s) are
a. An integral part of the current period financial statements
b. Not an integral part of the current period financial statements
c. Read without reference to amounts and other disclosures relating to the current period
 d. Capable of standing alone
9. In case the prior period financial statements were obtained by another auditor and the incoming auditor decides
to refer to another auditor, the incoming auditor’s report should include
a. That the financial statements of the prior period were audited by another auditor
b. The type of report issued by the predecessor and, if the report was modified, the reasons therefore
c. The date of the report
d. All of the above
10. This exists when other information contradicts information contained in the audited financial statements
a. Material error
b. Scope limitation
c. Material inconsistency
d. Material uncertainty
11. On reading other information, and an amendment to the financial statements is necessary, and the entity
refuses to make the amendment, the auditor would consider issuing a (n)
a. Qualified or adverse opinion
b. Qualified or disclaimer of opinion
c. Unqualified opinion with explanatory paragraph
d. Unqualified opinion
12. If an amendment to the other information in a document containing audited financial statements is necessary
and the entity refuses to make the amendment, the auditor would consider issuing a (n)
a. Qualified or adverse opinion
b. Qualified or disclaimer of opinion
c. Unqualified opinion with explanatory paragraph
d. Unqualified opinion
13. If supplementary information that is not required by the applicable financial reporting framework is presented
with the audited financial statements, the auditor shall
a. Withdraw from the engagement
b. Issue a qualified opinion due to disagreement with management
c. Issue an adverse opinion due to departure from the applicable financial reporting framework
d. Evaluate whether such supplementary information is clearly differentiated from the audited financial
statements
14. When reporting under the PSA, certain statements are required in all auditor’s reports (explicit) and others are
required only under certain conditions (implicit). Which combination that follows correctly describes the
auditor’s responsibilities for reporting?

PFRS Explicit Explicit Implicit Implicit

Consistency Implicit Explicit Explicit Implicit
Disclosure Implicit Implicit Explicit Explicit
Opinion Explicit Explicit Implicit Implicit
15. Auditors found that they has not capitalized material amount of leases in the financial statements. When
considering the materiality of this departure from financial reporting standards, the auditors would choose
between which reporting options?
a. Unqualified opinion or disclaimer of opinion
b. Unqualified opinion or qualified opinion
c. Emphasis of matter paragraph with unqualified or an adverse opinion
d. Qualified opinion or adverse opinion
16. The auditors determined that the entity is suffering financial difficulty and the going concern status is seriously
in doubt. Assuming the entity adequately disclosed this matter in the financial statements, the auditor must
choose between which of the following auditor’s report alternatives?
a. Unqualified opinion with a going concern explanatory paragraph or disclaimer of opinion
 b. Standard report or a disclaimer of opinion
c. Qualified opinion or adverse opinion
d. Standard report or adverse opinion
17. An entity accomplished an early extinguishment of debt and the auditor believe that literal application of the
financial reporting standards would cause recognition of a loss that would materially distort the financial
statements and cause them to be misleading. Given these facts, the auditors would probably choose which
reporting option?
a. Explain the situation and issue an adverse opinion
b. Explain the situation and issue a disclaimer of opinion
c. Explain the situation and issue an unqualified opinion
d. Issue the standard report
18. Which of these situations would require auditor’s to append an explanatory paragraph about consistency to an
otherwise unqualified opinion?
a. Entity changed its estimated allowance for uncollectible accounts receivable
b. Entity corrected a prior mistake in accounting for interest capitalization
c. Entity sold one of its subsidiaries and consolidated six subsidiaries this year compared to seven last year
d. Entity changed its inventory costing method from FIFO to LIFO
19. Jose became the new auditor of Sun Rise Corporation, succeeding Juan, who audited the financial statements
last year. Jose needs to report in Sun Rise’s comparative financial statements and should disclose in his report an
explanation about other auditors having audited the prior year
a. Only if Juan’s opinion last year was qualified
b. Describing the prior period audit and the opinion but not naming Juan as the predecessor auditor
c. Describing the audit but not revealing the type of opinion Juan gave
d. Describing the audit and the opinion but not naming Juan as the predecessor’s auditor
20. When component auditors are involved in the current audit of parts of the entity’s business, the group
engagement team partner may issue a report that (two answers)
a. Mentions the component auditors, describes the extent of the component auditor’s work, and
expresses an unqualified opinion
b. Does not mention the component auditors and expresses an unqualified opinion in a standard report
c. Places primary responsibility for the reporting on the component auditors
d. Names the component auditors, describes their work, and presents only the principal auditor’s report
21. An auditor’s report that refers to a departure from generally accepted accounting principles includes the
language, “In our opinion, with the foregoing explanation, the financial statements referred to above present
fairly…” This is a (n)
a. Adverse opinion
b. Qualified opinion
c. Unqualified opinion with an explanatory paragraph
d. Example of inappropriate reporting
22. An auditor is preparing an audit report with a qualified opinion. Which of the following phrases is the correct
way to start writing a qualified opinion?
a. Except for
b. Subject to
c. Either a or b
d. Neither a nor b
23. If management falls to provide adequate justification for a change from one generally accepted accounting
principle to another, the auditor should
a. Add an explanatory paragraph and express a qualified or an adverse opinion for lack of conformity with
GAAP
b. Disclaim an opinion because of uncertainty
 c. Disclose the matter in a separate explanatory paragraph (s) but not modify the opinion paragraph
d. Neither modify the opinion paragraph nor disclose the matter because both principles are generally
accepted
24. Which of the following modifications of the standard auditor’s report does not require an emphasis of a matter
paragraph?
a. Reference to other auditors
b. Inconsistency
c. Scope limitation
d. Adverse opinion
25. An auditor used the services of an expert during the audit of a client’s financial statements. When issuing an
unmodified auditor’s report, the auditor should
a. Justify the use of the expert’s services in the audit report
b. Disclose the use of an expert in the audit report
c. Not mention the expert in the audit report
d. Mention the expert in both the audit report and the notes to the financial statements
26. An auditor is unable to obtain SAAE as a basis for the opinion on the financial statements. This situation
illustrates a (n)
a. Scope limitation
b. Lack of independence
c. Uncertainty
d. Inconsistency
27. When an auditor qualifies an opinion because of inadequate disclosure, the auditor should describe the nature
of the omission in a separate explanatory paragraph and modify the
a. Introductory paragraph
b. Management responsibility paragraph
c. Opinion paragraph
d. All of these
28. The audit report is normally addressed to the
a. Those charged with governance and shareholders
b. Those charged with governance and the chair of the audit committee
c. Those charged with governance, shareholders, and the chair of the audit committee
d. Shareholders and the chair of the audit committee
29. Management is responsible for the preparation and fair presentation of the financial statements in accordance
with PFRS. This responsibility includes, except
a. Designing, implementing and maintaining internal controls relevant to preparation and presentation of
fairly stated financial statements
b. Selecting and applying appropriate accounting policies
c. Selecting and applying aggressive accounting policies
d. Making accounting estimates that are reasonable in the circumstances
30. An emphasis of a matter paragraph inserted in a standard report is normally associated with which type of
opinion?
a. Unqualified opinion
b. Qualified opinion
c. Adverse opinion
d. Disclaimer of opinion
31. Under which of the following conditions can a disclaimer of opinion never be issued?
a. Going concern problems are highly material and significant
b. The entity does not allow the auditors to have access to evidence about important accounts
c. The auditors own stock in the entity
 d. The auditors have determined that the entity uses the NIFO inventory costing method
32. How the auditor’s own responsibility for expressing the opinion on financial statements disclosed in the report?
a. Stated explicitly in the introductory paragraph of the standard report
b. Unstated but understood in the introductory paragraph of the standard report
c. Stated explicitly in the opinion paragraph of the standard report
d. Stated explicitly in the scope paragraph of the standard report
33. Company X hired Tan & Tan CPAs, to audit the financial statements of Company Y and deliver the report to
Standard Bank. Who is the client?
a. Standard Bank
b. Tan & Tan
c. Company X
d. Company Y
34. Which of the following is not included in the standard report on the financial statements?
a. An identification of the financial statements that were audited
b. A general description of an audit
c. An opinion that the financial statements present financial position in conformity with financial reporting
standards
d. An emphasis of matter paragraph commenting on the effect of economic conditions of the entity
35. If the auditors decided to present separate reports on the entity’s financial statements and internal control over
financial reporting, which of the following reports should be modified to reference the other report?
I. Report on Financial Statements
II. Report on Internal Control over Financial Reporting
a. I only
b. II only
c. Both statements
d. None of the statements
36. A material departure from financial reporting standards will result in auditor consideration of
a. Whether to issue an adverse opinion rather than a disclaimer of opinion
b. Whether to issue a disclaimer of opinion rather than an except for opinion
c. Whether to issue an adverse opinion rather than an except for opinion
d. Nothing because none of these opinion is applicable to this type of exception
37. The auditor’s report should be dated as of the date the
a. Report is delivered to the client
b. Auditors have accumulated sufficient evidence
c. Fiscal period under audit report
d. Review of the working papers is completed
38. In the report of the group engagement team, reference to the fact that a portion of the audit was made by a
component auditor is
a. Not to construed as a qualification, but rather as a division of responsibility between the two CPA firms
b. Not in accordance with Philippine Standards on Auditing
c. A qualification that lessens the collective responsibility of both CPA firms
d. An example of a dual opinion requiring the signatures of both auditors
39. Assume that the opinion paragraph of an auditor’s report begins as follows: “With the explanation given in note
6, the financial statements referred to above present fairly…” This is
a. An unqualified opinion
b. A disclaimer of opinion
c. An except for opinion
d. An improper type of reporting
40. The auditor who wishes to indicate that the entity has significant transactions with related parties should
disclose this fact in
a. An explanatory paragraph to the auditor’s report
b. An explanatory note to the financial statements
c. The body of the financial statements
d. The summary of significant accounting policies section of the financial statements
41. When restriction that significantly limit the scope of the audit are imposed by the client, the auditor should
generally issue which of the following opinions?
a. Qualified
b. Disclaimer
c. Adverse
d. Unqualified
42. Which of the following does not ordinarily involve the addition of an explanatory paragraph to an audit report?
a. A consistency modification
b. A qualified opinion
c. Part of the audit has been performed by other auditors
d. An adverse opinion
43. An audit report for a public client indicates that the financial statements were prepared in conformity with
a. Applicable financial reporting framework
b. Standards of the oversight board
c. Philippine standards on auditing
d. Philippine financial reporting standards
44. In extreme cases, such as situations involving multiple uncertainties that are significant to the financial
statements, the auditor may consider it appropriate to express a
a. Disclaimer of opinion
b. Unqualified report with an explanatory paragraph
c. Special report
d. Qualified report
45. A misstatement in the financial statements can be considered material, except
a. It overshadows the financial statements as a whole
b. Knowledge of the misstatement would affect a decision of a reasonable user of the financial statements
c. It affects more than one account on the statements
d. It affects the largest account balance in the statements
46. If a material exception relates to a departure from GAAP, 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
47. The likely result of substantial doubt about the ability of the client to continue as a going concern is the issuance
of which of the following audit reports?
I. Qualified
II. Unqualified with Explanatory Language
a. I only
b. II only
c. Both statements
d. None of the statements
48. A change in accounting principles that the auditors believes is not justified is likely to result in which of the
following audit reports?
I. Adverse
 II. Disclaimer
a. I only
b. II only
c. Both statements
d. None of the statements
49. Which of the following is least likely to be considered as an emphasis of matter paragraph in what remains an
unqualified report?
a. The company is a component of a larger business enterprise
b. An unusually important significant event
c. A decision not to conform accounts receivable
d. A risk or uncertainty
50. The element of the auditor’s report that distinguishes it from reports that might be issued by others is the
a. Title
b. Addressee
c. Auditor’s signature
d. Opinion paragraph
51. Subsequent to the issuance of audited financial statements, Red, CPA becomes aware of material misstatements
in the financial statements that exist prior to the date of his audit report. In this case, Red should
a. Notify the parties who are currently relying on the financial statements
b. Discuss the matter with management, and where necessary, recommend that the financial statements
be revised in light of the new information obtained
c. Document such information in the audit plan for succeeding audit
d. Submit revised copies of the financial statements and audit report to shareholders
52. An emphasis of matter paragraph may be included
a. Under no circumstances
b. Always after the opinion paragraph
c. Always before the opinion paragraph
d. Can be before the opinion paragraph, or after the opinion paragraph
53. An auditor’s report includes a statement that “the financial statements do not present fairly the financial
position in accordance with PFRS.” This auditor’s report was probably issued in connection with financial
statements that were
a. Prepared on another basis for accounting
b. Restricted for use by management
c. Misleading
d. Condensed
54. A CPA firm is associated with the financial statements of its client
a. Only when it does a financial audit
b. Only when it does assurance services, such as a review or an audit
c. Even if a CPA firm only assists a client in preparing financial statements but does not do an audit
d. It if performs any services at all for the client
55. The description of an audit in the standard auditor’s report include which of the following?
a. An audit involved performing procedures to obtain audit evidence about the amounts and disclosures in
the financial statements
b. The procedures selected depend on the auditor’s judgment including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or error
c. An audit also includes evaluating the appropriateness of the accounting policies used and the
reasonableness of accounting estimates made by management, as well as the overall presentation of
the financial statements
d. All of these
56. Examples of an inability to obtain sufficient appropriate audit evidence arising from a limitation on the scope of
the audit imposed by management include when
a. Management prevents the auditor from observing the counting of the physical inventory
b. Management prevents the auditor from requesting external confirmation of specific account balances
c. Management prevents the auditor to do ocular inspection of fixed assets acquisitions
d. All of the above
57. Which of the following best describes the expression “financial statements, taken as a whole”?
a. It applies equally to a complete set of financial statement and to an individual financial statement
b. It applies only to a complete set of financial statements
c. It applies equally to each item in each financial statement
d. It applies equally to each item material item in each financial statement
58. The auditing profession recognizes the need for uniformity in reporting as a means of
a. Defending against capricious lawsuits
b. Upgrading the communication skills of auditors
c. Standardizing the policies of various CPA firms
d. Avoiding confusion
59. When the auditor knows that the financial statements may be misleading because they were not prepared in
conformity with financial reporting standards, he or she must issue
a. A qualified opinion
b. An adverse opinion
c. A disclaimer of opinion
d. A qualified or an adverse opinion, depending on the materiality of the item in question
60. Three of the following conditions must be present if the auditor is to issue the standard unqualified audit report.
Which one of the following conditions need not be present to issue such a report?
a. All statements-balance sheet, income statement, statement of retained earnings, and statement of cash
flows are included in the financial statements
b. The PSAs have been followed in all respects on the engagement
c. The financial statements are presented in accordance with the PSAs
d. Sufficient evidence has been accumulated and the auditor has conducted the engagement in a manner
that enables him/her to conclude that the PSAs have been followed
61. Which of the following events occurring after the issuance of an auditor’s report most likely would cause the
auditor to make further inquiries about the previously issued financial statements?
a. A technological development that could affect the entity’s ability to continue as a going concern
b. The discovery of information regarding a contingency that existed before the financial statements were
issued
c. The entity’s sale of a subsidiary that accounts for 30% of the entity’s consolidated sales
d. The final resolution of a lawsuit explained in a separate paragraph of the auditor’s report
62. The purpose of the introductory paragraph in the standard unqualified report is to
a. Distinguish the audit report from a compilation or review report
b. Identify the financial statements which were audited, and the dates and time periods covered by the
report
c. Communicated the responsibilities of management in preparing the financial statements, and to clarify
the respective roles of management of the auditor
d. All of the above
63. The auditor’s responsibility paragraph of the standard unqualified audit report states that the audit is designed
to
a. Discover all errors and/or irregularities
b. Discover material errors and/or irregularities
c. Obtain reasonable assurance whether the statements are free of material misstatement
 d. Conform to financial reporting standards
64. Because of inadequate records the auditor is uncertain as to whether newly acquired property and equipment is
recorded initially at cost. The auditor should issue a (n)
a. Qualified opinion
b. Unqualified opinion
c. Adverse opinion
d. Standard opinion
65. An auditor may not express a qualified opinion when
a. A scope limitation prevents the auditor from completing an important audit procedure
b. The auditor’s report refers to the work of a specialist
c. An accounting principle at variance with GAAP is used
d. The auditor lack independence with respect to the audited entity
66. An auditor who concludes that an uncertainty is not adequately disclosed in the financial statements should
issue a
a. Disclaimer of opinion
b. Unqualified report with an explanatory paragraph
c. Special report
d. Qualified report
67. An auditor is unable to determine the amount associated with illegal acts committed by the client. The auditor
would most likely issue
a. Either qualified or disclaimer of opinion
b. An adverse opinion
c. Either qualified or adverse opinion
d. A disclaimer of opinion
68. A limitation on the scope of an audit sufficient to preclude an unqualified opinion will always result when
management
a. Engages the auditor after the year-end physical inventory
b. Fails to correct a material internal control weakness that had been identified during the prior year’s
audit
c. Refuses to furnish a management representation letter to the auditor
d. Prevents the auditor from reviewing the working papers of the predecessor auditor
69. In case of a material and pervasive client-imposed scope limitation the auditor must consider issuing a
a. Qualified opinion or disclaimer opinion
b. Unqualified with an explanatory paragraph
c. Disclaimer of opinion or adverse opinion
d. Disclaimer of opinion
70. Which of the following is not a true statement? “In the opinion paragraph of the standard unqualified report,
the auditor is required to express
a. An unqualified opinion about the financial statements
b. A conclusion whether the company followed PFRSs
c. Auditor has obtained SAAE to support his opinion
d. That the financial statements are presented fairly in all material respects
71. the audit report is important to users because it indicates
a. The last day of the fiscal period
b. The date on which the financial statements were filed with the SEC
c. The last date on which users may institute a lawsuit against either client or auditor
d. The last day that the auditor obtained SAAE to support his opinion on the financial statements
72. Three of the following conditions would, by itself, require the auditor to issue a report other than the
unqualified report. Which one would not require such a departure?
 a. Client company’s financial statements show a significant net loss for each of the last three years,
including the current fiscal period
b. The financial statements have not been prepared in accordance with the applicable financial reporting
framework
c. The auditor is not independent during the fiscal period under audit
d. The scope of the auditor’s examination has been restricted, although the cause of the restriction was
not the client’s fault
73. The three main types of audit opinion other than unqualified opinion are the
a. Adverse opinion, disclaimer of opinion, and unqualified opinion
b. Adverse opinion, reports on an unaudited financial statements, and disclaimer of opinion
c. Disclaimer of opinion, the qualified opinion, and reports on unaudited financial statements
d. Special audit reports, reports on unaudited financial statements, and adverse opinions
74. Several types of special audit reports are issued by a CPA. Which one of the following circumstances would not
require the issuance of such a special report?
a. Client’s financial statements are prepared using the cash basis
b. Client’s financial statements are prepared using the accrual basis
c. The CPA has been retained to audit only the current assets
d. The CPA has been retained to review the internal control system, not the financial statements
75. The most common type of audit report contains a(n)
a. Adverse opinion
b. Qualified opinion
c. Disclaimer of opinion
d. Unqualified opinion
76. An audit report should be dated no earlier than the
a. Date the report is delivered to the entity audited
b. Date a letter of audit inquiry is received from the entity’s attorney of record
c. Balance sheet date of the latest period reported on
d. Date of completion of the audit
77. A dual-dated contains the dates of a subsequent event and the date the
a. Auditor completed work in the client’s office
b. Financial statements were prepared
c. Subsequent event was resolved
d. Audit report was delivered
78. An auditor’s inability to obtain sufficient appropriate audit evidence may arise from circumstances relating to
the nature or timing of the auditor’s work. Examples are as follows except
a. The timing of the auditor’s appointment is such that the auditor is unable to observe the counting of the
physical inventories
b. The entity is required to use the equity method of accounting for an associated entity, and the auditor is
unable to obtain sufficient appropriate audit evidence about the latter’s financial information to
evaluate whether the equity method has been appropriately applied
c. The auditor was not able to obtain his current accreditation certificate
d. The auditor determines that performing substantive procedures alone is not sufficient, but the entity’s
controls are not effective
79. An auditor had expressed a qualified opinion on the financial statements of a prior period because the client’s
financial statements departed from GAAP. The prior period statements have been restated in the current period
to conform with GAAP. The auditor’s updated report on the prior period statements should
a. Express an unqualified opinion about the restated financial statements
b. Be accompanied by the auditor’s original report on the prior period
c. Bear the same date as the auditor’s original report on the prior period
 d. Qualify the opinion concerning the restated financial statements because of a change in accounting
principles
80. The objective of the consistency standard is to provide assurance that
a. There are no variations in the format and presentation of financial statements
b. Substantially different transactions and events are not accounted for on an identical basis
c. The auditor is consulted before material changes are made in the application of accounting principles
d. The comparability of financial statements between period is not materially affected by changes in
accounting principles without disclosure