POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Sta. Mesa Manila

AUDITING THEORY

- FORGET ME NOT -

Philippine Accountancy Act of 2004

SEC. 11. Grounds for Suspension or Removal of Members of the Board. – 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 this Act and its implementing rules and regulations or the Certified Public
Accountant’s Code of Ethics and the technical and professional standards of practice for certified public accountants;

(c) Final judgment of crimes involving moral turpitude; and

(d) Manipulation or rigging of the certified public accountant’s 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.

1. 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.

SEC. 18. Failing Candidates to Take Refresher Course - Any candidate who fails in two (2) complete Certified Public
Accountant Board Examinations shall be disqualified from taking another set of examinations unless he/she submits
evidence to the satisfaction of the Board that he/she enrolled in and completed at least twenty-four (24) units of subject
given in the licensure examination.

SEC. 19. Oath. - All successful candidates in the examination shall be required to take an oath of profession before any
member of the Board or before any government official authorized by the Commission or any person authorized by law
to administer oaths upon presentation of proof of his/her qualification, prior to entering upon the practice of the
profession.

SEC. 20. Issuance of Certificates of Registration and Professional Identification Card. – A Professional Identification Card
bearing the registration number, date of issuance, expiry date, duly signed by the chairperson of the Commission, shall
likewise be issued to every registrant renewable every three (3) years (par. 2).

SEC. 22. Indication of Certificate of Registration, Identification Card and Professional Tax Receipt. - The certified public
accountant shall be required to indicate his/her certificate of registration number, and date of issuance, the duration of
validity, including the Professional Tax Receipt number on the documents he/she signs, uses or issues in connection with
the practice of his/her profession.

2. Which of the following is/are TRUE?

I. Any candidate who fails in two (2) complete Certified Public Accountant Board Examinations shall be disqualified
from taking another set of examinations.
II. All successful candidates in the examination shall be required to take an oath of profession before the chairman
of the commission or before any government official authorized by the Board or any person authorized by law to
administer oaths upon presentation of proof of his/her qualification, prior to entering upon the practice of the
profession.
 III. A Professional Identification Card bearing the registration number, date of issuance, expiry date, duly signed by
the chairperson of the Commission and members of the boards, shall likewise be issued to every registrant
renewable every three (3) years.
IV. The certified public accountant may indicate his/her certificate of registration number, and date of issuance, the
duration of validity, including the Professional Tax Receipt number on the documents he/she signs, uses or
issues in connection with the practice of his/her profession.
a. I only b. I and II only c. I, II and III only d. I, II, III and IV

SEC. 7. Term of Office. - The Chairman and members of the Board shall hold office for a term of three (3) years. Any
vacancy occurring within the term of a member shall be filled up for the unexpired portion of the term only. No person
who has served two (2) successive complete terms shall be eligible for reappointment until the lapse of one (1) year.
Appointment to fill up an unexpired term is not to be considered as a complete term.

Provided that no person shall serve in the Board for more than 12 years (Sec. 7, IRR 9298).

Sec. 5 (A). The APO shall submit its nominations with complete documentation to the Commission not later than 60 days
prior to expiry of the term of an incumbent chairman or member.

Sec. 5. The Board shall elect a vice-chairman from among its members for a term of one year.

3. 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

4. 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

Philippine Framework for Assurance Engagements

5. An independent professional services that improve the context or quality of information for decision purposes.
a. compilation
b. auditing
c. Assurance service
d. Consultancy

The Framework does not apply to other services provided by auditors such as taxation, consultancy, and financial and
accounting advice (Par. 5, Philippine Standard on Auditing 120, FRAMEWORK OF PHILIPPINE STANDARDS ON AUDITING).

6. The framework for auditing and related services as addressed by PSA excludes
a. Review
b. Compilation
c. Tax services
d. Agreed upon procedure

An attitude of professional skepticism means the practitioner makes a critical assessment, with a questioning mind, of
the validity of evidence obtained and is alert to evidence that contradicts or brings into question the reliability of
documents or representations by the responsible party (par. 40, PHILIPPINE FRAMEWORK FOR ASSURANCE
ENGAGEMENTS).

7. Professional skepticism requires auditors to possess a(n) ______ mind.

a. introspective b. questioning c. intelligent d. unbelieving
8. 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.

a. Only I is correct b. Only II is correct c. Both I and II are correct d. No answer

9. 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

Types of Audit

Financial Audit Compliance Audit Operational Audit

That the organization has That the organization’s
That the financial statements
Assertions complied with laws, activities are conducted
are fairly presented
regulations or contracts. effectively and efficiently
Laws, regulations, and Objectives set by the board of
Criteria PFRS
contracts directors
Opinion whether the financial Recommendations or
Reports on degree of
Audit Report statements are fairly presented suggestions on how to
compliance
in conformity with PFRS improve operations
Auditors who
External Auditor Government Auditor Internal Auditor
generally performs

10. 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

11. 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.

a. Only I is correct b. Only II is correct c. Both I and II are correct d. No answer

PSA 120 Framework on Philippine Standards on Auditing

Audit

12. 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

13. 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.
Review Engagement

Par. 15. A review comprises inquiry and analytical procedures which are designed to review the reliability of an assertion
that is the responsibility of one party for use by another party.

14. 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

Par. 14. The objective of a review of financial statements is to enable an auditor to state whether, on the basis of
procedures which do not provide all the evidence that would be required in an audit, anything has come to the auditor's
attention that causes the auditor to believe that the financial statements are not prepared, in all material respects, in
accordance with an identified financial reporting framework.

15. Which of the following is an objective of a review engagement?

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.

Agreed Upon Engagement

Par. 17. In an engagement to perform agreed-upon procedures, an auditor3 is engaged to carry out those procedures of
an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on
factual findings. The recipients of the report must form their own conclusions from the report by the auditor. The report
is restricted to those parties that have agreed to the procedures to be performed since others, unaware of the reasons
for the procedures, may misinterpret the results.

16. Which of the following is true of the report based on agreed-upon-procedures?

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.

Compilation

Par. 18. In a compilation engagement, the accountant4 is engaged to use accounting expertise as opposed to auditing
expertise to collect, classify and summarize financial information.

17. 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.

18. The series of tasks and records of an entity by which transactions are processed as a means of maintaining financial
records:

a. Financial reporting systems

b. Accounting systems
c. Operating systems
d. Accounting and internal control systems
Level of Assurance

Evidence-gathering
Type of engagement Objective The assurance report
procedures
Reasonable assurance A reduction in Sufficient appropriate Description of the
engagement Assurance engagement evidence is obtained engagement
risk to an acceptably as part of a systematic circumstances, and a
low level in the engagement process positive form of
circumstances of the that includes: expression of the
engagement, as the conclusion (Paragraph
basis for a positive  Obtaining an 58)
form of expression of understanding of
the practitioner’s the engagement
conclusion (Paragraph circumstances;
11)
 Assessing risks;

 Responding to
assessed risks;

 Performing further
procedures using a
combination of
inspection,
observation,
confirmation,
recalculation, re-
performance,
analytical
procedures and
inquiry. Such
further procedures
involve substantive
procedures,
including , where
applicable,
obtaining
corroborating
information, and
depending on the
nature of the
subject matter,
tests of the
operating
effectiveness of
controls; and

 Evaluating the
evidence obtained
(Paragraphs 51 and
52)
Limited assurance A reduction in Sufficient appropriate Description of the
engagement assurance engagement evidence is obtained engagement
risk to a level that is as part of a systematic circumstances, and a
acceptable in the engagement process negative form of
circumstances of the that includes obtaining expression of the
engagement but where an understanding of conclusion (Paragraph
that risk is greater than the subject matter and 59)
for a reasonable other engagement
assurance engagement, circumstances, but in
as the basis for a which procedures are
negative form of deliberately limited
expression of the relative to a reasonable
 Evidence-gathering
Type of engagement Objective The assurance report
procedures
practitioner’s assurance engagement
conclusion (Paragraph (Paragraph 53)
11)

19. 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

20. 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.

21. 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.

22. 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.

Preliminary Engagement Activities

The auditor shall undertake the following activities at the beginning of the current audit engagement:

(a) Performing procedures required by PSA 220, “Quality Control for Audits of Historical Financial Information”
regarding the continuance of the client relationship and the specific audit engagement;

(b) Evaluating compliance with ethical requirements, including independence, as required by PSA 220; and

(c) Establishing an understanding of the terms of the engagement, as required by PSA 210, “Terms of Audit
Engagements.” (Ref: Para. A6-A8)

Acceptance or Continuance of Engagement

Predecessor Auditor

23. 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
a. Study and evaluate the client’s system of internal accounting control.
 b. Determine the integrity of management.
c. Determine the beginning balances of the current year’s balance sheet accounts.
d. Establish consistency in application of GAAP between years.

24. If permission from client to discuss its affairs with the proposed auditor is denied by the client, the predecessor
auditor should:
a. Keep silent of the denial.
b. Disclose the fact that the permission to disclose is denied by the client.
c. Disclose adequately to proposed auditor all noncompliance made by the client.
d. Seek legal advice before responding to the proposed auditor.

25. 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.

Par. 17. If the auditor is unable to agree to a change of the terms of the audit engagement and is not permitted by
management to continue the original audit engagement, the auditor shall:

a. Withdraw from the audit engagement where possible under applicable law or regulation; and
b. Determine whether there is any obligation, either contractual or otherwise, to report the circumstances to other
parties, such as those charged with governance, owners or regulators.

Philippine Standard on Auditing 210 (Redrafted), AGREEING THE TERMS OF AUDIT ENGAGEMENTS

26. 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?

I. Issue a disclaimer of opinion due to a significant scope limitation.

II. Auditor should withdraw from the engagement.
III. Consider whether there is any obligation to report to the board of directors or shareholders the circumstances
necessitating withdrawal
a. I c. II, III
b. I, II d. I, II, III

Having accepted an assurance engagement, a practitioner may not change that engagement to a non-assurance
engagement, or from a reasonable assurance engagement to a limited assurance engagement without reasonable
justification. A change in circumstances that affects the intended users’ requirements, or a misunderstanding concerning
the nature of the engagement, ordinarily will justify a request for a change in the engagement. If such a change is made,
the practitioner does not disregard evidence that was obtained prior to the change (Par 19, PHILIPPINE FRAMEWORK
FOR ASSURANCE ENGAGEMENTS).

27. 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

Engagement Letter

Par 10. Subject to paragraph 11, the agreed terms of the audit engagement shall be recorded in an audit engagement
letter or other suitable form of written agreement and shall include: (Ref: Para. A22-A25)

(a) The objective and scope of the audit of the financial statements;
(b) The responsibilities of the auditor;
(c) The responsibilities of management;
(d) Identification of the applicable financial reporting framework for the preparation of the financial statements; and
(e) Reference to the expected form and content of any reports to be issued by the auditor and a statement that there
may be circumstances in which a report may differ from its expected form and content.

Philippine Standard on Auditing 210 (Redrafted), AGREEING THE TERMS OF AUDIT ENGAGEMENTS
28. The objective and scope of the audit and the extent of the auditor’s responsibilities to the client are best
documented in
a. Independent auditor’s report
b. Audit engagement letter
c. Client’s Representation letter
d. Audit program

29. Which of the following is least likely included in an audit engagement letter?
a. The objective of financial reporting
b. Management responsibility for the financial statements
c. The form of any reports or other communication of the results of the engagement
d. Arrangement concerning the involvement of other auditors or experts in some aspects of the audit

30. An audit engagement letter least likely includes

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.

31. Which of the following is appropriately included in an audit engagement letter?

I. Because of the test nature and other inherent limitations of an audit, together with the inherent limitations of
any accounting and internal control system, there is an unavoidable risk that even some material
misstatements may remain undiscovered.
II. Our audit will be made with the objective of our expressing an opinion on the financial statements.
III. An audit also includes assessing the accounting procedures used and significant estimates made by
management.

a. I, II c. II, III
b. I, III d. I, II, III

Recurring Audits (Ref: Para. 13)

A28. The auditor may decide not to send a new audit engagement letter or other written agreement each period.
However, the following factors may make it appropriate to revise the terms of the audit engagement or to remind the
entity of existing terms:

• Any indication that the entity misunderstands the objective and scope of the audit.
• Any revised or special terms of the audit engagement.
• A recent change of senior management.
• A significant change in ownership.
• A significant change in nature or size of the entity’s business.
• A change in legal or regulatory requirements.
• A change in the financial reporting framework adopted in the preparation of the financial statements.
• A change in other reporting requirements.

32. Which of the following least likely requires the auditor to send a new engagement letter?
a. that the client misunderstands the objective and scope of the audit
b. Any revised or special terms of the engagement An indication
c. A recent change in the audit firm’s management
d. Legal requirements and other government agencies’ pronouncements

33. 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
Objective and scope of the audit Yes Yes Yes Yes
Assures CPA’s compliance to GAAS Yes No No Yes
Audit of Components

A25. When the auditor of a parent entity is also the auditor of a component, the factors that may influence the decision
whether to send a separate audit engagement letter to the component include the following:

• Who appoints the component auditor;

• Whether a separate auditor’s report is to be issued on the component;
• Legal requirements in relation to audit appointments;
• Degree of ownership by parent; and
• Degree of independence of the component management from the parent entity.

34. 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

Auditor’s Responsibility

35. 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.

Fraud and Error

Philippine Standard on Auditing 240 (Redrafted)
THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS

Par. 2. Misstatements in the financial statements can arise from either fraud or error. The distinguishing factor between
fraud and error is whether the underlying action that results in the misstatement of the financial statements is
intentional or unintentional

Par 6. The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting one
resulting from error. This is because fraud may involve sophisticated and carefully organized schemes designed to
conceal it, such as forgery, deliberate failure to record transactions, or intentional misrepresentations being made to the
auditor.

36. 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.

Par. 7. Furthermore, the risk of the auditor not detecting a material misstatement resulting from management fraud is
greater than for employee fraud, because management is frequently in a position to directly or indirectly manipulate
accounting records, present fraudulent financial information or override control procedures designed to prevent similar
frauds by other employees.

37. 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.
Par. 6. Collusion may cause the auditor to believe that audit evidence is persuasive when it is, in fact, false. The auditor’s
ability to detect a fraud depends on factors such as the skillfulness of the perpetrator, the frequency and extent of
manipulation, the degree of collusion involved, the relative size of individual amounts manipulated, and the seniority of
those individuals involved.

38. 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.

Par. 5. An auditor conducting an audit in accordance with PSAs is responsible for obtaining reasonable assurance that
the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error.

39. 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.

40. 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.

Communications To Management and With Those Charged With Governance

Par. 40. If the auditor has identified a fraud or has obtained information that indicates that a fraud may exist, the auditor
shall communicate these matters on a timely basis to the appropriate level of management in order to inform those
with primary responsibility for the prevention and detection of fraud of matters relevant to their responsibilities. (Ref:
Para. A59)

41. 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.

42. Which of the following is correct regarding suspicion of possible fraud?

a. The auditor should only communicate his suspicion if it is a material fraud.

b. In most cases where fraud is involved, it would be appropriate to report the matter to a level above that
responsible for the persons believes to be implicated.
c. The auditor must report his suspicion of possible occurrence of fraud to the supervisor of the person believed to
be implicated.
d. Where suspicion of fraud is not dispelled by the results of modified procedures, the auditor should assume that
financial statements are fairly presented.

43. 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?

a. The types of fraud or error.

b. The total assets of the client.
c. The likelihood that a particular type of fraud or error could have a material effect on the financial statements.
d. The likelihood of their occurrence
Compliance with Laws

44. 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.

Planning

45. Audit plan should

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

46. 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

47. The audit program should contain the following, except:

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

48. Audit program should set out

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

49. Which of the following would the auditor not consider when preparing the audit program?

a. Specific assessment to be provided by substance procedure.

b. Required level of assurance to be provided by substantive procedures.
c. Timing of test of controls and substantive procedures.
d. The type of opinion expressed in prior audit.

50. 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.

51. 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.
Audit Risk

52. 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

As the acceptable level of detection risk decreases, the assurance directly provided from substantive tests increases.
Hence, the auditor should design more effective audit procedures in order to achieve the desired level of assurance.

53. 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

Audit Documentation

54. 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

System of Quality Control

Elements of System of Quality Control (REA2LM)

 Relevant Ethical Requirements

 Engagement Performance
 Acceptance and Continuance of Client Relationships and Audit Engagements
 Assignment of Engagement Teams
 Leadership Responsibilities for Quality on Audits
 Monitoring

Under Philippine Standard on Quality Control (PSQC) 1, “Quality Control for Firms that Perform Audits and Reviews of
Historical Financial Information, and Other Assurance and Related Services Engagements,” a firm has an obligation to
establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel
comply with professional standards and regulatory and legal requirements, and that the auditors’ reports issued by the
firm or engagement partners are appropriate in the circumstances.
Quality control systems, policies and procedures are the responsibility of the audit firm. Under PSQC 1 (Redrafted), the
firm has an obligation to establish and maintain a system of quality control to provide it with reasonable assurance that:

a. The firm and its personnel comply with professional standards and regulatory and legal requirements; and

b. The reports issued by the firm or engagement partners are appropriate in the circumstances.

55. 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

a. A system of peer review.

b. Continuing professional education.
c. A system of quality controls.
d. Compliance with generally accepted reporting standards.

56. In connection with the element of professional development, a CPA firm’s system of quality control should ordinarily
provide that all personnel

a. Have the knowledge required to enable them to fulfill responsibilities assigned.

b. Possess judgment, motivation, and adequate experience.
c. Seek assistance from persons having appropriate levels of knowledge, judgment, and authority.
d. Demonstrate compliance with peer review directives.
57. 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.

58. 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

59. 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.

Sufficient Appropriate Audit Evidence

60. 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

Sampling

61. An advantage of using statistical sampling techniques is that such techniques

a. mathematically measure risk.
b. eliminate the need for judgmental decisions.
c. eliminate nonsampling risk.
d. have been established in the courts to be superior to judgmental sampling.

Type Substantive Testing Test of Control Effect

I Risk of Incorrect Rejection Risk of assessing control risk too High Efficiency of the audit
II Risk of Incorrect Acceptance Risk of assessing control risk too low Effectiveness of the audit

62. 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.

63. 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
 Sample Size = Relationship with Sample size

Confidence Level x Expected Population Deviation Direct

Tolerable Error Inverse

64. The sample size of a test of controls varies inversely with

Expected population
Deviation rate Tolerable rate
a. Yes Yes
b. No No
c. Yes No
d. No Yes

65. The maximum misstatements that may exist in a population that an auditor is willing to accept
a. Materiality level
b. Tolerable error
c. Tolerable deviations
d. Likely misstatements

66. Which of the following is not an element of nonsampling risk?

a. The auditor uses inappropriate procedures in auditing accounts receivables.
b. The use of unreasonably small sample size.
c. Misinterpretations of audit evidence.
d. Auditor fails to recognize the error in the sample.

Audit Procedure

The seven audit procedures under PSA 500 are the following (AEI 2OR2)

Analytical Par. A21. Analytical procedures consist of evaluations of financial information made by a study of
Procedure plausible relationships among both financial and non-financial data.

Par. A18. An external confirmation represents audit evidence obtained by the auditor as a direct
External
written response to the auditor from a third party (the confirming party), in paper form, or by
Confirmation
electronic or other medium.
Par. A22. Inquiry consists of seeking information of knowledgeable persons, both financial and
Inquiry nonfinancial, within the entity or outside the entity. Inquiry is used extensively throughout the audit
in addition to other audit procedures.

Par. A14. Inspection involves examining records or documents, whether internal or external, in
Inspection
paper form, electronic form, or other media, or a physical examination of an asset.

Par. A17. Observation consists of looking at a process or procedure being performed by others, for
Observation example, the auditor’s observation of inventory counting by the entity’s personnel, or of the
performance of control activities.

Par. A20. Reperformance involves the auditor’s independent execution of procedures or controls
Performance
that were originally performed as part of the entity’s internal control.

Par. A19. Recalculation consists of checking the mathematical accuracy of documents or records.
Recalculation
Recalculation may be performed manually or electronically.

67. 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
68. 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

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.

Type of Audit Procedure

A. Analytical review procedures

B. Tests of controls

C. Risk assessment procedures (other than analytical procedures)

D. Tests of details of account balances, transactions, or disclosures

69. Prepare a flowchart of internal control over purchases. C

70. Calculate the ratio of bad debt expense to credit sales. A

71. Determine whether disbursements are properly approved. B

72. Confirm accounts receivable. D

Test of Control
Philippine Standard on Auditing 330 (Redrafted)
THE AUDITOR’S RESPONSES TO ASSESSED RISKS

Par 4(b) Test of controls – An audit procedure designed to evaluate the operating effectiveness of controls in preventing,
or detecting and correcting, material misstatements at the assertion level.

73. 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.

74. 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.

75. The applications of auditing procedures using the computer as an audit tool refer to

a. Integrated test facility

b. Data-based management system
c. Auditing through the computer
d. Computer assisted audit techniques

Substantive Testing

Par 4(a) Substantive procedure – An audit procedure designed to detect material misstatements at the assertion level.
Substantive procedures comprise:

(i) Tests of details (of classes of transactions, account balances, and disclosures), and
(ii) Substantive analytical procedures.

Test of Details

76. Tests of details of balances are specific procedures intended to:

a. test for monetary errors in the financial statements.
b. prove that the accounts with material balances are classified correctly.
c. identify the details of the internal control system.
 d. prove that the trial balance is in balance.

Account Receivable

77. 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.

Inventory

78. 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).

Equity

79. 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.

Disclosure

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

Related Party

81. When an entity has the ability to control the other entity or exercise significant influence over the other entity in
making financial and operating decisions manifest:

a. Related parties
b. Related services
c. Decentralization
d. Centralized operations

Representation Letter
Philippine Standard on Auditing 580 (Revised and Redrafted)
WRITTEN REPRESENTATIONS

Par. 4. Although written representations provide necessary audit evidence, they do not provide sufficient appropriate
audit evidence on their own about any of the matters with which they deal. Furthermore, the fact that management has
provided reliable written representations does not affect the nature or extent of other audit evidence that the auditor
obtains about the fulfillment of management’s responsibilities, or about specific assertions.

82. 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.
Par. A4. Written representations may therefore be requested from the entity’s chief executive officer and chief financial
officer, or other equivalent persons in entities that do not use such titles.

83. 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.

Date of and Period(s) Covered by Written Representations

Par. 14. The date of the written representations shall be as near as practicable to, but not after, the date of the auditor’s
report on the financial statements. The written representations shall be for all financial statements and period(s)
referred to in the auditor’s report. (Ref: Para. A17-A20)

84. Which of the following auditing procedures is ordinarily performed last?

a. Reading of the minutes of the director's meetings.
b. Confirming accounts payable.
c. Obtaining a management representation letter.
d. Testing of the purchasing function.

Going Concern Assumption

85. 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.

86. The management’s assessment of the entity’s ability to continue as a going concern covers a period of:

a. Not longer than 12 months from balance date.

b. At least 12 months from the balance sheet date.
c. Not longer than 12 months from the date of audit report.
d. At least 12 months from the date of audit report.

87. 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?

a. The auditor should inquire of management of indication of those events or conditions.

b. The auditor should make extensive analytical procedures.
c. Consider those events that may require disclaimer of opinion.
d. Analyze the ability of the company to generate cash flows.

Forming an Audit Opinion

Auditor’s Report
Par. 20. The auditor’s report shall be in writing. (Ref: Para. A13–A14)

Date of the Auditor’s Report

Par. 48. The auditor’s report shall be dated no earlier than the date on which the auditor has obtained sufficient
appropriate audit evidence on which to base the auditor’s opinion on the financial statements, including evidence that:
(Ref: Para. A61–A64)

(a) All the statements that comprise the financial statements, including the related notes, have been prepared; and
(b) Those with the recognized authority have asserted that they have taken responsibility for those financial statements.

88. An audit report should be dated as of

a. the date the report is delivered to the entity audited.
b. the date of the last day of fieldwork.
 c. the balance sheet date of the latest period reported on.
d. the date a letter of audit inquiry is received from the entity's attorney of record.

89. 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.

90. 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

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.

Based on the above information answer the following:

91. Which of the following is/are incorrect related to audit of Happy Inc.?
A. There is a client imposed a scope limitation on Grinner and Greeter audit of financial statement.
B. An additional paragraph would be added to describe the scope limitation.
C. The opinion paragraph would be modified to express a qualified opinion.
D. Although it is possible to issue a qualified opinion for a less material scope limitation, disclaimers of opinion are
more appropriately to issue.
E. The Auditor's Responsibility section would be modified to indicate that Grinner and Greeter were not able to
obtain sufficient appropriate evidence.

92. 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

93. Which of the following is/are true?

i. Scope limitations are situations in which auditors and management are unable to obtain sufficient
appropriate evidence to support the conclusion.
ii. Circumstance-imposed scope limitations are those limitations that are beyond the auditors' or client's
control.
iii. client-imposed scope limitations are based on deliberate refusals by the client to provide access to evidence
or otherwise limit the auditors' application of auditing procedures.
A. i only B. i and ii only C. ii and iii only D. i and iii only E. iii only
94. Which of the following is/are correct?
i. . If alternative procedures are available, a standard (unmodified) report is issued.
ii. If the scope limitation is material, but not pervasive, a qualified opinion is issued.
iii. If the scope limitation is material and pervasive, a disclaimer of opinion is issued.

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.

Report on the Audit of the Financial Statements

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.

Basis for Opinion

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

Key Audit Matters

Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a
whole. Our opinion on the financial statements is not modified with respect to any of the key audit matters described
below, and we do not express an opinion on these individual matters.

Valuation of Financial Instruments

The Company’s disclosures about its structured financial instruments are included in Note 5. The Company’s investments
in structured financial instruments represent 25% of the total amount of its financial instruments. Because the valuation
of the Company’s structured financial instruments is not based on quoted prices in active markets, there is significant
measurement uncertainty involved in this valuation.

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.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with
Philippine Accounting Standards and Philippine Financial Reporting Standards.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in
accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to
obtain absolute assurance about whether the financial statements are free from material misstatement.

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.
 Murray & Co, CPAs
January 31, 2019

Title
Par. 21. The auditor’s report shall have a title that clearly indicates that it is the report of an independent auditor. (Ref:
Para. A15)

Based on the above information presented above, answer the following questions:
95. 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

96. 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.

Auditor’s Responsibilities for the Audit of the Financial Statements

Par. 37(b) State that reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with PSAs will always detect a material misstatement when it exists;

97. 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.

Date of the Auditor’s Report

Par. 48. The auditor’s report shall be dated no earlier than the date on which the auditor has obtained sufficient
appropriate audit evidence on which to base the auditor’s opinion on the financial statements, including evidence that:
(Ref: Para. A61–A64)

(a) All the statements that comprise the financial statements, including the related notes, have been prepared; and
(b) Those with the recognized authority have asserted that they have taken responsibility for those financial statements.

98. What should be the date of the report?

A. March 1
B. December 31
C. January 31
D. April 15

Addressee
Par. 22. The auditor’s report shall be addressed, as appropriate, based on the circumstances of the engagement. (Ref:
Para. A16)

99. The addressee of the report shall include?

A. The name of the Chairman of the Board of Directors.
B. The address of the Company’s president.
C. The mailing address of the Company.
D. Only the appropriate addressee or person who requests the report.

Par. 37. This section of the auditor’s report shall: (Ref: Para. A45)

(a) State that the objectives of the auditor are to:

(i) Obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error; and
(ii) Issue an auditor’s report that includes the auditor’s opinion. (Ref: Para. A46)
 (b) State that reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with PSAs will always detect a material misstatement when it exists; and

100. How should reasonable assurance be included in the report?

A. As part of the basis for opinion immediately after the description of sufficient and appropriate audit evidence.
B. As part of auditors responsibility immediately after the description of misstatement that could arise in
performance of the audit.
C. As part of key audit matters included in the going concern matters describing how it affects the measures of
evidence in performance of audit.
D. As part of auditors responsibility immediately after the description of the objectives of the audit.
E. As part of key audit matters describing the matters arising from audit that affects opinion of the auditor in giving
an assurance.

101. 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.

Signature of the Auditor (Ref: Para. 46)

Par. A59. The auditor’s signature is either in the name of the audit firm, the personal name of the auditor or both, as
appropriate for the particular jurisdiction. In addition to the auditor’s signature, in certain jurisdictions, the auditor may
be required to declare in the auditor’s report the auditor’s professional accountancy designation or the fact that the
auditor or firm, as appropriate, has been recognized by the appropriate licensing authority in that jurisdiction.*

*In the Philippines, SRC Rule 68, As Amended, of the Securities and Exchange Commission prescribes the manner of
signing the auditor’s report and requires the indication of related auditor registration / accreditation / licensing
information.

102. 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

Auditor’s Opinion

23. The first section of the auditor’s report shall include the auditor’s opinion, and shall have the heading “Opinion.”

24. The Opinion section of the auditor’s report shall also:

(a) Identify the entity whose financial statements have been audited;
(b) State that the financial statements have been audited;
(c) Identify the title of each statement comprising the financial statements;
(d) Refer to the notes, including the summary of significant accounting policies; and
(e) Specify the date of, or period covered by, each financial statement comprising the financial statements. (Ref:
Para. A17–A18)
 Unqualified
PHILIPPINE STANDARD ON AUDITING 700 (REVISED)
FORMING AN OPINION AND REPORTING ON FINANCIAL STATEMENTS

(c) Unmodified opinion – The opinion expressed by the auditor when the auditor concludes that the financial statements
are prepared, in all material respects, in accordance with the applicable financial reporting framework.7

103. 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.

104. 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.

Emphasis of a Matter Paragraph

Assertions Disclosure Opinion

Uncertainties
Going Concern
Early Application of New Accounting
Adequately Disclosed in the notes to Unmodified Opinion with emphasis of
Standards
the financial statements a matter paragraph
Major Catastrophe
Subsequent Discovery of Facts
Special Purpose FS

105. 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.

106. 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.

107. 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.
 108. 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....”

a. Explanatory paragraph to adverse opinion.

b. Explanatory paragraph to a qualified opinion.
c. Emphasis of matter about the going concern problems of the entity.

Modification to the Opinion

Evidence Material but not Pervasive Material and Pervasive

√ Material Misstatement Qualified Opinion Averse Opinion

ꭙ Scope Limitation Qualified Opinion Disclaimer of Opinion

Material misstatement may arise from Scope limitation arises when the auditor is

• Inappropriate accounting policy selected • Unable to perform necessary audit procedures

• Misapplication of selected accounting policy • Unable to obtain sufficient appropriate evidence
• Inappropriate or inadequate disclosure about an assertion

Qualified Opinion
Par. 7. The auditor shall express a qualified opinion when:

a. The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in
the aggregate, are material, but not pervasive, to the financial statements; or
b. The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor
concludes that the possible effects on the financial statements of undetected misstatements, if any, could be
material but not pervasive.

109. 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:

a. Unqualified opinion with explanatory paragraph.

b. Qualified or adverse opinion.
c. Qualified or disclaimer of opinion.
d. Adverse or disclaimer of opinion.

110. 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):

a. Unqualified opinion with explanatory paragraph.

b. Qualified or adverse opinion.
c. Qualified or disclaimer of opinion.
d. Disclaimer of opinion.

111. 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.

112. 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.

113. In which of the following situations would qualified opinion be inappropriate?

A. Financial statements are materially misstated.
B. A doubt that is more than substantial about the ability of the company to continue as a going concern.
C. A significant scope limitation.
D. The management insisted of not attaching the statement of cash flows.

114. Whenever an auditor issues a qualified report, he or she

A. must use the term “subject to” in the opinion paragraph.
B. may use either the terms “subject to” or “ except for” in the opinion paragraph, depending on the nature of
the qualification.
C. must use the term “except for” in the opinion paragraph.
D. must not use the terms “subject to” or “except for” in the opinion paragraph.

Adverse Opinion
Par. 8. The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit
evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the
financial statements.

115. 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.

Disclaimer of Opinion
Par. 9. The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit evidence
on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive.

Par. 10. The auditor shall disclaim an opinion when, in extremely rare circumstances involving multiple uncertainties, the
auditor concludes that, notwithstanding having obtained sufficient appropriate audit evidence regarding each of the
individual uncertainties, it is not possible to form an opinion on the financial statements due to the potential interaction
of the uncertainties and their possible cumulative effect on the financial statements.

116. 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.

117. 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.

118. 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.

119. 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

120. 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.

121. 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.

Comparatives/Corresponding Information

122. 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.

123. 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.