Professional Documents
Culture Documents
AUDITING THEORY
1. The framework for auditing and related services as addressed by PSA excludes
a. Review
b. Compilation
c. Tax services
d. Agreed upon procedure
2. What level of assurance does a review report provide to users of financial statements?
a. High
b. Absolute
c. Moderate
d. No assurance on the statements.
3. It refers to the level of auditor’s satisfaction as to the reliability of an assertion being made by one party for use by another
party.
a. Confidence level
b. Assurance level
c. Reasonableness level
d. Tolerable level
4. Which of the following is an appropriate combination of procedures required in completing a review engagement?
a. Inquiry and observation
b. Inquiry and analytical procedures
c. Observation and analytical procedures
d. Analytical procedures and inspection
a. The report is restricted to those parties who have agreed to the procedures to be performed.
b. The CPA provides the recipients of the report limited assurance as to reasonableness of the assertion(s) presented
in the financial information.
c. The report states that the auditor has not recognized any basis that requires revision of financial statements.
d. The report should state that the procedures performed are limited to analytical procedures and inquiry.
6. Which of the following engagements provides third parties the highest level of assurance about the client’s financial
statements?
a. Review
b. Audit
c. Agreed-upon procedures
d. Compilation
a. Expressing a positive opinion that the financial information is presented in conformity with generally accepted
accounting principles.
b. Expressing a limited assurance to users who have agreed as to procedures that will be performed by the CPA.
c. Reporting whether material modifications should be made to such financial statements to make them conform with
generally accepted accounting principles.
d. Reporting that the financial statements, in all materials respects, fairly present the financial position and operating
results of the client.
8. The objective of the ordinary audit of financial statements is the expression of an opinion on:
a. the fairness of the financial statements. c. the accuracy of the annual report.
b. the accuracy of the financial statements. d. the balance sheet and income statement.
9. If the auditor believes that the financial statements are not fairly stated or are unable to reach an conclusion because of
insufficient evidence, the auditor:
a. should withdraw from the engagement.
b. should request an increase in audit fees so that more resources can be used to conduct the audit.
c. has the responsibility of notifying financial statement users through the auditor’s report.
d. should notify regulators of the circumstances.
10. Which of the following best describes the auditor’s responsibility with respect to detection of fraud and error?
a. Based on the risk assessment the auditor should design audit procedures to obtain reasonable assurance that
misstatements arising from fraud and error that are material to the financial statements taken as a whole are
detected.
b. In designing the audit, the auditor should plan to discover all forms of errors and fraud.
c. The auditor is held responsible for the prevention of fraud and errors.
d. The auditor should assess risk of material misstatements due to error but not due to fraud.
11. Which of the following should the auditor likely to do when the application of planned audit procedures indicates the
possible existence of fraud or error?
a. The auditor should resign in order to avoid legal responsibility and costly litigations.
b. He should discuss the matter with the person whom he believes is involved with the irregularities.
c. He should consider the potential effect on the financial statements.
d. He should refer the suspected fraud or error to the internal auditor.
12. Which of the following is the least an auditor may do when he has suspicion of occurrence of fraud?
a. If the auditor believes the indicated fraud could have a material effect on the financial statements, he should
perform appropriate modified procedures.
b. Unless circumstances clearly indicate that fraud is an isolated occurrence, the auditor adjusts the nature, timing and
extent of substantive procedure.
c. The auditor should consider the implications of fraud in relation to other aspects of the audit, particularly the
reliability of management representations.
d. The auditor should communicate to management only those actual findings about fraud that brings material
potential effect on financial statements.
13. If the auditor believes an indicated fraud or error could have a material effect on the financial statements, the auditor
should perform appropriate modified or additional procedures. Which of the following least likely affect the extent of
the modified or additional procedures that the auditor should perform?
15. If the auditor concludes that the fraud or error has a material effect on the financial statements and has not been
properly corrected in the financial statements, the auditor should issue a:
16. Audit risk is composed of different risk associated in the whole audit process, which of the following risk is controllable
by the auditor?
a. Inherent risk b. Detection risk c. Control risk d. Combined risk assessment
17. A written representation letter from a client's management that, among other matters, acknowledges responsibility for
the fair presentation of financial statements, should normally be signed by the
a. Chief executive officer and the chief financial officer.
b. Chief financial officer and the chairman of the board of directors.
c. Chairman of the audit committee of the board of directors.
d. Chief executive officer, the chairman of the board of directors, and the client's lawyer.
19. Whenever an auditor issues an adverse opinion, the implication is that the auditor
a. does not know if the statements are presented fairly.
b. does not believe the statements are presented fairly.
c. is satisfied that the statements are presented fairly except for a specific aspect within the financial statements.
d. is satisfied that the statements are presented fairly.
20. If the auditor believes there is minimal likelihood that resolution of an uncertainty will have a material effect on the
financial statements, the auditor would issue a(n)
a. Qualified opinion. c. Adverse opinion.
b. Unqualified opinion. d. Disclaimer of opinion.
21. Under which of the following sets of circumstances might an auditor disclaim an opinion?
a. The financial statements contain a departure from PFRS, the effect of which is material.
b. The principal auditor decides to make reference to the report of another auditor who audited a subsidiary.
c. There has been a material change between periods in the method of the application of accounting principles.
d. There were significant limitations on the scope of the audit.
23. The auditor’s best defense when material misstatements are not uncovered is to have conducted the audit:
a. in accordance with auditing standards.
b. as effectively as reasonably possible.
c. in a timely manner.
d. only after an adequate investigation of the management team.
24. Which of the following circumstances regarding the entity’s noncompliance to laws or regulations may cause the auditor
to resign from an engagement?
a. The auditor is unable to determine whether noncompliance has occurred.
b. If the auditor concludes that the noncompliance has a material effect on the financial statements and has not been
properly reflected in the financial statements.
c. When the entity does not take remedial action that he considers necessary in the circumstances even when the
noncompliance is not material to financial statements.
d. When the disclosure of the effect of noncompliance to legal authority is necessary.
25. If permission from client to discuss its affairs with the proposed auditor is denied by the client, the predecessor auditor
should:
26. If the auditor concludes that the noncompliance has a material effect on the financial statements, and has not been
properly reflected in the financial statements, the auditor should express a(n):
27. In the event of a client-imposed scope limitation and the auditor failed to obtain sufficient appropriate evidence to
evaluate whether noncompliance that may be material to the financial statements has, or is likely to have occurred, he
should express a (n):
a. Unqualified opinion with explanatory paragraph.
b. Qualified opinion due to inadequate disclosure.
c. Qualified or adverse opinion.
d. Qualified or disclaimer of opinion.
30. In comparing management fraud with employee fraud, the auditor’s risk of failing to discover the fraud is:
a. greater for management fraud because managers are inherently more deceptive than employees.
b. greater for management fraud because of management’s ability to override existing internal controls.
c. greater for employee fraud because of the higher crime rate among blue collar workers.
d. greater for employee fraud because of the larger number of employees in the organization.
31. If several employees collude to falsify documents, the chance a normal audit would uncover such acts is:
a. very low. b. very high. c. zero. d. none of the above.
32. If an auditor conducted an audit in accordance with auditing standards, which of the following would the auditor likely
detect?
a. Unrecorded transactions.
b. Incorrect postings of recorded transactions.
c. Counterfeit signatures on paid checks.
d. Fraud involving collusion.
33. After general audit objectives are understood, specific audit objectives for each account balance on the financial
statements can be developed. Which of the following statements is true?
a. There should be at least one specific objective for each relevant general objective.
b. There will be only one specific objective for each relevant general objective.
c. There will be many specific objectives developed for each relevant general objective.
d. There must be one specific objective for each general objective.
34. The most important test of details of balances for accounts receivable is:
a. confirmations.
b. recalculation of the aged receivables and uncollectible accounts.
c. tracing credit memos for returned merchandise to receiving room reports.
d. tracing from shipping documents to journals to the accounts receivable ledger.
a. Audit objective
b. Time budget for the various audit areas
c. Set of planned audit procedures
d. The combined assessed level of inherent and control risk
7. Which of the following would the auditor not consider when preparing the audit program?
A B C D
Nature of procedure Yes Yes Yes No
Timing of planned procedures No Yes Yes Yes
Extent of planned procedures Yes Yes No No
A B C D
A. Succeed action Yes No Yes No
B. Be flexible Yes No No Yes
C. Be cost beneficial Yes Yes Yes Yes
38. The record of the overall audit plan will vary depending on the:
A B C D
Size of the entity Yes No No Yes
Complexity of the audit Yes Yes No Yes
Specific methodology and
technology used by the auditor No Yes Yes Yes
39. Which of the following least likely affect the form and content of the overall audit plan?
a. Complexity of the audit engagement.
b. Methodology and technology used by the auditor.
c. The entity’s form of business organization.
d. The size of the entity.
40. An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test
is performed to satisfy the audit objective of:
a. accuracy. b. existence. c. control. d. completeness.
41. When performing tests of controls and tests of transactions for sales, the auditor generally defines the population as:
a. all accounts receivable transactions for the year. c. all cash receipts transactions for the year.
b. all sales invoices for the year. d. all sales invoices less sales return credit memos.
42. Which of the following would be the most persuasive type of evidence?
a. Check register c. Observation of assets
b. Electronic bank statement d. Inquiry with the in-house attorney
43. Which of the following procedure is used extensively throughout the audit and often is complementary to performing
other audit procedures?
a. Inspection b. Observation c. Confirmation d. Inquiry
44. An auditor completed fieldwork on February 10, 2015 for a December 31, 2014 year-end client. A significant
subsequent event occurred on February 22, 2015. In this case, which of the following report dates would not be
appropriate?
a. February 10, 2015. c. February 22, 2015.
b. February 10, except Note 1, February 22, 2015. d. December 31, 2014.
45. An auditor had expressed a qualified opinion on the financial statements of a prior period because the client's financial
statements departed from PFRS. The prior period statements are restated in the current period to conform with PFRS.
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.
46. I. The role of accountants is to record, classify, and summarize economic events in a logical manner for the purpose of
providing financial information for decision making.
II. The role of auditors is to determine whether the financial information prepared by accountants properly reflects the
economic events that occurred.
47. I. Results of compliance audits are typically reported to someone within the organizational unit being audited rather than
to a broad spectrum of outside users.
II. CPA firms are never allowed to provide bookkeeping services for audit clients.
a. Only I is correct b. Only II is correct c. Both I and II are correct d. No answer
48. Currently, the vice chairman and chairman of the board of accountancy is:
a. Joel L. Tan-Torres and Gerard V. Sanvictores c. Gloria T. Baysa and Joel L. Tan – Torres
b. Samuel B. Padilla and Joel L. Tan-Torres d. Joel L. Tan-Torres and Eliseo A. Aurellado
49. The President of the Philippines, upon the recommendation of the Commission, after giving the concerned member an
opportunity to defend himself in a proper administrative investigation to be conducted by the Commission, may
suspend or remove any member on the following grounds:
a. Neglect of duty or incompetence
b. Violation or tolerance of any violation of the Act and its implementing rules and regulations or the Certified Public
Accountant’s Code of Ethics and excluding the technical and professional standards of practice for certified public
accountants
c. Final judgment of crimes involving moral turpitude
d. Manipulation or rigging of the certified public accountants licensure examination results, disclosure of secret and
confidential information in the examination questions prior to the conduct of the said examination or tampering of
grades.
50. The auditor consider events and condition relating to the going concern assumption during the planning stage in order
to:
a. Help management do action that may mitigate its going concern problems.
b. Identifying the areas of accounting and internal control systems that need tests of control.
c. To have a timely discussion with management and a review of management’s plans and resolutions of any identified
going concern issues.
d. In order not to extend the management’s assessment period to twelve months from balance sheet date.
51. The management’s assessment of the entity’s ability to continue as a going concern covers a period of:
10. What is the auditor’s responsibility of detecting significant doubt about the entity’s ability to continue as a going
concern beyond twelve months from the balance sheet date?
52. The following information is included in the explanatory paragraph of an audit report:
“…We draw attention to note 9 in the financial statements which indicates that the company incurred a net loss of
P4,250,000 during the year ended September 30,2003 and as of that date, the Company’s liabilities exceeded its total
assets by P3,800,000....”
53. I. Financial statement audits, operational audits, and compliance audits are similar in that each type of audit involves
accumulating and evaluating evidence about information to ascertain and report on the degree of correspondence
between the information and established criteria.
II. The differences between each type of audit are the person who examined and the criteria used to evaluate the
information.
55. Given the following information, what number results from [{(E) x [(C) – (A)} – {(D) + (B)}]?
Item A: the number of years that comprises the maximum number of years of any member of the board of accountancy.
Item B: The required minimum number of CPE/CPD credit a CPA shall earn in each year prior to renewal.
Item C: the number of days for the APO to submit its nominees to PRC for the board of accountancy prior to
expiration of the term of the incumbent chairman.
Item D: the number of proposed subjects covered in the CPA licensure examination which will take effect on May 2016
board.
Item E: the term of the vice chairman of the board.
a. 5 b. 42 c. 60 d. 48
56. A common inventory observation procedure is to select a random sample of tag numbers and identify the tag with that
number attached to the actual inventory item. The audit objective being achieved by this procedure is:
a. inventory as recorded on tags actually exists (existence).
b. existing inventory is counted and tagged (completeness).
c. inventory is counted accurately (accuracy).
d. inventory is classified correctly (classification).
57. Identify the appropriate type of opinion to issue when the auditor believes that there is a minimal loss resulting from the
resolution of an uncertainty.
a. Unqualified opinion.
b. Unqualified opinion with a separate explanatory paragraph.
c. Qualified opinion or disclaimer of opinion, depending on whether the uncertainty is adequately disclosed.
d. Qualified opinion or disclaimer of opinion, depending upon the materiality of the loss.
58. When there are extreme uncertainties that are significant to the financial statements, the auditor may consider it
appropriate to:
a. Withdraw from the engagement c. Disclaim an opinion
b. Issue an adverse opinion d. Issue a qualified opinion
59. A CPA, engaged to examine financial statements, observes that the accounting for a certain material item is not in
conformity with Philippine financial reporting standards, and that this fact is prominently disclosed in a footnote to the
financial statements. The CPA does not agree with this departure from PFRS and should
a. Not allow the accounting treatment for this item to affect the type of opinion because the deviation from
Philippine financial reporting standards was disclosed.
b. Express an unqualified opinion and add an explanatory paragraph emphasizing the matter by reference to the
footnote.
c. Qualify the opinion because of the deviation from Philippine financial reporting standards.
d. Disclaim an opinion.
60. When the financial statements of the prior period were not audited, the incoming auditor should:
a. not allow the inclusion of the corresponding figures in the financial statements of the current period.
b. obtain sufficient appropriate audit evidence that the corresponding figures meet the requirements of the relevant
financial reporting framework.’
c. Disclaim his opinion and treat the unaudited corresponding figures as basis of scope limitation.
d. Insist that an audit of prior year’s financial statements must be made.
61. Which of the following types of owners’ equity transactions would be found in the minutes of the board meetings and
needs authorization by the board of directors?
a. Issuance of capital stock. c. Declaration of dividends.
b. Repurchase of capital stock. d. All of them.
62. Which of the following is not a reason why the auditor requests that the client provide a letter of representation?
a. Professional auditing standards require the auditor to obtain a letter of representation.
b. It impresses upon management its responsibility for the accuracy of the information in the financial statements.
c. It provides written documentation of the oral responses already received to inquiries of management.
d. It provides written documentation, which is a higher quality of evidence than management’s oral responses to
inquiries.
63. Which of the following is a correct response of the auditor when he requires a lower acceptable level of detection risk?
Substantive Testing Procedures
Nature Timing Extent
a. Less effective Year-end More extensive
b. Less effective Interim Less extensive
c. More effective Year-end More extensive
d. More effective Year-end Less extensive
65. Which of the following is responsible for the fairness of representations made in financial statements?
a. The independent auditor. c. The client's management.
b. The internal auditor. d. The audit committee
66. A basic tool used by the auditor to control the audit work and review the progress of the audit.
a. Audit program c. Engagement letter.
b. Progress flowchart d. Time and Expense Summary
67. The International standard on auditing (ISA) issued a revised draft of audit opinion that will be used in any assurance
engagement, the basic difference of this report to the currently used draft of audit opinion under Philippine standard on
Auditing include(s):
a. Audit opinion is supported by the concept of reasonable assurance right after the opinion paragraph which is the
first paragraph in the new opinion.
b. Going concern assumption and assessment is no longer included in the face of the opinion but fully disclosed in the
notes to financial statement.
c. Both A and B
d. Neither A nor B
68. The risk of incorrect acceptance and the risk of assessing control risk too low relate to the
a. Preliminary estimates of materiality levels. c. Efficiency of the audit.
b. Allowable risk of tolerable misstatement. d. Effectiveness of the audit.
69. In conducting a substantive test of an account balance, an auditor hypothesizes that no material misstatement exists.
The risk that sample results will support the auditor’s hypothesis when a material misstatement actually does exist is the
risk of
a. Incorrect rejection c. Alpha error
b. Incorrect acceptance d. Type I error
71. According to Philippine Standard on Auditing, the procedures employed in doing compilation are:
a. Designed to enable the accountant to express a limited assurance.
b. Designed to enable the accountant to express a negative assurance.
c. Not designed to enable the accountant to express any form of assurance.
d. Less extensive than review procedures but more extensive than agreed-upon procedures.
72. What type of assurance would you expect to see for an audit opinion on the fairness of financial statements?
a. No assurance. c. Negative assurance.
b. Limited assurance. d. Positive assurance.
73. What type of assurance would you expect to see for a compilation of financial statement information?
a. No assurance. c. Negative assurance.
b. Limited assurance. d. Positive assurance.
Auditors perform audit procedures to obtain audit evidence that will allow them to draw reasonable conclusions as to
whether the client’s financial statements are prepared and presented in conformity with Philippine Financial Reporting
Standards. Match each audit procedure with its type.
B. Tests of controls
a. Related parties
b. Related services
c. Decentralization
d. Centralized operations
79. The process of obtaining and evaluating audit evidence through a direct communication form a third party in response
to a request for information about a particular item affecting assertions made by management in the financial statements:
a. Confirmation
b. Inquiry
c. Vouching
d. Observation
80. An information in the financial statements regarding distinguished component or industry and geographical aspect of an
entity:
a. Segment information
b. Note to financial statements
c. Corresponding figures
d. Comparatives
81. The applications of auditing procedures using the computer as an audit tool refer to
a. Materiality level
b. Tolerable error
c. Tolerable deviations
d. Likely misstatements
84. The series of tasks and records of an entity by which transactions are processed as a means of maintaining financial
records:
1. The objective and scope of the audit and the extent of the auditor’s responsibilities to the client are best documented
in
a. A reference to the inherent limitation of an audit that some material misstatements may remain undiscovered.
b. Identification of specific audit procedures that the auditor needs to undertake.
c. Description of any letters or reports that the auditor expects to submit to the client
d. Arrangements concerning the involvement of internal auditors and other client’s staff.
88. Which of the following least likely requires the auditor to send a new engagement letter?
a. An indication that the client misunderstands the objective and scope of the audit
b. Any revised or special terms of the engagement
c. A recent change in the audit firm’s management
d. Legal requirements and other government agencies’ pronouncements
89. The following are valid reasons why an auditor sends to his client an engagement letter:
A B C D
Avoid misunderstanding with respect to
engagement Yes Yes No Yes
Confirms the auditor’s of the appointment Yes Yes Yes No
90. Which of the following least likely influence the auditor’s decision to send separate engagement letter to a component of
parent entity client?
a. Legal requirements
b. Degree of ownership by parent
c. Location of the principal place of business of the component entity
d. Who appoints the auditor of the component
91. Which of the following is not a valid reason for a change of the engagement to a lower “level of assurance”?
a. Change in circumstances affecting the need for the service
b. Restriction on the scope of the engagement.
c. Misunderstanding as to the nature of the engagement originally requested
d. The client’s need is satisfied by an engagement that provides lower level of assurance
92. When a change in the type of engagement from higher to lower level of assurance is reasonably justified, the report
based on the revised engagement
93. Which of the following actions may be appropriate if the auditor is unable to agree to a change of the engagement and is
not permitted to continue the original engagement?
a. I, II c. II, III
b. I, III d. I, II, III
95. A basic objective of a CPA firm is to provide professional services that conform with professional standards.
Reasonable assurance of achieving this basic objective is provided through
96. When one auditor succeeds another, the successor auditor should request the
a. Client to instruct its attorney to send a letter of audit inquiry concerning the status of the prior year’s litigation,
claims, and assessments.
b. Predecessor auditor to submit a list of internal accounting control weaknesses that have not been corrected.
c. Client to authorize the predecessor auditor to allow a review of the predecessor auditor’s working papers.
d. Predecessor auditor to update the prior year’s report to the date of the change of auditors.
97. In connection with the element of professional development, a CPA firm’s system of quality control should ordinarily
provide that all personnel
98. A prospective client’s refusal to grant a CPA permission to communicate with the predecessor auditor will bear directly
on the CPA’s ability to
99. A CPA firm’s personnel partner periodically studies the CPA firm’s personnel advancement experience to ascertain
whether individuals meeting stated criteria are assigned increased degrees of responsibility. This is evidence of the CPA
firm’s adherence to prescribed standards of
a. Quality control.
b. Supervision and review.
c. Due professional care.
d. Fieldwork.
8. The quality control policy that states that audit work is to be assigned to personnel who have the degree of technical
training and proficiency required in the circumstances relates to
a. Delegation
b. Assignment
c. Professional requirement
d. Consultation
100. Which of the following is least likely considered a quality control procedure used to satisfy control policy on
consultation?
a. Identifies areas and specialized situations where consultation is required and encourage personnel to consult with or
in use authoritative sources on other complex matters.
b. Designates individuals as specialists to serve as authoritative sources and define their authority in consultative
situations.
c. Assigns an appropriate person or persons to be responsible for assigning personnel to audits.
d. Specifies the extent of documentation to be provided for the result of consultation in those areas and specialized
situations where consultation is required.
101. The auditor may continue to express unqualified opinion though there are modifications made in the audit report.
Which of the following situations, would the auditor likely modify his opinion?
A. The existence of multiple uncertainties that are adequately described in the notes to financial statements.
B. The prior year’s financial statements were audited by other CPAs.
C. An important subsidiary whose financial statements were included in the consolidated financial statements were
audited by other CPAs.
D. A substantial doubt about the client’s ability to continue as a going concern that is adequately disclosed in the
financial statements.
103. Which of the following is not a reason to issue a modified audit report with opinion other than unqualified opinion?
A. The scope of the auditor’s work is restricted by the client.
B. The amount of inventories at cost as presented in the balance sheet significantly exceeded their market values.
C. Certain significant matter is omitted from either the financial statements or notes to financial statements.
D. An adequately disclosed significant uncertainty, the resolution of which is dependent upon future events and
which may affect the financial statements.
104. Which of the following situations may likely require a modified audit report with modified wordings or an emphasis
of matter paragraph?
A. A significant uncertainty, not adequately disclosed in the financial statements.
B. An audit of inventory is restricted by the client. The auditor was satisfied about the balance of the inventory by
doing alternative audit procedures.
C. A change in the application of generally accepted accounting principle that is justified.
D. A less than substantial doubt regarding the ability of the entity to continue as a going concern.
105. Which of the following circumstances may not result to a disclaimer of opinion?
A. A significant scope limitation in auditing the existence of inventories. The inventory amount comprises 75
percent of the total assets of the client.
B. The auditor believes that there are multiple uncertainties that are significant to the financial statements.
C. The accounts receivable of the client comprises 80 percent of the total assets. The auditor was instructed by the
client not to confirm account balances. The auditor, however, was satisfied by the results of alternative audit
procedures.
D. The auditor’s wife owns very a few number of common shares of the client.
107. An explanatory paragraph may be added to the audit report while at the same time issuing an unqualified opinion in
all cases except when:
A. the client has changed an accounting principle with the agreement of the auditor.
B. there is an immaterial departure from GAAP to ensure fair presentation with the agreement of the auditor.
C. the audit opinion is partly based on the work of another auditor.
D. the audit work has been significantly limited by management.
CASE ANALYSIS 1
Grinner and Greeter, CPAs, were engaged to perform an audit of the financial statements of Happy Inc. Happy's
management would not allow Grinner and Greeter to confirm any of the accounts receivable. All other auditing procedures
were performed as considered necessary by Grinner and Greeter and no issues were encountered. However, Grinner and
Greeter were unable to satisfy themselves with regard to the balance in accounts receivable.
Grinner and Greeter, CPAs, were performing their annual audit of Johnson Manufacturing Company. Johnson is currently
being sued for P2,000,000 related to an alleged defective product that they sold to a customer. Johnson's legal counsel has
told Tick and Tie that it is probable that Johnson will lose the suit and have to pay the entire P2,000,000. Johnson's
management has included information in the footnotes about the lawsuit. However, they have not recorded any loss or
liability in the income statement or balance sheet.
109. Which of the following is/are correct related to audit of Johnson Company?
i. Because Johnson Manufacturing has not properly recorded a loss and a liability, the financial statements are
materially misstated.
ii. Depending on the overall materiality and pervasiveness of the misstatement, the auditor should issue either a
unqualified or qualified opinion.
iii. The opinion paragraph would be modified to express either a qualified opinion or an adverse opinion.
A. i only B. i and ii only C. ii and iii only D. i and iii only E. iii only
A. i and ii only B. i and iii only C. ii and iii only D. i and iii only E. i, ii and iii only
CASE ANALYSIS 2
Murray & Co., CPAs completed the audit of Classic Inc., a public entity, on March 1, 2019 for a January 31, 2019 fiscal year
end. The audit team encountered no significant issues and found no material misstatements. Murray & Co. has audited
Classic Inc. for several years and past audits did not reveal any significant issues or material misstatements. The audit team
partner determined that a standard (unmodified) report on Classic Inc.'s financial statements was appropriate. The auditors'
report, drafted by I.M. Nu, a staff assistant, is provided below.
Audit Report
To the Board of Directors and Shareholders
Classic, Inc.
Opinion
In our opinion, the financial statements referred to above present fairly, the financial position of Classic, Inc. as of January
31, 2019 and the results of its operations and its cash flows for the year then ended.
Going Concern
The Company’s financial statements have been prepared using the going concern basis of accounting. The use of this basis
of accounting is appropriate unless management either intends to liquidate the Company or to cease operations, or has no
realistic alternative but to do so.
The objectives of our audit 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.
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.
Based on the above information presented above, answer the following questions:
112. What is the correct title of the report to be issued?
A. The Indipendent Auditors Report
B. Independent Auditors Report
C. Independent Auditor’s Report
D. Independent’s Auditors Report
E. The Report on Independent Audit
113. When shall the sub-title “Report on the Audit of the Financial Statements” is used?
A. It is always used and required by the revised ISA700/PSA700.
B. It is used when there is a report on other legal and regulatory requirements.
C. It is used when the auditor is having an emphasis in an opinion as included in the Key Audit matters.
D. It is used when the Going Concern assumption is included in the Key Audit Matters.
114. Which of the following is incorrect regarding the Auditors responsibility section of the report?
A. The second paragraph omits the phrase regarding the auditor's judgment.
B. The sentence indicating that the audit evidence is sufficient and appropriate to provide a basis for the opinion has
been omitted.
C. The reasonable assurance and its definition were omitted.
D. The absolute assurance was indicated as result of performing the audit is not required but might be indicated.
118. Report on Other Legal and Regulatory Requirements might include which of the following?
A. The supplementary information on taxes, duties, licenses and fees in Notes to the Financial Statements is presented
for the purpose of filing with the Bureau of internal Revenue and is not required part of the basic financial
statements.
B. The purpose of forming an opinion on the basic financial statements taken at individual level.
C. The information has not been subjected to the auditing procedures applied in our audit of the basic financial
statements.
D. The information that are not fairly stated, in all material respects, in relation to the basic financial statements taken
as a whole.
E. All of them are included.
119. Which of the following is required to be presented in the report issued by the auditor under the name of the signing
partner?
i. CPA Certificate No. 863736
ii. SEC Accreditation No. 06364-AR-2 (Group B), March 11, 2019, valid until March 10, 2021
iii. PTR No. 34940019, January 2, 2017, Makati City
iv. Tax Identification No. 121-312-129-000
A. i only B. i and ii only C. i, ii and iii only D. ii,iii and iv only E. i, ii, iii and iv
120. When a previously expressed opinion is updated from qualified to unmodified, the auditors report on comparative
financial statements should:
A. not modify the previously expressed opinion or refer to factors affecting the opinion on the prior-years' financial
statements.
B. update the opinion expressed on the prior-years' financial statements but provide no explanation for the updated
opinion.
C. not modify the previously expressed opinion but include a reference to the footnote describing the factors affecting
the opinion on the prior-years' financial statements.
D. update the previously expressed opinion and explain the reasons for the change, including a reference to the
footnote describing the change.