The Auditor’s Report on Financial Statements

Question 1

219. 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).

Answer 1

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.

Question 2

220. In which of the following circumstances would an auditor most likely add an emphasis of matter paragraph to the auditor’s report while expressing an unqualified opinion?

A. There is a substantial doubt about the entity’s ability to continue as a going concern.
B. Management’s estimates of the effects of future events are unreasonable.
C. No depreciation has been provided in the financial statements.
D. Certain transactions cannot be tested because of management’s records retention policy.

Answer 2

A. There is a substantial doubt about the entity’s ability to continue as a going concern.

Question 3

221. 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

A. Unmodified opinion
B. Disclaimer of opinion
C. Adverse opinion.
D. Scope qualification

Answer 3

A. Unmodified opinion

Question 4

222. 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
B. An unmodified opinion
C. An adverse opinion
D. A “subject to” opinion

Answer 4

B. An unmodified opinion

Question 5

223. When would the auditor refer to the work of an appraiser in the auditor’s report?

A. An adverse opinion is expressed based on a difference of opinion between the client and the outside appraiser as to the value of certain assets.
B. A disclaimer of opinion is expressed because of a scope limitation imposed on the auditor by the appraiser.
C. A qualified opinion is expressed because of a matter unrelated to the work of the appraiser.
D. An unqualified opinion is expressed and an emphasis of matter paragraph is added to disclose the use of the appraiser’s work.

Answer 5

A. An adverse opinion is expressed based on a difference of opinion between the client and the outside appraiser as to the value of certain assets.

Question 6

224. 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

Answer 6

B. Pervasive

Question 7

225. 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.

Answer 7

A. Should read the other information to consider whether it is inconsistent with the audited financial statements.

Question 8

226. An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. If the auditor concludes that the financial statements do not require revision, but the client refuses to revise or eliminate the material inconsistency, the auditor may

A. Disclaim an opinion on the financial statements after explaining the material inconsistency in an emphasis of matter paragraph.
B. Revise the auditor’s report to include an other matter paragraph describing the material inconsistency.
C. Express a qualified opinion after discussing the matter with the client’s directors.
D. Consider the matter closed because the other information is not in the audited statements.

Answer 8

B. Revise the auditor’s report to include an other matter paragraph describing the material inconsistency.

Question 9

227. 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

Answer 9

D. Yes Yes

Question 10

228. 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.

Answer 10

B. The financial statements fail to disclose information that is required by Philippine Financial Reporting Standards.

Question 11

229. An auditor should disclose the substantive reasons for expressing an adverse opinion in the Basis for Adverse Opinion paragraph

A. Following the opinion paragraph.
B. Preceding the opinion paragraph.
C. Following the introductory paragraph.
D. Within the notes to the financial statements.

Answer 11

B. Preceding the opinion paragraph.

Question 12

230. 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.

Answer 12

A. Under the corresponding figures framework, the corresponding figures for the prior period(s) are integral part of the current period financial statements.

Question 13

231. In which of the following circumstances would an auditor’s report least likely include specific reference to the corresponding figures?

A. When the auditor’s report on the prior period, as previously issued, included a modified opinion and the matter which gave rise to the modification is resolved and properly dealt with in the financial statements.
B. When the auditor’s report on the prior period, as previously issued, included a modified opinion and the matter which gave rise to the modification is unresolved, and results in a modification of the auditor’s report regarding the current period figures.
C. When the auditor’s report on the prior period, as previously issued, included a modified opinion and the matter which gave rise to the modification is unresolved, but does not result in a modification of the auditor’s report regarding the current period figures.
D. When the auditor’s report on the prior period financial statements containing a material misstatement included an unmodified opinion and the prior period financial statements have not been revised and reissued, and the corresponding figures have not been properly restated and/or appropriate disclosures have not been made.

Answer 13

A. When the auditor’s report on the prior period, as previously issued, included a modified opinion and the matter which gave rise to the modification is resolved and properly dealt with in the financial statements.

Question 14

232. 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.

Answer 14

D. I, II, and III.

Question 15

233. When the prior period financial statements are not audited, the incoming auditor should state in the auditor’s report that
     I. The corresponding figures are unaudited.
     II. The incoming auditor is not required to perform procedures regarding opening balances of the current period.

A. I only C. Both I and II
B. II only D. Neither I nor II

Answer 15

A. I only

Question 16

234. 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.

Answer 16

D. I, II, III, and IV.

Question 17

235. 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. Refer to the report of the incoming auditor only in the scope paragraph.
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.

Answer 17

D. Not refer to the report or the work of the incoming auditor.

Question 18

236. The following statements relate to unaudited prior year financial statements that are presented in comparative form with audited current year financial statements. Which is incorrect?

A. The incoming auditor should state in the auditor’s report that the comparative financial statements are unaudited.
B. The incoming auditor need not perform audit procedures regarding opening balances of the current period.
C. Clear disclosure in the financial statements that the comparative financial statements are unaudited is encouraged.
D. In situations where the incoming auditor identifies that the prior year unaudited figures are materially misstated, the auditor should request management to revise the prior year’s figures or if management refuses to do so, appropriately modify the report.

Answer 18

B. The incoming auditor need not perform audit procedures regarding opening balances of the current period.