AUDITING THEORY 5.

The description of an audit in the scope

AUDIT REPORT paragraph of the standard audit report
includes all of the following except:
Related PSAs: PSA 700, 710, 720, 560, 570, a. Evaluating the overall financial
600 and 620 statement presentation.
b. Assessing control risk.
B c. Examining, on a test basis, evidence
1. When an independent auditor expresses an supporting the amount and disclosures
unqualified opinion he asserts that: in the financial statements.
(1) He performed the audit in accordance d. Assessing the accounting principles
with generally accepted auditing used and significant estimates made by
standards. management.
(2) The company is a profitable and viable B
entity. 6. The audit report is normally addressed to
(3) The financial statements examined are the:
in conformity with GAAP. Board of directors Chair of the Aud
(4) The financial statements are accurate Stockholders
and free of errors. a. No Yes
a. All of the above statements are true. b. Yes Yes
b. Only statements (1) and (3) are true. c. Yes Yes
c. Only statements (2) and (4) are true. d. Yes No
d. All of the above statements are false. D
B 7. If comparative financial statements are
2. An audit report should be dated as of the presented and the present auditor has audited
a. date the report is delivered to the entity both years, the auditor should:
audited. a. Reissue the report
b. date the financial statements were b. Dual date the report
approved by the client management. c. Redate the report
c. balance sheet date of the latest period d. Update the report
reported on. C
d. date a letter of audit inquiry is received 8. In which of the following situations would the
from the entity’s attorney of record. auditor appropriately issue a standard
D unqualified report with no explanatory
3. If a company’s external auditor expresses an paragraph concerning consistency?
unqualified opinion as a result of the audit of a. A change in the method of accounting
the company’s financial statements, readers for specific subsidiaries that comprise
of the audit report can assume that the group of companies for which
a. The external auditor found no fraud. consolidated statements are
b. The company is financial sound and the presented.
financial statements are accurate. b. A change from an accounting principle
c. Internal control is effective. that is not generally accepted to one
d. All material disagreements between the that is generally accepted.
company and external auditor about the c. A change in the percentage used to
application of accounting principles calculate the provision for warranty
were resolved in the satisfaction of the expense.
external auditor. d. Correction of a mistake in the
A application of a generally accepted
4. A statement that the auditor’s responsibility is accounting principle.
to express an opinion on the financial C
statements is contained in the: 9. An auditor’s report contains the following
a. Opening paragraph sentences:
b. Scope paragraph We did not audit the financial
c. Opening and scope paragraph statements of B Company, a
d. Opinion paragraph consolidated subsidiary, whose
B statements reflect total assets and
 revenues constituting 20 percent and a. Either a qualified opinion or a
22 percent, respectively, of the disclaimer of opinion.
related consolidated totals. These b. An adverse opinion.
statements were audited by other c. Either a qualified opinion or an adverse
auditors, whose report has been opinion.
furnished to us, and our opinion, d. A disclaimer of opinion.
insofar as it relates to the amounts D
included for B Company, is based 14.The objective of the consistency standard is to
solely upon the report of the provide assurance that
other auditors. a. There are no variations in the format
These sentences and presentation of financial
a. disclaim an opinion statements.
b. qualify the opinion b. Substantially different transactions and
c. divide responsibility events are not accounted for on an
d. should not be part of the audit report identical basis.
A c. The auditor is consulted before
10.The management of a client company material changes are made in the
believes that the statement of cash flow is not application of accounting principles.
a useful document and refuses to include one d. The comparability of financial
in the annual report to stockholders. As a statements between periods is not
result, the auditor’s opinion should be materially affected by changes in
a. qualified due to inadequate accounting principles without
disclosure disclosure.
b. qualified due to a scope limitation A
c. adverse 15.If management fails to provide adequate
d. unqualified justification for a change from one generally
D accepted accounting principle to another, the
11.An auditor’s opinion reads as follows: “In our auditor should
opinion, except for the above-mentioned a. Add an explanatory paragraph and
limitation on the scope of our audit…” This is express a qualified or an adverse
an example of a(n) opinion for lack of conformity with
a. review opinion generally accepted accounting
b. emphasis on a matter principles.
c. qualified opinion b. Disclaim an opinion because of
d. unacceptable reporting practice uncertainty.
D c. Disclose the matter in a separate
12.Eagle Company’s financial statements contain explanatory paragraph(s) but not
a departure from generally accepted modify the opinion paragraph.
accounting principles because, due to unusual d. Neither modify the opinion nor disclose
circumstances, the statements would the matter because both principles are
otherwise be misleading. The auditor should generally accepted.
express an opinion that is D
a. Qualified and describe the departure in 16.When an auditor qualifies an opinion because
a separate paragraph. of inadequate disclosure, the auditor should
b. Unqualified but not mention the describe the nature of the omission in a
departure in the auditor’s report. separate explanatory paragraph and modify
c. Qualified or adverse, depending on the
materiality, and describe the departure Introductory paragraph Scope paragraph
in a separate paragraph. Opinion paragraph
d. Unqualified and describe the departure a. Yes No No
in a separate paragraph.
A b. Yes No Yes
13.An auditor is unable to determine the amounts
associated with illegal acts committed by a c. No Yes Yes
client. The auditor would most likely issue
 d. No Yes No c. disclaimer of opinion
d. adverse opinion
D A
17.An auditor may not express a qualified opinion 21.A dual dated report contains the dates of a
when subsequent event and the date the:
a. A scope limitation prevents the a. Auditor completed work in the client’s
auditor from completing an important office
audit procedure. b. Financial statements were prepared
b. The auditor’s report refers to the work c. Subsequent event was resolved
of a specialist. d. Audit report was delivered
c. An accounting principles at variance D
with generally accepted accounting 22.If the principal auditor decides to take
principles is used. responsibility for the work of other auditors,
d. The auditor lacks independence with the principal auditor should:
respect to the audited entity. a. Modify the opening paragraph
C b. Modify the opening and opinion
18.An auditor decides to express a qualified paragraphs
opinion on an entity’s financial statements c. Modify all three paragraphs
because a major inadequacy in its d. Issue a standard report
computerized accounting records prevents the D
auditor from applying necessary procedures. 23.An auditor who concludes that an uncertainty
The opinion paragraph of the auditor’s report is not adequately disclosed in the financial
should state that the qualification pertains to statements should issue a:
a. A client-imposed scope limitation. a. Disclaimer of opinion.
b. A departure from generally accepted b. Unqualified report with an explanatory
auditing standards. paragraph.
c. The possible effects on the financial c. Special report.
statements. d. Qualified report.
d. Inadequate disclosure of necessary D
information. 24.An auditor may wish to emphasize a matter
B included in the financial statements by adding
19.Totoy, CPA, was engaged to audit the financial an explanatory paragraph to the audit report.
statements of Bibo Co., a new client, for the In this case the following paragraphs of the
year ended December 31, 2004. Totoy audit report should be modified:
obtained sufficient audit evidence for all of a. Introductory paragraph
Bibo’s financial statement items except Bibo’s b. Scope paragraph
opening inventory. Due to inadequate c. Opinion paragraph
financial records, Totoy could not verify Bibo’s d. None
January 1, 2004 inventory balances. Totoy’s D
opinion on Bibo’s 2004 financial statements 25.In the case of a client imposed scope
most likely will be limitation, the auditor must consider issuing a:
Balance Sheet Income Statement a. Qualified opinion or disclaimer of
a. Disclaimer Disclaimer opinion
b. Unqualified Disclaimer b. Qualified opinion or adverse opinion
c. Disclaimer Adverse c. Disclaimer of opinion or adverse
d. Unqualified Adverse opinion
B d. Disclaimer of opinion
20.When management prepares financial A
statements on the basis of a going concern 26.Which of the following modifications of the
and the auditor believes the company may standard auditor’s report does not require an
not continue as a going concern, the auditor explanatory paragraph.
should issue a(n) a. Reference to other auditors
a. qualified opinion b. Inconsistency
b. unqualified opinion with an c. Scope limitation
explanatory paragraph d. Adverse opinion
 A b. Indicate the possible adjustments to the
27.Pamela, CPA, was engaged to audit the financial statements that might have
financial statements of One Co. after its fiscal been determined to be necessary had
year had ended. The timing of Pamela’s the limitation not existed.
appointment as auditor and the start of field c. Refer the users to the particular note to
work made confirmation of accounts financial statements that adequately
receivable by direct communication with the discusses the limitation
debtors ineffective. However, Pamela applied d. Indicate that the auditor is not satisfied
other procedures and was satisfied as to the of the results of the alternative
reasonableness of the account balances. procedures that he had performed.
Pamela’s auditor’s report most likely B
contained a(n) 31.What is the purpose of the following
a. Unqualified opinion. paragraph in a particular audit report:
b. Unqualified opinion with an explanatory “…We draw attention to note X in
paragraph. the financial statements which
c. Qualified opinion because of a scope discusses that the company incurred
limitation. a net loss of P6.4 million during the
d. Qualified opinion because of a departure from year ended December 31, 2004 and
GAAS. as of that date, the Company’s
C liabilities exceeded its total assets by
28.A limitation on the scope of an audit sufficient P2,500,000...”
to preclude an unqualified opinion will always a. A standard reporting requirement.
result when management b. Emphasis of matter about the going
a. Engages the auditor after the year-end concern problems of the entity.
physical inventory count is completed. c. Inadequate disclosure qualification.
b. Fails to correct a material internal d. An inappropriate reporting.
control weakness that had been A
identified during the prior year’s audit. 32.An explanatory paragraph following an opinion
c. Refuses to furnish a management paragraph that describes an uncertainty
representation letter to the auditor. follows:
d. Prevents the auditor from reviewing As discussed in Note X to the
the working papers of the predecessor financial statements, the company is
auditor. a defendant in a lawsuit alleging
A infringement of certain patent rights
29.When an auditor expresses an opinion other and claiming damages. Discovery
than unqualified opinion, a clear description of proceedings are in progress. The
all substantive reasons for the modification of ultimate outcome of the litigation
the opinion should be included in the report. cannot presently be determined.
This explanation should be presented: Accordingly, no provision for any
a. As a separate paragraph that precedes liability that may result upon
the opinion paragraph of the audit adjudication has been made in the
report. accompanying financial statements.
b. As a separate paragraph, preferably What type of opinion should the auditor
after the opinion paragraph, of the express in this circumstance?
audit report. a. unqualified
c. In the opinion paragraph b. qualified
d. As a separate paragraph in the notes to c. disclaimer
financial statements. d. adverse
B C
30.Where a limitation on the scope of the 33.If an amendment to other information in a
auditor’s work requires modification of an document containing audited financial
unqualified opinion, the auditor’s report statements is necessary and the entity
should describe the limitation and: refuses to make the amendment, the auditor
a. Indicate that the auditor is no longer would consider issuing: a. Qualified or
responsible to his opinion. adverse opinion
 b. Qualified or disclaimer of opinion c. It helps the auditor identify the usual
c. Unqualified opinion with explanatory circumstances that are expected to
paragraph occur.
d. Unqualified opinion. d. It makes the auditors more informed of
A their responsibilities with respect to
34.When management does not amend the audit report.
financial statements in circumstances where D
the auditor believes they need to be amended 3. The most common type of audit report
and the auditor’s report has not been released contains a(n):
to the entity, the auditor should express a. Adverse opinion.
a. Qualified or adverse opinion b. Qualified opinion.
b. Qualified or disclaimer of opinion c. Disclaimer of opinion.
c. Unqualified opinion with explanatory d. Unqualified
paragraph D
d. Unqualified opinion. 4. If an auditor is certain an illegal act has a
B material effect on financial statements and
35.If subsequent to the issuance of the audited the clients agrees to adjust the statements
financial statements, the auditor becomes accordingly, the auditor should: a. Withdraw
aware of material misstatements in the from the engagement.
financial statements that exist prior to the b. Disclaim an opinion on the financial
date of the audit report, the auditor should statements taken as a whole.
a. Notify the parties who currently relying c. Issue a qualified opinion.
on the financial statements. d. Issue an unqualified opinion.
b. Discuss the matter with management, C
and should take the action appropriate 5. It exists when other information contradicts
in the circumstances. information contained in the audited financial
c. Document such information in the statements.
audit plan for succeeding audit. a. Material misstatement of fact
d. Submit revised copies of the financial b. Material error
statements and audit report to the c. Material inconsistency
stockholders. d. Material deviation
C
QUIZZERS 6. After issuing a report, a auditor has no longer
B obligation to make continuing inquiries or
1. Which of the following is not explicitly perform other procedures concerning the
included in the opening paragraph of an audit audited financial statements, unless
report? a. Management of the entity requests
a. Identification of the financial the auditor to reissue the auditor’s
statements that have been audited. report.
b. A statement by the auditor that the b. Information about an event that
audit provides a reasonable basis for occurred after the end of fieldwork
the opinion. comes to the auditor’s attention.
c. Statement that the financial c. Information, which existed at the
statements are the responsibility of report date and may affect the report,
the entity’s management. comes to the auditor’s attention.
d. Statement that the responsibility of d. Final determinations or resolutions are
the auditor is to express an opinion on made of contingencies that had been
the financial statements based on his disclosed in the financial statements.
audit. C
B 7. Which of the following events occurring after
2. A measure of uniformity in the form and the issuance of an auditor’s report most likely
content of the auditor’s report is desirable would cause the auditor to make further
because inquiries about the previously issued financial
a. It helps the auditors avoid legal liability. statements?
b. It helps the readers understand the
report.
 a. A technological development that 2005, the client revised the 2004 financial
could affect the entity’s future ability statements to correct the previous departure
to continue as a going concern. from GAAP. The auditor's 2005 report on the
b. The entity’s sale of a subsidiary that 12/31/04 and 12/31/05 comparative financial
accounts for 30 percent of the entity’s statements will
consolidated sales. a. Express unqualified opinions on both the
c. The discovery of information regarding 2004 and 2005 financial statements.
a contingency that existed before the b. Express a qualified opinion on the 2004
financial statements were issued. financial statements and an unqualified
d. The final resolution of a lawsuit opinion on the 2005 statements.
explained in a separate paragraph of c. Retain the qualified opinion covering
the auditor’s report the 2004 statements, but add an
B explanatory paragraph describing the
8. An auditor would issue an adverse opinion if correction of the prior departure from
a. The audit was begun by other GAAP.
independent auditors who withdrew d. Render qualified audit opinions for both
from the engagement. 2004 and 2005 financial statements
b. The statements taken as a whole do given the 2005 carryover effect of the
not fairly present the financial 2004 error.
condition and results of operations of A
the company. 11.An auditor may reasonably issue an "except
c. A qualified opinion cannot be given for" qualified opinion for
because the auditor lacks
independence. Inadequate disclosure Scope
d. The restriction on the scope of the limitation
audit was significant. Yes Yes
C Yes No
9. An audit report contains the following No Yes
paragraph: No No
"Because of the inadequacies in the D
company's accounting records during the 12.Soon after Boyd's audit report was issued,
year ended June 30, 2005, it was not Boyd learned of certain related party
practicable to extend our auditing transactions that occurred during the year
procedures to the extent necessary to under audit. These transactions were not
enable us to obtain certain evidential disclosed in the notes to the financial
matter as it relates to classification of statements. Boyd should
certain items in the consolidated a. Plan to audit the transactions during
statements of operations." the next engagement.
This paragraph most likely describes b. Recall all copies of the audited
a. A material departure from GAAP financial statements.
requiring a qualified audit opinion. c. Ask the client to disclose the
b. An uncertainty that should not lead to transactions in subsequent interim
a qualified opinion. statements.
c. A material scope restriction requiring a d. Determine whether the lack of
qualification of the audit opinion. disclosure would affect the auditor's
d. A matter that the auditor wishes to report.
emphasize and that does not lead to a A
qualified audit opinion. 13.An auditor includes an explanatory paragraph
A in an otherwise unqualified report in order to
10.The auditor issued a qualified opinion covering emphasize that the entity being reported on is
the financial statements of Client A for the a subsidiary of another business enterprise.
year ended December 31, 2004. The reason The inclusion of this paragraph
for the qualification was a departure from a. Is appropriate and would not negate
GAAP. In presenting comparative statements the unqualified opinion.
for the years ended December 31, 2004 and b. Is a qualification.
 c. Is a violation of generally accepted c. Disclaimer of responsibility concerning
reporting standards if this information the portion of the financial statements
is disclosed in footnotes to the examined by the other auditor.
financial statements. d. Name of the other auditor.
d. Necessitates a revision of the opinion B
paragraph to include the phrase "with 17.The independent auditor refers to both GAAP
the foregoing explanation." and GAAS when writing the standard audit
B report.
14.Which of the following best describes the These terms are mentioned as follows:
auditor's responsibility for "other information" a b c d
included in the annual report to stockholders Scope Paragraph GAAP GAAS GAAP GAAS
which contains financial statements and the Opinion Paragraph GAAS GAAP GAAP
auditor's report? GAAS
a. The auditor has no obligation to read A
the "other information." 18.Which of the following best describes the
b. The auditor has no obligation to reference to the expression “taken as a
corroborate the "other information," whole” in the fourth generally accepted
but should read the "other information" auditing standard of reporting?
to determine whether it is materially a. It applies equally to a complete set of
inconsistent with the financial financial statements and to an
statements. individual financial statement.
c. The auditor should extend the b. It applies only to a complete set of
examination to the extent necessary to financial statements.
verify the "other information." c. It applies equally to each item in each
d. The auditor must modify the auditor's financial statement.
report to state that the "other d. It applies equally to each material item
information is unaudited" or "not in each financial statement.
covered by the auditor's report." B
A 19.If an accounting change has no material effect
15.In which of the following circumstances would on the financial statements in the current year
an auditor be most likely to express an but the change is reasonably certain to have a
adverse opinion? material effect in later years, the change
a. The statements are not in conformity should be
with the ASC Statements regarding a. Treated as a consistency modification
the capitalization of leases. in the auditor’s report for the current
b. Information comes to the auditor's year.
attention that raises substantial doubt b. Disclosed in the notes to the financial
about the entity's ability to continue statements of the current year.
in existence. c. Disclosed in the notes to the financial
c. The chief executive officer refuses the statements and referred to in the
auditor access to minutes of board of auditor’s report for the current year.
directors' meetings. d. Treated as a subsequent event.
d. Control tests show that the entity's B
internal control is so poor that the 20.An auditor’s standard report expressed an
financial records cannot be relied unqualified opinion and includes an
upon. explanatory paragraph that emphasizes a
B matter included in the notes to the financial
16.When a principal auditor decides to make statements. The auditor’s report would be
reference to another auditor's examination, deficient if the explanatory paragraph states
the principal auditor's report should always that the entity
indicate clearly, in the introductory, scope, a. Is a component of a larger business
and opinion paragraphs, the enterprise.
a. Magnitude of the portion of the financial b. Has changed form the completed
statements examined by the other contract method to the percentage of
auditor.
b. Division of responsibility.
 completion method to account for long- 24.A successor auditor should refer to a
term construction contracts. predecessor auditor’s report in the
c. Has had a significant subsequent event. a. Opening paragraph
d. Has accounting reclassifications that b. Scope paragraph
enhance the comparability between c. Opinion paragraph
years. d. Opening and opinion paragraph
C A
21.In which of the following circumstances would 25.Because of inadequate records the auditor is
an adverse opinion be appropriate? uncertain as to whether property and
a. The auditor is not independent with equipment is stated at cost. The auditor
respect to the enterprise being audited should issue a (n):
b. An uncertainty prevents the issuance of a. Qualified opinion
an unqualified report b. Unqualified opinion
c. The statements are not in conformity c. Adverse opinion
with authoritative statements regarding d. Standard opinion
accounting for pension plans B
d. A client-imposed scope limitation 26.The auditor’s report contains a paragraph
prevents the auditor from complying explaining that the entity changed from the
with generally accepted auditing straightline to the declining balance method
standards of depreciation. The auditor expressed an:
B a. Adverse opinion
22.An auditor is confronted with an exception b. Unqualified opinion
sufficiently material to warrant departing from c. Qualified opinion
the standard wording of an unqualified report. d. Disclaimer of opinion
If the exception relates to a departure from C
the generally accepted accounting principles, 27.The following circumstances result in a
the auditor must decide between a(n) modified, but unqualified report, except:
a. adverse opinion and an unqualified Inconsistent application of accounting
opinion principles.
b. adverse opinion and a qualified opinion Emphasis of a related party transaction that is
c. adverse opinion and a disclaimer of disclosed in a footnote.
opinion Lack of disclosure of a restriction on payment
d. disclaimer of opinion and a qualified of dividends.
opinion Other auditors perform work for which the
A principal auditor does not assume
23.An auditor had expressed a qualified opinion responsibility.
on the financial statements of a prior period D
because the client’s financial statements 28.Under which of the following sets of
departed from generally accepted accounting circumstances might an auditor disclaim an
principles. The prior period statements are opinion?
restated in the current period to conform with a. The financial statements contain a
generally accepted accounting principles. The departure from GAAP, the effect of
auditor’s updated report on the prior period which is material.
statements should b. The principal auditor decides to make
a. express an unqualified opinion about reference to the report of another
the restated financial statements auditor who audited a subsidiary.
b. be accompanied by the auditor’s c. There has been a material change
original report on the prior period between periods in the method of the
c. bear the same date as the auditor’s application of accounting principles.
original report on the prior period d. There were significant limitations on
d. qualify the opinion concerning the the scope of the audit.
restated financial statements because B
of a change in accounting principles 29.Which of the following description is not
A included in the scope paragraph of the
auditor’s report?
 a. Examining, on a test basis, evidence to 33.Which of the following factors, by itself, would
support the financial statement not cause uncertainty about the ability of a
amounts and disclosures. company to continue as a going concern?
b. Determining the accounting principles a. A significant net loss.
used in the preparation of the financial b. Inability to pay its obligations as they
statements. come due.
c. Assessing the significant estimates c. The occurrence of uninsured
made by management in the catastrophe.
preparation of the financial statement. d. Legal proceedings that might jeopardize
d. Evaluating the overall financial the entity’s ability to operate.
statement presentation. B
D 34.If the auditor concludes that the fraud or error
30.Which of the following statements is best has a material effect on the financial
described in the scope paragraph of the statements and has not been properly
independent auditor’s report? corrected in the financial statements, the
a. The audit was planned and performed auditor should issue a:
to obtain reliable assurance about a. Unqualified opinion with explanatory
whether the financial statements are paragraph.
free of material misstatements. b. Qualified or adverse opinion.
b. The audit was conducted in accordance c. Qualified or disclaimer of opinion.
with financial reporting framework. d. Adverse or disclaimer of opinion.
c. The auditor makes the significant C
estimates in the preparation of the 35.If the auditor is precluded by the entity from
financial statements. obtaining evidence to evaluate whether fraud
d. A statement by the auditor that the or error that may be material to the financial
audit provides a reasonable basis for statements has, or is likely to have, occurred,
the opinion. the auditor should issue a (n):
B a. Unqualified opinion with explanatory
31.When there is an assessed substantial doubt paragraph.
about the ability of the entity to continue as a b. Qualified or adverse opinion.
going concern and such information is c. Qualified or disclaimer of opinion.
adequately disclosed in the notes to financial d. Adverse or disclaimer of opinion.
statements, the auditor should express a(n): C
a. Standard unqualified opinion. 36.In which of the following circumstances would
b. Unqualified opinion with explanatory an auditor usually choose between expressing
paragraph. a qualified opinion or disclaiming an opinion?
c. Qualified opinion a. Departure from generally accepted
d. Adverse opinion accounting principles
C b. Inadequate disclosure of accounting
32.If adequate disclosure is not made by the policies
entity regarding substantial doubt about its c. Inability to obtain sufficient competent
ability to continue as a going concern, the evidential matter
auditor should include in his report specific d. Unreasonable justification for a change
reference to the substantial doubt as to ability in accounting principle
of the company to continue as a going
concern and should express: PSA 700 – The Auditor’s Report on Financial
a. Unqualified opinion with explanatory Statements
paragraph A
b. A subject to qualified opinion or 37.The element of the auditor’s report that
adverse opinion. distinguishes it from reports that might be
c. Either an “except for” qualified opinion issued by others is
or an adverse opinion. a. Title
d. A disclaimer of opinion. b. Addressee
A c. Auditor’s signature
d. Opinion paragraph
 A 42.In extreme cases, such as situations involving
38.The financial statements audited by the multiple uncertainties that are significant to
auditor are identified in the the financial statements, the auditor may
a. Opening paragraph consider it appropriate to express a
b. Scope paragraph a. Qualified or adverse opinion
c. Opinion paragraph b. Disclaimer of opinion
d. All of the above. c. Unqualified opinion with explanatory
C paragraph
39.Which of the following statements can be d. Unqualified opinion.
found on the scope paragraph of the standard
audit report? PSA 710 – Comparatives
a. The financial statements are the A
responsibility of the Company’s 43.Which statement is incorrect regarding
management. comparatives?
b. Our responsibility is to express an The auditor is not required to determine
opinion on these financial statements whether the comparatives comply in all
based on our audit. material respects with GAAP relevant to
c. We believe that our audit provides a the financial statements being audited.
reasonable basis for our opinion. There are two broad financial reporting
d. The financial statements ‘present frameworks for comparatives: the
fairly, in all material respects’. corresponding figures and the
D comparative financial statements.
40.Which statement is incorrect regarding the Under the corresponding figures framework,
date of the auditor’s report? the corresponding figures for the prior
a. The auditor should date the report as period(s) are an integral part of the
of the completion date of the audit. current period financial statements and
b. The date of the report informs the have to be read in conjunction with the
reader that the auditor has considered amounts and other disclosures relating
the effect on the financial statements to the current period.
and on the report of events and Under the comparative financial statements
transactions of which the auditor framework, the comparative financial
became aware and that occurred up statements for the prior period(s) are
to that date. considered separate financial
c. The auditor should not date the report statements.
earlier than the date on which the D
financial statements are signed or 44.Which statement is incorrect regarding
approved by management. corresponding figures?
d. The auditor should date the report as a. The corresponding figures are not
of date the report is delivered to the presented as complete financial
entity audited. statements capable of standing alone.
D b. The level of detail presented in the
41.The following will usually result in a modified corresponding amounts and
report but will not affect the auditor’s opinion, disclosures is dictated primarily by its
except relevance to the current period
a. Existence of going concern problem. figures.
b. There is a significant uncertainty (other c. The auditor’s report refers only to the
than a going concern problem), the financial statements of the current
resolution of which is dependent upon period.
future events and which may affect the d. The auditor’s report refers to each
financial statements. period that financial statements are
c. Emphasis of a matter. presented.
d. There is a disagreement with C
management regarding the 45.When the comparatives in which the prior
acceptability of the accounting policies audit report is unmodified, the auditor should
selected. issue an audit report in which:
B
 a. The comparatives are specifically b. Not allow the inclusion of the
identified in the opening paragraph but corresponding figures in the financial
not referred to in the opinion paragraph statements of the current period.
of the auditor’s report. c. Disclaim his opinion and treat the
b. The comparatives are specifically unaudited corresponding figures as
identified in the opening paragraph and basis of scope limitation.
are referred to in the opinion d. Obtain sufficient appropriate audit
paragraph. evidence that the corresponding
c. The comparatives are not specifically figures meet the requirements of the
identified in the audit report. relevant financial reporting
d. The comparatives are described in the framework.’
emphasis of matter paragraph of the
auditor’s report. PRE-ENGAGEMENT
D MULTIPLE CHOICE QUESTIONS
46.In case the prior period financial statements D
were audited by another auditor and the 1. Prior to the acceptance of an audit
incoming auditor decides to refer to another engagement with a client who has terminated
auditor, the incoming auditor’s report should the services of the predecessor auditor, the
indicate: a. That the financial statements of CPA should
the prior period were audited by another a. Contact the predecessor auditor
auditor. without advising the prospective client
b. The type of report issued by the and request a complete report of the
predecessor auditor and, if the report circumstance leading to the
was modified, the reasons therefore. termination with the understanding
c. The date of that report. that all information disclosed will be
d. All of the above. kept confidential.
B b. Accept the engagement without
47.In relation to comparatives as corresponding contacting the predecessor auditor
figures, which of the following is incorrect? since the CPA can include audit
a. When the prior period financial procedures to verify the reason given
statements are not audited, the by the client for the termination.
incoming auditor should state in the c. Not communicate with the predecessor
auditor’s report that the corresponding auditor because this would in effect be
figures are unaudited. asking the auditor to violate the
b. The incoming auditor must refer to the confidential relationship between
predecessor auditor’s report on the auditor and client.
corresponding figures in the incoming d. Advise the client of the intention to
auditor’s report for the current period. contact the predecessor auditor and
c. When the financial statements of the request permission for the contact.
prior period were audited by another B
auditor, the incoming auditor’s report 2. Before accepting an audit engagement, a
should state that the prior period was successor auditor should make specific
audited by another auditor. inquiries of the predecessor auditor regarding
d. In situations were the incoming auditor the predecessor’s
identified that the corresponding a. Opinion of any subsequent events occurring
figures are materially misstated, the since the predecessor’s audit report was
auditor should request management to issued.
revise the corresponding figures or if b. Understanding as to the reasons for the
management refuses to do so,
change of auditors.
appropriately modify the report.
c. Awareness of the consistency in the
D
application of GAAP between periods.
48.When the financial statements of the prior
d. Evaluation of all matters of continuing
period were not audited, the incoming auditor
accounting significance.
should:
D
a. Insist that an audit of prior year’s
financial statements must be made.
3. A successor auditor most likely would make 8. The following are valid reasons why an auditor
specific inquiries of the predecessor auditor sends to his client an engagement letter:
regarding
a. Specialized accounting principles of the A B C D
client’s industry. Avoid misunderstanding with respect to
b. The competency of the client’s internal audit Yes Yes No Yes engagement
staff. Confirms the auditor’s acceptance of the
c. The uncertainty inherent in applying sampling Yes Yes Yes No appointment
procedures. Objective and scope of the audit
d. Disagreements with management as to Yes Yes Yes Yes
auditing procedures. Assures CPA’s compliance to GAAS
D Yes No No Yes
4. Which of the following should an auditor A
obtain from the predecessor auditor prior to 9. Which of the following is appropriately
accepting an audit engagement? included in an audit engagement letter?
a. Analysis of balance sheet accounts I. Because of the test nature and other
b. Analysis of income statement accounts inherent limitations of an audit,
c. All matters of continuing accounting together with the inherent limitations
significance of any accounting and internal control
d. Facts that might bear on the integrity of system, there is an unavoidable risk
management that even some material
D misstatements may remain
5. When an independent auditor is approached undiscovered.
to perform an audit for the first time, he or II. The audit will be made with the
she should make inquiries of the predecessor objective of expressing an opinion on
auditor. Inquiries are necessary because the the financial statements.
predecessor may be able to provide the III. An audit also includes assessing the
successor with information that will assist the accounting procedures used and
successor in determining whether significant estimates made by
a. The predecessor’s work should be used. management.
b. The company rotates auditors. a. I and II
c. In the predecessor’s opinion, control risk is b. I and III
low. c. II and III
d. The engagement should be accepted. d. I, II and III
B A
6. If permission from client to discuss its affairs 10. Which of the following is least likely included
with the proposed auditor is denied by the in an audit engagement letter?
client, the predecessor auditor should: a. The objective of financial reporting.
a. Keep silent of the denial. b. Management responsibility for the financial
b. Disclose the fact that the permission statements.
to disclose is denied by the client. c. The form of any reports or other
c. Disclose adequately to proposed communication of the results of the
auditor all noncompliance made by engagement.
the client. d. Arrangement concerning the involvement of
d. Seek legal advice before responding other auditors or experts in some aspects of
to the proposed auditor the audit.
B B
7. The objective and scope of the audit and the 11. An audit engagement letter least likely
extent of the auditor’s responsibilities to the includes
client are best documented in a. A reference to the inherent limitation of an
a. Independent auditor’s report audit that some material misstatements may
b. Audit engagement letter remain undiscovered.
c. Client’s representation letter b. Identification of specific audit procedures that
d. Audit program the auditor needs to undertake.
B
c. Description of any letters or reports that the 16. When a change in the type of engagement
auditor expects to submit to the client. from higher to lower level of assurance is
d. Arrangements concerning the involvement of reasonably justified, the report based on the
internal auditors and other client’s staff. revised engagement
C a. Should contain a separate paragraph that
12. Which of the following least likely requires the refers to the original engagement.
auditor to send a new engagement letter? b. Should always refer to any procedures that
a. An indication that the client misunderstands may have been performed in the original
the objective and scope of the audit. engagement.
b. Any revised or special terms of the c. Should qualify the opinion due to scope
engagement. limitation.
c. A recent change in the audit firm’s d. Omits reference to the original engagement.
management. C
d. Legal requirements and other government 17. Which of the following actions may be
agencies’ pronouncements. appropriate if the auditor is unable to agree to
C a change of the engagement and is not
13. Which of the following least likely influence permitted to continue the original
the auditor’s decision to send a separate engagement I. Issue a qualified opinion due to
engagement letter to a component of parent a significant scope limitation.
entity client? II. Auditor should withdraw from the
a. Legal requirements engagement.
b. Degree of ownership over a III. Consider whether there is any
component entity by parent company obligation to report to the board of
c. Location of the principal place of directors or shareholders the
business of the component entity circumstances necessitating
d. Who appoints the auditor of the withdrawal
component a. I only
D b. I and II
14. According to PSA 210, which of the following c. II and III
statements is correct? d. I, II and III
a. The auditor and the client need not agree on
the terms of the engagement.
b. Where the terms of the engagement are
changed, the auditor and the client need not
agree on the new terms if they already agreed
on the old terms.
c. The engagement letter assists in the
supervision and review of the audit work.
d. The auditor may agree to a change of
engagement where there is reasonable
justification for doing so.
B
15. Which of the following is a NOT 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.
D