Chapter 8 Risk-Based Audit of Financial Statements:

Reporting
1. When a publicly held company refuses to include in its audited financial statements any of the
segment information that the auditor believes is required, the auditor should express a/an
a. Disclaimer of opinion because of the significant scope limitation.
b. Adverse opinion because of a significant uncertainty.
c. Unmodified opinion with an Emphasis of Matter paragraph emphasizing the matter.
d. Qualified opinion because of inadequate disclosure.

2. Which of the following audit procedures would most likely cause an auditor to have substantial
doubt about an entity’s ability to continue as a going concern?
a. Restrictions on the disposal of principal assets are present.
b. Usual trade credit from suppliers is denied.
c. Significant related party transactions are pervasive.
d. Arrearages in principal stock dividend are paid.

3. A written management representation letter is most likely to be an auditor’s best source of

corroborative information of a client’s intention to
a. Settle an outstanding lawsuit for an amount less than the accrued loss contingency.
b. Discontinue a line of business.
c. Terminate an employee pension plan.
d. Make a public offering of its ordinary share capital.

4. The written representations shall be in the form of a representation letter addressed to the
a. Entity’s management
b. Auditor
c. Entity’s chief executive officer
d. Entity’s chief financial officer

5. In which of the following circumstances would an auditor most likely meet with the client’s legal
counsel to discuss the likely outcome of the litigation and claims?
I. The auditor determines that the matter is a significant risk.
II. There is a disagreement between management and the entity’s legal counsel.
III. The subject matter of the litigation is complex.

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

6. A client is presenting comparative (two-year) financial statements. Which of the following is

correct concerning responsibilities of a continuing auditor?
a. The auditor may issue either one audit report on both presented years, or two audit reports, one
on each year.
b. The auditor should issue one audit report, but only on the most recent year.
c. The auditor should issue two audit reports, one on each year.
d. The auditor should issue one audit report that is on both presented years.

7. The following statements relate to the date of the auditor’s report. Which is false?
 a. The auditor should date the report as of the completion date of the audit.
b. The date of the auditor’s report should not be earlier than the date on which the financial
statements are signed or approved by management.
c. The date of the auditor’s report should not be later than the date on which the financial
statements are signed or approved by management.
d. The date of the auditor’s report should always be later than the date of financial statements
(i.e., the balance sheet date).

8. A client makes test counts on the basis of a statistical plan. The auditor observes such counts as are
deemed necessary and is able to become satisfied as to the reliability of the client’s procedures. In
reporting on the results of the audit, the auditor
a. Must qualify the opinion if the inventories were material.
b. Can express an unmodified opinion.
c. Must comment in Emphasis of Matter paragraph as to the inability to observe year-end
inventories.
d. Is required to disclaim an opinion if the inventories were material.

9. When an audit is made in accordance with PSAs, the auditor should always
a. Observe the taking of physical inventory on the balance sheet date.
b. Obtain certain written representations from management.
c. Employ analytical procedures as substantive to obtain evidence about specific assertions
related to account balances.
d. Document the understanding of the client’s internal control and the basis for all conclusions
about the assessed level of control risk for financial statement assertions.

10. After issuing a report, an auditor has no obligation to make continuing inquiries or perform other
procedures concerning the audited financial statements, unless
a. Final determinations or resolutions are made of contingencies that had been disclosed in the
financial statements.
b. Information about an event that occurred after the date of the auditor’s report comes to the
auditor’s report comes to the auditor’s attention.
c. The control environment changes after issuance of the report.
d. Information, which existed at the report date and may affect the report comes to the
auditor’s attention.

11. Under PSA 580 (Written Representations), the auditor is required to obtain audit evidence that
management
I. Has fulfilled its responsibility for the fair presentation of the financial statements in
accordance with applicable financial reporting framework
II. Has provided the auditor with all relevant information and access as agreed in the terms of
the audit engagement

a. I only
b. II only
c. Both I and II
d. Neither I nor II

12. Which of the following conditions or events most likely would cause an auditor to have substantial
doubt about an entity’s ability to continue as a going concern?
a. Cash flows from operating activities are negative.
b. Stock dividends replace annual cash dividends.
 c. Significant related party transactions are pervasive.
d. Research and development projects are postponed.

13. Which of the following would not necessarily be a related party transaction?
a. A purchase from another corporation that is controlled by the corporation’s chief shareholder.
b. A loan from the corporation to a major shareholder.
c. Sale of land to the corporation by the spouse of a director.
d. A sale to another corporation with a similar name.

14. A CPA engaged to audit financial statements observes that the accounting for a certain material is
not in accordance with the applicable financial reporting framework, although the departure is
prominently disclosed in a note to the financial statements. The CPA should
a. Express an unmodified opinion but insert an Emphasis of Matter paragraphs emphasizing the
matter by reference to the note.
b. Disclaim an opinion.
c. Not allow the accounting treatment for this item to affect the type of opinion because the
departure from the requirement of the applicable financial reporting framework was disclosed.
d. Modify the opinion because of the departure from the requirement of the applicable
financial reporting framework.

15. Which of the following audit procedures would most likely assist an auditor in identifying
conditions and events that may indicate there could be substantial doubt about an entity’s ability to
continue as a going concern?
a. Confirmation of bank balances.
b. Confirmation of accounts receivable from major customers.
c. Reconciliation of interest expense with debt outstanding.
d. Review of compliance with terms of debt agreements.

16. When audited financial statements are presented in a document (e.g., annual report) containing
other information, the auditor
a. Should read the other information to consider whether it is inconsistent with the audited
financial statements.
b. Has no responsibility for the other information because it is not part of the basic financial
statements.
c. Has an obligation to perform auditing procedures to corroborate the other information.
d. Is required to express a qualified opinion if the other information has a material misstatement of
fact.

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

a. I only
b. II only
c. Both I and II
d. Neither I nor II

18. An auditor should obtain evidence relevant to all of the following factors concerning third-party
litigation against a client except the
 a. Jurisdiction in which the matter will be resolved.
b. Existence of a situation indicating an uncertainty as to the possible loss.
c. Probability of an unfavorable outcome.
d. Period in which the underlying cause for legal action occurred.

19. The auditor is required to perform procedures designed to obtain sufficient appropriate evidence to
identify all events that may require adjustment of, or disclosure in, the financial statements up to
the
a. Date of the auditor’s report.
b. Date of approval of the financial statements.
c. Date the financial statements are issued.
d. Date of the financial statements.

20. Which of the following phrases would an auditor most likely include in the auditor’s report when
expressing a qualified opinion because of inadequate disclosure?
a. Do not present fairly in a material respects.
b. Except for the omission of the information included in the Basis for Qualified Opinion
paragraph.
c. With foregoing explanation of these omitted procedures.
d. Subject to the departure from PFRS, as described above.

21. LEONOR CO.’s financial statements adequately disclose uncertainties that concern future events,
the outcome of which are not susceptible to reasonable estimation. The auditor’s report should
include:
a. An unmodified opinion
b. A “subject to” qualified opinion
c. An “except for” qualified opinion
d. An adverse opinion

22. The auditor should consider the status of legal matters up to the
a. Balance sheet date
b. Date of the auditor’s report
c. Date of approval of the financial statements
d. Date of issuance of the financial statements

23. When considering the use of management’s written representations as audit evidence about the
completeness assertion, an auditor should understand that such representations,
a. Constitute sufficient appropriate evidence to support the assertion when considered in
combination with a sufficiently low assessed level of control risk.
b. Are not part of the audit evidence considered to support the assertion.
c. Replace a low assessed level of control risk as audit evidence to support the assertion.
d. Complement, but do not replace, substantive tests designed to support the assertion.

24. Which of the following should be considered when forming an opinion on the audited financial
statements?
I. Whether sufficient appropriate evidence has been obtained.
II. Whether uncorrected misstatements are material, individually or in aggregate
III. The qualitative aspects of the entity’s accounting practices, including indicators of possible bias
in management’s judgments.

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

25. The primary reason an auditor requests that letters of inquiry be sent to a client’s attorneys is to
provide the auditor with
a. A description and evaluation of litigation, claims, and assessments that existed at the balance
sheet date.
b. The attorneys’ opinion of the client’s historical experiences in recent similar litigation.
c. Corroboration of the information furnished by management about litigation, claims, and
assessments.
d. The probable outcome of asserted claims and pending or threatened litigation.

26. In which of the following circumstances would an auditor usually choose between expressing a
qualified opinion or disclaiming an opinion?
a. Departure from the requirements of the applicable financial reporting framework.
b. Unreasonable justification for a change in accounting principle.
c. Inability to obtain sufficient appropriate evidence.
d. Inadequate disclosure of accounting policies.

27. Which of the following is included in the introductory paragraph of the auditor’s report?
a. Identification of the financial statements audited, including the date of and period covered
by the financial statements
b. A statement that the financial statements are the responsibility of the entity’s management.
c. A statement that the audit was conducted in accordance with the Philippine Standards on
Auditing.
d. A statement that the responsibility of the auditor is to express an opinion on the financial
statements based on the audit.

28. Which of the following event occurring after the issuance of an auditor’s report most likely would
cause the auditor to make further inquiries about the previously issued financial statements?
a. A technological development that could affect the entity’s future ability to continue as a going
concern.
b. The entity’s sale of a subsidiary that accounts for 30% of the entity’s consolidated sales.
c. The discovery of information regarding a contingency that existed before the financial
statements were issued.
d. The final resolution of a lawsuit disclosed in the notes to the financial statements.

29. Management’s refusal to give the auditor permission to communicate with the entity’s legal counsel
is most likely to lead to
a. An adverse opinion.
b. A qualified opinion or an adverse opinion.
c. An unmodified opinion.
d. A qualified opinion or a disclaimer of opinion.

30. Harold, CPA, believes there is substantial doubt about the ability of Jersamtan Co. to continue as a
going concern for a reasonable period of time. In evaluating Jersamtan’s plans for dealing with the
adverse effects of future conditions and events, Harold most likely would consider, as a mitigating
factor, Jersamtan’s plans to
a. Postpone expenditures for research and development projects.
b. Purchase production facilities current being leased from a related party.
 c. Strengthen internal controls over cash disbursements.
d. Discuss with lenders the terms of all debt and loan agreements.

31. Which of the following procedures should be performed by the auditor to determine the
completeness of information provided by those charged with governance and management
identifying the names of all known related parties?
I. Review prior year’s working papers for names of known related parties.
II. Inquire as to the affiliation of those charged with governance and officers with other entities.
III. Review minutes of the meetings of shareholders and those charged with governance.

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

32. If a company’s external auditor expresses an unmodified opinion as a result of the audit of the
company financial statements, readers of the audit report can assume that
a. The external auditor found no fraud.
b. The company is financially sound and the financial statements are accurate.
c. Internal control is effective.
d. The auditor concludes that the financial statements are prepared, in all material respects,
in accordance with the applicable financial reporting framework.

33. If a misstatement is immaterial to the financial statements of the company for the current period, but
is expected to have a material effect in future periods, it is appropriate to express a/an
a. Qualified opinion
b. Unmodified opinion
c. Disclaimer of opinion
d. Adverse opinion

34. The auditor should review information provided by those charged with governance and
management identifying
I. The names of all known related parties.
II. Related party transactions.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

35. The responsibility for the identification and disclosure of related parties and transactions with such
parties rests with the
a. Auditor
b. Entity’s management
c. Financial Reporting Standards Council (FRSC)
d. Securities and Exchange Commission (SEC)

36. An auditor is concerned with completing various phases of the audit after the balance sheet date.
This subsequent period extends to the date of the
a. Delivery of the auditor’s report to the client.
b. Auditor’s report.
 c. Final review of the audit working papers.
d. Public issuance of the financial statements.

37. The refusal of a client’s lawyer to provide a representation on the legality of a particular act
committed by the client is ordinarily
a. Proper ground to withdraw from the engagement.
b. Insufficient reason to modify the auditor’s report because of the lawyer’s obligation of
confidentiality.
c. Considered to be a scope limitation.
d. Sufficient reason to issue a “subject to” opinion.

38. The letter of audit inquiry should be

a. Prepared and sent by the auditor.
b. Prepared by management and sent by the auditor.
c. Prepared and sent by management.
d. Prepared by the auditor and sent by the management.

39. The primary source of information to be reported about litigations, claims, and assessments is the
a. Independent auditor
b. Client’s Management
c. Court records
d. Client’s lawyer

40. What type of opinion is most appropriate when management does not provide written
representations about its responsibility for the preparation of financial statements?
a. Qualified opinion
b. Disclaimer of opinion
c. Adverse opinion
d. Unmodified opinion

41. Whenever there is a scope limitation, the appropriate response is to issue a/an
a. Qualified opinion
b. Adverse opinion
c. Disclaimer of opinion
d. Unmodified report, a qualification of scope and opinion or a disclaimer, depending on
materiality.

42. To distinguish it from reports that might be issued by others, such as by officers of the entity, the
board of directors, or from the reports of other auditors who may not have to abide by the same
ethical requirements as the independent auditor, the auditor’s report should have an appropriate
a. Addressee
b. Title
c. Signature
d. Opinion

43. Which paragraphs of an auditor’s report on financial statements should refer to Philippine Financial
Reporting Standards?
a. Introductory and Opinion
b. Auditor’s Responsibility and Management’s Responsibility
c. Introductory and Auditor’s Responsibility
d. Management’s Responsibility and Opinion
44. When a client will not permit inquiry of outside legal counsel, the audit report will ordinarily
contain a/an
a. Disclaimer of opinion.
b. Adverse opinion.
c. “Subject to” qualified opinion.
d. Unmodified opinion with an Emphasis of Matter paragraph.

45. The date of the written representation shall be

a. After the date of the auditor’s report.
b. After the date of approval of the entity's financial statements.
c. Before the entity’s financial statements are issued.
d. As near as practicable to, but not after the date of the auditor’s report on the financial
statements.