University of Mindanao - Main Campus (Matina, Davao City)

AUDIT 411

1)On January 2, 2011, the TANYA CO. received a notice from its primary suppliers that effective immediately all wholesale prices would be increased 10%. On the basis of the notice, TANYA revalued its December 31, 2010 inventory to reflect the higher costs. As a result, the statement of financial position reflects inventory stated at an amount higher than its net realizable value. The inventory constituted a material proportion of total assets; however, the effect of the revaluation was material to current assets but not to total assets of net income. In reporting on the company’s financial statements for the year ended December 31, 2010, in which inventory is valued at the adjusted amount, the auditor would most likely

1. 1. Express an unmodified opinion provided the nature of the adjustment and the amounts involved are disclosed in notes to the financial statements.
   2. Express a qualified opinion.
   3. Disclaim an opinion.
   4. Express an adverse opinion.

2. SAMATHA APARTMENTS CO. completed construction and began to lease a 100-unit apartment on May 28, 2009. During June, 50 units were leased, and an additional 30 units were leased in July 2010. During the month of May 2009, the company charged to expense P46,000 for the cost of advertising,

a grand opening party, and the advertising agency fee for planning the campaign. At December 31, 2010, the statement of financial position reflected P175,000 of deferred costs representing the initial direct costs incurred by the company including commissions and legal fees paid in negotiating the lease, and a note disclosed that the costs were being amortized over the term of the related lease.

During your audit of the company’s financial statements for the year ended December 31, 2010 (conducted in accordance with PSAs), no facts other than those described above came to your knowledge that would cause your opinion to be other than that the financial statements were presented fairly in accordance with Philippine Financial Reporting Standards.

What type of opinion should your report contain?

1. 1. An adverse opinion
   2. An unmodified opinion
   3. A disclaimer of opinion
   4. A qualified opinion.

3. When an auditor modifies an opinion because of inadequate disclosure, the auditor should describe the nature of the omission in a separate “Basis for Modification” paragraph and modify the

Auditor’s

4. Jervs, CPA, concludes that there is significant doubt about GARAY CO.’s ability to continue as a going concern. If Garay’s financial statements adequately disclose its financial difficulties, Jervs’ report should

5. Which sections of an auditor’s unmodified report on financial statements should refer to Philippine Standards on Auditing (PSA) and Philippine Financial Reporting Standards (PFRS)?

PSA                                                                        PFRS

1. 1. Management’s Responsibility    Opinion Paragraph

Auditor’s Responsibility

1. 2. Auditor’s Responsibility                Management’s Responsibility

Opinion Paragraph

1. 3. Opinion Paragraph                                          Management’s Responsibility
   4. Auditor’s Responsibility                Opinion Paragraph

6. In which of the following circumstances would an auditor most likely add an Emphasis of Matter paragraph to the auditor’s report while expressing an unmodified opinion?
   1. The auditor is asked to report on a single financial statement (e.g., a balance sheet).
   2. There is significant doubt about the entity’s ability to continue as a going concern.
   3. Management’s estimates of the effects of future events are unreasonable.
   4. Certain transactions cannot be tested because of management’s records retention policy.

7. When the financial statements contain material but not pervasive misstatements because the accounting policies selected are not consistent with the applicable financial reporting framework, the auditor should
   1. Express a qualified opinion and describe the matter giving rise to the modification in a separate paragraph.
   2. Express a qualified opinion and describe the matter giving rise to the modification within the opinion paragraph.
   3. Disclaim an opinion and describe the matter giving rise to the modification in a separate paragraph.
   4. Disclaim an opinion and describe the matter giving rise to the modification within the opinion paragraph.

8. Which of the following statements is correct with respect to an auditor’s report expressing an opinion on a specific element on a financial statement?
   1. The auditor who has expressed an adverse opinion on the financial statements as a whole can never express an unmodified opinion on a specific element in these financial statements
   2. The materiality determined for a specific element of a financial statements may be lower than the materiality determined for the entity’s complete set of financial statements
   3. Such a report can only be issued if the auditor is also engaged to audit the entire set of financial statements
   4. The attention devoted to the specific element is usually less than it would be if the financial statements as a whole were audited

9. An auditor may express an opinion on an entity’s accounts receivable balance even if the auditor has disclaimed an opinion on the financial statements taken as a whole provided the
   1. Report on the accounts receivable is presented separately from the disclaimer of opinion on the financial statements
   2. Auditor also reports on the current asset portion of the entity’s balance sheet
   3. Use of the report on the accounts receivable is restricted
   4. Report on the accounts receivable discloses the reason for the disclaimer of opinion on the financial statements

10. An emphasis of matter paragraph of an auditor’s report describes an uncertainty as follows:

Without qualifying our opinion, we draw attention to Note X to the financial statements. The Company is the defendant in a lawsuit alleging infringement of certain patent rights and claiming royalties and punitive damages. The company has filed a counter action and preliminary hearings and discovery proceeding on both actions are in progress. The ultimate outcome of the matter cannot presently be determined and non provision for any liability that may result has been made in the financial statements.

What type of opinion should the auditor express under these circumstances?

1. 1. Unqualified                                                                        c. “Subject to” qualified
   2. “Except for” qualified                                                     d. Disclaimer

11. Which of the following statements is a basic element of the auditor’s report?
    1. The auditor is responsible for the preparation and fair presentation of the financial statements
    2. The financial statements are consistent with those of the prior period
    3. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements

1. 4. The disclosures provide reasonable assurance that the financial statements are free of material misstatement

12. 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
    1. Must qualify the opinion if the inventories were material
    2. Can express an unqualified opinion
    3. Must comment in an emphasis of matter paragraph as to the inability to observe year-end inventories
    4. Is required to disclaim an opinion if the inventories were material

13. Which of the following terms is used in the standard to describe the effects on the financial statements of misstatements or the possible effects on the financial statements, if any, that are undetected due to an inability to obtain sufficient appropriate audit evidence?
    1. Persuasive                          b. Pervasive                                       c. Material                           d. Extensive

14. A limitation on the scope of the audit may arise from

1. Circumstances beyond the control of the entity
2. Circumstances relating to the nature and timing of the auditor’s work
3. Limitations imposed by management
   1. I and II only                                         c. I and III only
   2. II and III only                                      d. I, II and III

15. What are the concerns of an auditor when assessing whether comparative financial statements meet the requirements of the relevant financial reporting framework?

1. That prior period figures presented agree with the amounts and other disclosures presented in the prior or if necessary, appropriate adjustments and / or disclosures have been made
2. That accounting policies of the prior period are consistent with those of the current period
   1. Yes, Yes                b.   Yes, No                          c.   No, Yes                          d. No, No

16. When the comparatives are presented as comparative financial statements:
    1. The auditor should issue a report in which the comparatives are referred to when the comparatives are materially misstated
    2. The auditor is not required to identify the comparative in his report because his opinion applies only to the current year’s financial statements
    3. The auditor should issue a report in which the comparatives are specifically identified because the auditor’s opinion is expressed individually on the financial statements of each period presented
    4. The auditor is only required to specifically identified the comparatives when his opinion on the prior year’s financial statements is other than unqualified.

17. Which of the following is an incorrect statement about comparatives?
    1. The auditor may express a qualified, adverse of disclaimer of opinion with respect to one or more financial statements for one or more periods, while issuing a different report on other financial statements
    2. When reporting on the prior period financial statements in connection with the current year’s audit, if the opinion on such prior period financial statements is different from the opinion

previously expressed, the auditor should disclose the substantive reasons for the different opinion in the opening paragraph.

1. 3. The auditor may consider expressing an opening on prior period financial statement which is different from the opinion that he had previously expressed on such financial statements
   4. When the prior period financial statements are not audited, the incoming auditor should carry on appropriate procedures of verifying the opening balances

18. When the prior year’s financial statements, that are used as comparatives, were audited by other auditor, the incoming auditor should modify:
    1. The opening paragraph of the audit report          c. The scope paragraph of the audit report
    2. The opinion paragraph of the audit report            d. All the three paragraphs of the audit report

19. When an incoming auditor becomes aware of certain material misstatement in the prior periods comparative financial statements on which the predecessor auditor previously issued unmodified report, the incoming auditor should
    1. Modify the opening paragraph by referring to the predecessor auditor, the type of opinion issued and the date of the report
    2. Restate the financial statements of the prior period
    3. Discuss the matter with the management and, after having obtained management’s authorization, contract the predecessor auditor and propose that the prior period financial statements be restated
    4. Obtain management’s authorization for the revision of the prior year’s financial statements and include an emphasis of matter paragraph to describe such a revision made

20. Which of the following action by the incoming auditor on unaudited comparative financial statements is inappropriate to do?
    1. In situation where the incoming auditor identifies that the prior years unaudited financial statements are materially misstated, the auditor should revised them.
    2. The incoming auditor should state in the auditor’s report that the comparative financial statements are unaudited.
    3. The incoming auditor should carry out appropriate procedures regarding opening balances of the current period.
    4. Modify the audit report if such materially misstated prior years financial statements are not revised by the management.

21. A continuing auditor has just completed the audit of the entity. The audit report for the past tree years included an emphasis of matter paragraph that referred to a substantial doubt about the ability o0f the entity to continue as a going concern. At the middle of the current audit year, the major stockholder infused substantial capital that made the company stable. The continuing auditor should report on the comparative financial statements by:
    1. Updating the audit report by using a standard financial paragraph audit report
    2. Including an emphasis of matter paragraph that refers to prior years’ going concern problem
    3. Issue an unqualified opinion with an emphasis of matter paragraph that describes the steps the management did in solving its going concern problem
    4. Qualify the audit report due to questionable strategy of strengthening the entity’s financial stability.

22. An auditor’s report on comparative financial statements should be dated as of the date of the
    1. Issuance of the report                                   c. Completion of the auditor’s recent field work
    2. Latest financial statements                          d. Last subsequent event disclosed in the statements

23. The following explanatory paragraph accompanies the auditor’s report financial statements as of and for period ending December 31, 2005:

“Because we were appointed auditors of the Company during 2004, we were not able to observe the counting of the physical inventories at the beginning of 2004 or satisfy ourselves concerning those inventory quantities by alternative procedures. Since opening inventories Our audit report on

the financial statements for the year ended December 31, 2004 was modified accordingly.”

The foregoing paragraph is included in connection with a report in which the auditor.

1. 1. Expresses an unmodified opinion regarding the current financial statements but a modified report regarding comparatives
   2. Expresses unmodified opinion regarding the current period figures but a modified report regarding the corresponding figures
   3. Expresses modified report on both the current financial statements and comparatives
   4. Expresses modified report regarding the current period and corresponding figures

24. For what purpose does the following explanatory paragraph in an audit report that companies the financial statements of Grey Company as of and for the year ended December 31, 2005 serve?

“As discussed in Note No. 9 to the financial statements no depreciation has been provided in the financial statements which practice, in our opinion, is not in accordance with generally accepted accounting principles in the Philippines. This is a result of a decision taken by management at the start of 2004 and caused us to qualify our audit opinion on the financial statements relating to the year. Based on the straight-line depreciation……The loss of the year should be increased by 1.2 million in 2005 and P800,000 in 2004….”

1. 1. An explanatory paragraph for a modification of the auditor’s report regarding the current period and the corresponding figures.
   2. An explanatory paragraph for a modification of the corresponding figures not for modification of current period figures.
   3. An explanatory paragraph for a modification of the auditor’s report regarding both the current financial statements and prior year’s financial statements
   4. An explanatory paragraph regarding the modification of the auditor’s report regarding prior year’s financial statements only

25. The following modification is made in the opening paragraph of the audit profit that accompanies the financial statement Gold, Inc.

We have audited the accompany balance sheet as of December 31, 2005, and the related….for the year the ended. These financial statements….”The financial statements of the company as of and for the year ended December 31, 2004, where audited by and the auditor whose report dated April 5, 2005, expressed an unqualified opinion this statements.” The modified is made in connection to:

1. 1. Prior period financial statements were audited by other auditor and the incoming auditor decided to share responsibilities with the predecessor auditor.
   2. Prior period financial statements were audited by another auditor and such financial statements of prior year are used as comparatives.
   3. Reference to the predecessor auditor’s report on the corresponding figures in the incoming auditor’s report for the current period
   4. A modified report regarding the current period figures but unmodified report regarding the corresponding figures

26. When an independent auditor expresses an unqualified opinion he asserts that:

1. He performed the audit in accordance with generally accepted auditing standards.
2. The company is a profitable and viable entity.
3. The financial statements examined are in conformity with GAAP.
4. The financial statements are accurate and free of errors.

1. All of the above statements are true.             c. Only statements (1) and (3) are true.
2. Only statements (2) and (4) are true.              d. All of the above statements are false.

27. An audit report should be dated as of the
    1. date the report is delivered to the entity audited.
    2. date the financial statements were approved by the client management.
    3. balance sheet date of the latest period reported on.
    4. date a letter of audit inquiry is received from the entity’s attorney of record.

28. If a company’s external auditor expresses an unqualified opinion as a result of the audit of the company’s financial statements, readers of the audit report can assume that
    1. The external auditor found no fraud.
    2. The company is financial sound and the financial statements are accurate.
    3. Internal control is effective.
    4. All material disagreements between the company and external auditor about the application of accounting principles were resolved in the satisfaction of the external auditor.

29. A statement that the auditor’s responsibility is to express an opinion on the financial statements is contained in the:
    1. Opening paragraph                                         c. Opening and scope paragraph
    2. Scope paragraph                                              d. Opinion paragraph

30. The description of an audit in the scope paragraph of the standard audit report includes all of the following except:
    1. Evaluating the overall financial statement presentation.
    2. Assessing control risk.
    3. Examining, on a test basis, evidence supporting the amount and disclosures in the financial statements.
    4. Assessing the accounting principles used and significant estimates made by management.

31. If comparative financial statements are presented and the present auditor has audited both years, the auditor should:

1. 1. Reissue the report                                          c.   Redate the report
   2. Dual date the report                                       d. Update the report

32. In which of the following situations would the auditor appropriately issue a standard unqualified report with no explanatory paragraph concerning consistency?
    1. A change in the method of accounting for specific subsidiaries that comprise the group of companies for which consolidated statements are presented.
    2. A change from an accounting principle that is not generally accepted to one that is generally accepted.
    3. A change in the percentage used to calculate the provision for warranty expense.
    4. Correction of a mistake in the application of a generally accepted accounting principle.

33. An auditor’s report contains the following sentences:

We did not audit the financial statements of B Company, a consolidated subsidiary, whose statements reflect total assets and revenues constituting 20 percent and 22 percent, respectively, of the related consolidated totals. These statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for B Company, is based solely upon the report of the other auditors.

These sentences

1. 1. disclaim an opinion                          c. divide responsibility
   2. qualify the opinion                          d. should not be part of the audit report

34. The management of a client company believes that the statement of cash flow is not a useful document and refuses to include one in the annual report to stockholders. As a result, the auditor’s opinion should be
    1. qualified due to inadequate disclosure                  c. adverse
    2. qualified due to a scope limitation                            d. unqualified

35. An auditor’s opinion reads as follows: “In our opinion, except for the above-mentioned limitation on the scope of our audit…” This is an example of a(n)
    1. review opinion                                  c.    qualified opinion
    2. emphasis on a matter                    d.    unacceptable reporting practice

36. Eagle Company’s financial statements contain a departure from generally accepted accounting principles because, due to unusual circumstances, the statements would otherwise be misleading.

The auditor should express an opinion that is

1. 1. Qualified and describe the departure in a separate paragraph.
   2. Unqualified but not mention the departure in the auditor’s report.
   3. Qualified or adverse, depending on materiality, and describe the departure in a separate paragraph.
   4. Unqualified and describe the departure in a separate paragraph.

37. An auditor is unable to determine the amounts associated with illegal acts committed by a client. The auditor would most likely issue
    1. Either a qualified opinion or a disclaimer of opinion.
    2. An adverse opinion.

1. 3. Either a qualified opinion or an adverse opinion.
   4. A disclaimer of opinion.

38. The objective of the consistency standard is to provide assurance that
    1. There are no variations in the format and presentation of financial statements.
    2. Substantially different transactions and events are not accounted for on an identical basis.
    3. The auditor is consulted before material changes are made in the application of accounting principles.
    4. The comparability of financial statements between periods is not materially affected by changes in accounting principles without disclosure.

39. If management fails to provide adequate justification for a change from one generally accepted accounting principle to another, the auditor should
    1. Add an explanatory paragraph and express a qualified or an adverse opinion for lack of conformity with generally accepted accounting principles.
    2. Disclaim an opinion because of uncertainty.
    3. Disclose the matter in a separate explanatory paragraph(s) but not modify the opinion paragraph.
    4. Neither modify the opinion nor disclose the matter because both principles are generally accepted.

40. When an auditor qualifies an opinion because of inadequate disclosure, the auditor should describe the nature of the omission in a separate explanatory paragraph and modify the

Introductory paragraph Scope paragraph Opinion paragraph

41. An auditor may not express a qualified opinion when
    1. A scope limitation prevents the auditor from completing an important audit procedure.
    2. The auditor’s report refers to the work of a specialist.
    3. An accounting principles at variance with generally accepted accounting principles is used.
    4. The auditor lacks independence with respect to the audited entity.

42. An auditor decides to express a qualified opinion on an entity’s financial statements because a major inadequacy in its computerized accounting records prevents the auditor from applying necessary procedures. The opinion paragraph of the auditor’s report should state that the qualification pertains to
    1. A client-imposed scope limitation.
    2. A departure from generally accepted auditing standards.
    3. The possible effects on the financial statements.
    4. Inadequate disclosure of necessary information.

43. When management prepares financial statements on the basis of a going concern and the auditor believes the company may not continue as a going concern, the auditor should issue a(n)
    1. qualified opinion
    2. unqualified opinion with an explanatory paragraph

1. 3. disclaimer of opinion
   4. adverse opinion

44. A dual dated report contains the dates of a subsequent event and the date the:
    1. Auditor completed work in the client’s office                      c.    Subsequent event was resolved
    2. Financial statements were prepared                                       d.    Audit report was delivered

45. If the principal auditor decides to take responsibility for the work of other auditors, the principal auditor should:
    1. Modify the opening paragraph                                                  c. Modify all three paragraphs
    2. Modify the opening and opinion paragraphs                       d.    Issue a standard report

46. An auditor who concludes that an uncertainty is not adequately disclosed in the financial statements should issue a:
    1. Disclaimer of opinion.                                                                    c.    Special report.
    2. Unqualified report with an explanatory paragraph.          d.    Qualified report.

47. An auditor may wish to emphasize a matter included in the financial statements by adding an explanatory paragraph to the audit report. In this case the following paragraphs of the audit report should be modified:
    1. Introductory paragraph                 c. Opinion paragraph
    2. Scope paragraph                              d.   None

48. In the case of a client imposed scope limitation, the auditor must consider issuing a:
    1. Qualified opinion or disclaimer of opinion             c.   Disclaimer of opinion or adverse opinion
    2. Qualified opinion or adverse opinion                      d.    Disclaimer of opinion

49. Which of the following modifications of the standard auditor’s report does not require an explanatory paragraph.
    1. Reference to other auditors                       c.    Scope limitation
    2. Inconsistency                                                    d.    Adverse opinion

50. Pamela, CPA, was engaged to audit the financial statements of One Co. after its fiscal year had ended. The timing of Pamela’s appointment as auditor and the start of field work made confirmation of accounts receivable by direct communication with the debtors ineffective. However, Pamela applied other procedures and was satisfied as to the reasonableness of the account balances. Pamela’s auditor’s report most likely contained a(n)
    1. Unqualified opinion.
    2. Unqualified opinion with an explanatory paragraph.
    3. Qualified opinion because of a scope limitation.
    4. Qualified opinion because of a departure from GAAS.

51. A limitation on the scope of an audit sufficient to preclude an unqualified opinion will always result when management
    1. Engages the auditor after the year-end physical inventory count is completed.

1. 2. Fails to correct a material internal control weakness that had been identified during the prior year’s audit.
   3. Refuses to furnish a management representation letter to the auditor.
   4. Prevents the auditor from reviewing the working papers of the predecessor auditor.

52. When an auditor expresses an opinion other than unqualified opinion, a clear description of all substantive reasons for the modification of the opinion should be included in the report. This explanation should be presented:
    1. As a separate paragraph that precedes the opinion paragraph of the audit report.
    2. As a separate paragraph, preferably after the opinion paragraph, of the audit report.
    3. In the opinion paragraph
    4. As a separate paragraph in the notes to financial statements.

53. Where a limitation on the scope of the auditor’s work requires modification of an unqualified opinion, the auditor’s report should describe the limitation and:
    1. Indicate that the auditor is no longer responsible to his opinion.
    2. Indicate the possible adjustments to the financial statements that might have been determined to be necessary had the limitation not existed.
    3. Refer the users to the particular note to financial statements that adequately discusses the limitation
    4. Indicate that the auditor is not satisfied of the results of the alternative procedures that he had performed.

54. What is the purpose of the following paragraph in a particular audit report:

“…We draw attention to note X in the financial statements which discusses that the company incurred a net loss of P6.4 million during the year ended December 31, 2013 and as of that date, the Company’s liabilities exceeded its total assets by P2,500,000...”

1. 1. A standard reporting requirement.
   2. Emphasis of matter about the going concern problems of the entity.
   3. Inadequate disclosure qualification.
   4. An inappropriate reporting.

55. An explanatory paragraph following an opinion paragraph that describes an uncertainty follows:

As discussed in Note X to the financial statements, the company is a defendant in a lawsuit alleging infringement of certain patent rights and claiming damages. Discovery proceedings are in progress. The ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying financial statements.

What type of opinion should the auditor express in this circumstance?

1. 1. unqualified                         b.    qualified                      c.   disclaimer                     d.    adverse

56. If an amendment to other information in a document containing audited financial statements is necessary and the entity refuses to make the amendment, the auditor would consider issuing:

a.Qualified or adverse opinion                       c.    Unqualified opinion with explanatory paragraph b.Qualified or disclaimer of opinion             d.    Unqualified opinion.