UL INTEGRATED REVIEW & REFRESHER COURSE IN ACCOUNTANCY

AUDITING AUD 1.6/RDB

PSA 700
FORMING AN OPINION AND REPORTING ON FINANCIAL
STATEMENTS

FOCUS NOTES:

• In an audit of historical financial information, the objectives of the auditor are:

(a) To form an opinion on the financial statements based on an evaluation of the conclusions drawn from
the audit evidence obtained; and
(b) To express clearly that opinion through a written report.
• “General purpose financial statements” are financial statements prepared in accordance with a general
purpose framework.
• General purpose framework – A financial reporting framework designed to meet the common financial
information needs of a wide range of users. The financial reporting framework may be a fair presentation
framework or a compliance framework
• Unmodified opinion – The opinion expressed by the auditor when the auditor concludes that the financial
statements are prepared, in all material respects, in accordance with the applicable financial reporting
framework.

• Requirements:
- The auditor shall form an opinion on whether the financial statements are prepared, in all material
respects, in accordance with the applicable financial reporting framework.
- To form an opinion, auditor shall conclude whether he has obtained reasonable assurance about
whether the FS as whole are free from material misstatement, whether due to fraud or error. That
conclusions shall take into account the following evaluations:
1. Evaluate the sufficiency and appropriateness of evidence
2. Evaluate whether uncorrected misstatements are material, individually or in aggregate
3. Evaluate whether the financial statements are prepared, in all material respects, in accordance
with the requirements of the applicable financial reporting framework.
4. Evaluate whether the financial statements appropriately disclose the significant accounting
policies selected and applied.
5. Evaluate whether the accounting policies selected and applied are consistent with the applicable
financial reporting framework and are appropriate
6. Evaluate whether the accounting estimates made by management are reasonable;
7. Evaluate whether the information presented in the financial statements is relevant, reliable,
comparable, and understandable.
8. Evaluate whether the financial statements provide adequate disclosures to enable the intended
users to understand the effect of material transactions and events on the information conveyed in
the financial statements.
9. Evaluate whether the terminology used in the financial statements, including the title of each
financial statement, is appropriate.
10. Evaluate whether the financial statements achieve fair presentation (overall presentation, structure
and content of the financial statements and whether the financial statements represent the
underlying transactions and events in a manner that achieves fair presentation).
11. Evaluate whether the financial statements adequately refer to or describe the applicable financial
reporting framework.

• The auditor shall express an unmodified opinion when the auditor concludes that the financial statements
are prepared, in all material respects, in accordance with the applicable financial reporting framework.
Otherwise, modify the opinion in accordance with PSA 705.

• If financial statements prepared in accordance with the requirements of a fair presentation framework do
not achieve fair presentation, the auditor shall discuss the matter with management and, depending on the
requirements of the applicable financial reporting framework and how the matter is resolved, shall
determine whether it is necessary to modify the opinion in the auditor’s report in accordance with PSA
705 (Revised).

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• When the financial statements are prepared in accordance with a compliance framework, the auditor is
not required to evaluate whether the financial statements achieve fair presentation. However, if in
extremely rare circumstances the auditor concludes that such financial statements are misleading, the
auditor shall discuss the matter with management and, depending on how it is resolved, shall determine
whether, and how, to communicate it in the auditor’s report.

• The auditor’s report shall be in writing.

• Elements of the Auditor’s Report in an Audit Conducted in Accordance with Philippine Standards on
Auditing
a. Title;
b. Addressee;
c. Auditor’s opinion
d. Basis for opinion
e. Going concern (when applicable)
f. Key audit matters (for listed entity)
g. Other information
h. Responsibilities for the financial statements
i. Auditor’s responsibilities for the audit of the financial statements
j. Other reporting responsibilities
k. Name of the engagement partner
l. Signature of the auditor
m. Auditor’s address
n. Date of the auditor’s report

• Title
✓ The auditor’s report shall have a title that clearly indicates that it is the report of an independent
auditor.
“Independent Auditor’s Report” or “Report of Independent Auditor”

• Addressee
✓ The auditor’s report shall be addressed as required by the circumstances of the engagement.
✓ Ordinarily, the auditor’s report is addressed to those for whom the report is prepared, often either to:
➢ the shareholders or
➢ to those charged with governance (board of directors) of the entity whose financial statements
are being audited
➢ or BOTH

• Auditor’s Opinion
✓ the first section of the auditor’s report shall include the auditor’s opinion, and shall have the heading
“Opinion.”
✓ Identify the entity whose financial statements have been audited
✓ State that the financial statements have been audited;
✓ Identify the title of each statement comprising the financial statements;
✓ Refer to the notes including summary of significant accounting policies; and
✓ Specify the date of, or period covered by, each financial statement comprising the financial
statements.

• Basis for opinion

✓ The auditor’s report shall include a section, directly following the Opinion section, with the heading
“Basis for Opinion, that:

➢ States that the audit was conducted in accordance with Philippine Standards on Auditing;
➢ Refers to the section of the auditor’s report that describes the auditor’s responsibilities under
the PSAs;
➢ Includes a statement that the auditor is independent of the entity in accordance with the
relevant ethical requirements relating to the audit, and has fulfilled the auditor’s other ethical

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responsibilities in accordance with these requirements. The statement shall identify the
jurisdiction of origin of the relevant ethical requirements; and
➢ States whether the auditor believes that the audit evidence that auditor has obtained is
sufficient and appropriate to provide a basis for the auditor’s opinion.

• Going Concern
✓ Where applicable, the auditor shall report in accordance with PSA 570.

• Key Audit Matters

✓ For audits of complete set of general purpose financial statements of listed entities, the auditor shall
communicate key audit matters in the auditor’s report in accordance with PSA 701.
✓ When the auditor is otherwise required by law or regulation or decides to communicate key audit
matters in the auditor’s report, the auditor shall do so in accordance with PSA 701.

• Other Information
✓ Where applicable, the auditor shall report in accordance with PSA 720.

• Responsibilities for the financial statements

✓ The auditor’s report shall include a section with a heading “Responsibilities of Management for the
Financial Statements.”
✓ This section of auditor’s report shall describe management’s responsibility for
➢ Preparing the financial statements in accordance with the applicable financial reporting
framework, and for such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to
fraud or error; and
➢ Assessing the entity’s ability to continue as going concern and whether the use of a going
concern basis of accounting is appropriate, as well as disclosing, matters relating to going
concern.
➢ This section of the auditor’s report shall also identify those responsible for the oversight of the
financial reporting process, when those responsible for such oversight are different from those
who fulfill the responsibilities as described above (the management responsibility). In this
case, the heading of this section shall also refer to “Those Charged with Governance” or such
term that is appropriate in the context of the legal framework in the particular jurisdiction.
✓ When the financial statements are prepared in accordance with a fair presentation framework, the
description of responsibilities for the financial statements in the auditor’s report shall refer to “the
preparation and fair presentation of these financial statements” or “the preparation of financial
statements that give a true and fair view,” as appropriate in the circumstances.

• Auditor’s Responsibilities for the Audit of Financial Statements

✓ The auditor’s report shall include a section with the heading “Auditor’s Responsibilities for the Audit
of the Financial Statements.”
✓ This section of the auditor’s report shall:
(a) State that the objectives of the auditor are to:
(i) Obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error; and
(ii) Issue an auditor’s report that includes the auditor’s opinion.
(b) State that reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with PSAs will always detect a material misstatement when it exists;
and
(c) State that misstatements can arise from fraud or error, and either:
(i) Describe that they are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis of
these financial statements; or
(ii) Provide a definition or description of materiality in accordance with the applicable financial
reporting framework.
✓ (PSA 700 paragraph 39)The Auditor’s Responsibilities for the Audit of the Financial Statements
section of the auditor’s report shall further:

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(a) State that, as part of an audit in accordance with PSAs, the auditor exercises professional
judgment and maintains professional skepticism throughout the audit; and
(b) Describe an audit by stating that the auditor’s responsibilities are:
(i) To identify and assess the risks of material misstatement of the financial statements,
whether due to fraud or error; to design and perform audit procedures responsive to those
risks; and to obtain audit evidence that is sufficient and appropriate to provide a basis for
the auditor’s opinion. The risk of not detecting a material misstatement resulting from fraud
is higher than for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal control.
(ii)To obtain an understanding of internal control relevant to the audit in order to design
audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control. In circumstances
when the auditor also has a responsibility to express an opinion on the effectiveness of
internal control in conjunction with the audit of the financial statements, the auditor shall
omit the phrase that the auditor’s consideration of internal control is not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control.
(iii) To
evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by management.
(iv) To conclude on the appropriateness of management’s use of the going concern basis of
accounting and, based on the audit evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt on the entity’s ability to
continue as a going concern. If the auditor concludes that a material uncertainty exists, the
auditor is required to draw attention in the auditor’s report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to modify the opinion. The
auditor’s conclusions are based on the audit evidence obtained up to the date of the
auditor’s report. However, future events or conditions may cause an entity to cease to
continue as a going concern.
(v) When the financial statements are prepared in accordance with a fair presentation
framework, to evaluate the overall presentation, structure and content of the financial
statements, including the disclosures, and whether the financial statements represent the
underlying transactions and events in a manner that achieves fair presentation.
(c) When PSA 600 applies, further describe the auditor’s responsibilities in a group audit
engagement by stating that:
(i)The auditor’s responsibilities are to obtain sufficient appropriate audit evidence
regarding the financial information of the entities or business activities within the group to
express an opinion on the group financial statements;
The auditor is responsible for the direction, supervision and performance of the group
(ii)
audit; and
(iii) The auditor remains solely responsible for the auditor’s opinion.

✓ (PSA 700 Paragraph 40) The Auditor’s Responsibilities for the Audit of the Financial Statements
section of the auditor’s report also shall:
(a) State that the auditor communicates with those charged with governance regarding, among
other matters, the planned scope and timing of the audit and significant audit findings, including
any significant deficiencies in internal control that the auditor identifies during the audit;
(b) For audits of financial statements of listed entities, state that the auditor provides those
charged with governance with a statement that the auditor has complied with relevant ethical
requirements regarding independence and communicates with them all relationships and other
matters that may reasonably be thought to bear on the auditor’s independence, and where
applicable, related safeguards; and
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(c) For audits of financial statements of listed entities and any other entities for which key audit
matters are communicated in accordance with PSA 701, state that, from the matters
communicated with those charged with governance, the auditor determines those matters that
were of most significance in the audit of the financial statements of the current period and are
therefore the key audit matters. The auditor descsribes these matters in the auditor’s report unless
law or regulation precludes public disclosure about the matter or when, in extremely rare
circumstances, the auditor determines that a matter should not be communicated in the auditor’s
report because the adverse consequences of doing so would reasonably be expected to outweigh
the public interest benefits of such communication.
✓ Location of the description of the auditor’s responsibilities for the audit of the financial
statements
The description of the auditor’s responsibilities for the audit of the financial statements required by
paragraphs 39–40 shall be included:
(a) Within the body of the auditor’s report;
(b) Within an appendix to the auditor’s report, in which case the auditor’s report shall include a
reference to the location of the appendix; or
(c) By a specific reference within the auditor’s report to the location of such a description on a
website of an appropriate authority, where law, regulation or national auditing standards
expressly permit the auditor to do so.
When the auditor refers to a description of the auditor’s responsibilities on a website of an
appropriate authority, the auditor shall determine that such description addresses, and is not
inconsistent with, the requirements in paragraphs 39–40 of this PSA (700).

• Other Reporting Responsibilities

✓ If the auditor addresses other reporting responsibilities in the auditor’s report on the financial
statements that are in addition to the auditor’s responsibilities under the PSAs, these other reporting
responsibilities shall be addressed in a separate section in the auditor’s report with a heading titled
“Report on Other Legal and Regulatory Requirements” or otherwise as appropriate to the content
of the section, unless these other reporting responsibilities address the same topics as those presented
under the reporting responsibilities required by the PSAs in which case the other reporting
responsibilities may be presented in the same section as the related report elements required by the
PSAs.
✓ If other reporting responsibilities are presented in the same section as the related report elements
required by the PSAs, the auditor’s report shall clearly differentiate the other reporting
responsibilities from the reporting that is required by the PSAs.
✓ If the auditor’s report contains a separate section that addresses other reporting responsibilities, the
requirements of paragraphs 21–40 of PSA 700 shall be included under a section with a heading
“Report on the Audit of the Financial Statements.” The “Report on Other Legal and Regulatory
Requirements” shall follow the “Report on the Audit of the Financial Statements.”

• Name of the Engagement Partner

✓ The name of the engagement partner shall be included in the auditor’s report on financial statements
of listed entities unless, in rare circumstances, such disclosure is reasonably expected to lead to a
significant personal security threat. In the rare circumstances that the auditor intends not to include
the name of the engagement partner in the auditor’s report, the auditor shall discuss this intention
with those charged with governance to inform the auditor’s assessment of the likelihood and severity
of a significant personal security threat.

• Signature of the Auditor

✓ The auditor’s report shall be signed.

• Auditor’s Address
✓ The auditor’s report shall name the location in the jurisdiction where the auditor practice

• Date of the Auditor’s Report

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✓ The auditor’s report shall be dated no earlier than the date on which the auditor has obtained
sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial
statements, including evidence that:
(a) All the statements and disclosures that comprise the financial statements have been prepared; and
(b) Those with the recognized authority have asserted that they have taken responsibility for those
financial statements.

• Supplementary Information Presented with the Financial Statements

✓ If supplementary information that is not required by the applicable financial reporting framework is
presented with the audited financial statements, the auditor shall evaluate whether, in the auditor’s
professional judgment, supplementary information is nevertheless an integral part of the financial
statements due to its nature or how it is presented. When it is an integral part of the financial
statements, the supplementary information shall be covered by the auditor’s opinion.
✓ If supplementary information that is not required by the applicable financial reporting framework is
not considered an integral part of the audited financial statements, the auditor shall evaluate whether
such supplementary information is presented in a way that sufficiently and clearly differentiates it
from the audited financial statements. If this is not the case, then the auditor shall ask management to
change how the unaudited supplementary information is presented. If management refuses to do so,
the auditor shall identify the unaudited supplementary information and explain in the auditor’s report
that such supplementary information has not been audited.

Sample Auditor’s Report on Financial Statements of a Listed Entity

INDEPENDENT AUDITOR’S REPORT

To the Shareholders and Those Charged with Governance of ABC Company

4th Floor Pelizloy Centrum
Session Road, Baguio City

Report on the Audit of the Financial Statements1

Opinion
We have audited the financial statements of ABC Company (the Company), which comprise the statement of financial
position as at December 31, 20X1, and the statement of income, statement of comprehensive income, statement of
changes in equity and statement of cash flows for the year ended December 31, 20X1, and notes to the financial
statements, including a summary of significant accounting policies.
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of
the Company as at December 31, 20X1, and its financial performance and its cash flows for the year ended December
31, 20X1 in accordance with Philippine Financial Reporting Standards (PFRSs).

Basis for Opinion

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

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the
financial statements of the current period. These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

1
The sub-title “Report on the Audit of the Financial Statements” is unnecessary in circumstances when the second sub-title “Report on Other Legal and Regulatory
Requirements” is not applicable.
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[Description of each key audit matter in accordance with PSA 701.]

Other Information [or another title if appropriate such as “Information Other than the Financial Statements and
Auditor’s Report Thereon”]
[Reporting in accordance with the reporting requirements in PSA 720 (Revised) – see Illustration 1 in Appendix 2 of
PSA 720 (Revised).]
Responsibilities of Management and Those Charged with Governance for the
Financial Statements2
Management is responsible for the preparation and fair presentation of the financial statements in accordance with
PFRSs,3 and for such internal control as management determines is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a
going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of
accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic
alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with
PSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with PSAs, we exercise professional judgment and maintain professional skepticism
throughout the audit. We also:
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and
appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from
fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control.4
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and
related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the
audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast
significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the
audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the
Company to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and
whether the financial statements represent the underlying transactions and events in a manner that achieves fair
presentation.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing
of the audit and significant audit findings, including any significant deficiencies in internal control that we identify
during our audit.

2
Throughout these illustrative auditor’s reports, the terms management and those charged with governance may need to be replaced by another term that is appropriate
in the context of the legal framework in the particular jurisdiction.
3
Where management’s responsibility is to prepare financial statements that give a true and fair view, this may read: “Management is responsible for the preparation
of financial statements that give a true and fair view in accordance with International Financial Reporting Standards, and for such ...”
4
This sentence would be modified, as appropriate, in circumstances when the auditor also has a responsibility to issue an opinion on the effectiveness of internal
control in conjunction with the audit of the financial statements.
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We also provide those charged with governance with a statement that we have complied with relevant ethical
requirements regarding independence, and to communicate with them all relationships and other matters that may
reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most
significance in the audit of the financial statements of the current period and are therefore the key audit matters. We
describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or
when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because
the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such
communication.

Report on Other Legal and Regulatory Requirements

[The form and content of this section of the auditor’s report would vary depending on the nature of the auditor’s other reporting
responsibilities prescribed by local law, regulation or national auditing standards. The matters addressed by other law, regulation
or national auditing standards (referred to as “other reporting responsibilities”) shall be addressed within this section unless the
other reporting responsibilities address the same topics as those presented under the reporting responsibilities required by the PSAs
as part of the Report on the Audit of the Financial Statements section. The reporting of other reporting responsibilities that address
the same topics as those required by the PSAs may be combined (i.e., included in the Report on the Audit of the Financial Statements
section under the appropriate subheadings) provided that the wording in the auditor’s report clearly differentiates the other
reporting responsibilities from the reporting that is required by the PSAs where such a difference exists.
The engagement partner on the audit resulting in this independent auditor’s report is Renante D. Balocating.

RENANTE D. BALOCATING & CO., CPAs

Renante D. Balocating
RENANTE D. BALOCATING
CPA Certificate No. _____________
SEC Accreditation No. ………………..
Tax Identification No. __________
BIR Accreditation No. …………….
PTR No. _____________ issued on ___________ at _______________

3rd Floor Arenn Building

Perez Boulevard, Dagupan City

March 21, 20X2

PSA 701
COMMUNICATING KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITOR’S REPORT

FOCUS NOTES:
• Purpose of communicating key audit matters (KAM):
- to enhance the communicative value of the auditor’s report by providing greater transparency
about the audit that was performed.
- provide additional information to intended users of the financial statements (“intended users”) to
assist them in understanding those matters that, in the auditor’s professional judgment, were of most
significance in the audit of the financial statements of the current period.
- assist intended users in understanding the entity and areas of significant management judgment in the
audited financial statements.
- provide intended users a basis to further engage with management and those charged with
governance about certain matters relating to the entity, the audited financial statements, or the audit
that was performed.

• Communicating key audit matters in the auditor’s report is in the context of the auditor having formed an
opinion on the financial statements as a whole. Communicating key audit matters in the auditor’s report
is:
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a. NOT A substitute for disclosures in the financial statements that the applicable financial reporting
framework requires management to make, or that are otherwise necessary to achieve fair presentation;
b. NOT A substitute for the auditor expressing a modified opinion when required by the circumstances
of a specific audit engagement in accordance with PSA 705 (Revised);5
c. NOT A substitute for reporting in accordance with PSA 570 (Revised) 6 when a material uncertainty
exists relating to events or conditions that may cast significant doubt on an entity’s ability to continue
as a going concern; or
d. NOT A separate opinion on individual matters.

• The objectives of the auditor are to determine key audit matters and, having formed an opinion on the
financial statements, communicate those matters by describing them in the auditor’s report.

• Key audit matters—Those matters that, in the auditor’s professional judgment, were of most significance
in the audit of the financial statements of the current period. Key audit matters are selected from matters
communicated with those charged with governance.

• Communicating KAM is required for audits of complete set of general purpose financial statements of
listed entity. PSA 701 also applies in circumstances when the auditor otherwise decides to communicate
key audit matters in the auditor’s report or when the auditor is required by law or regulation to
communicate key audit matters in the auditor’s report.

• PSA 705 (Revised) prohibits the auditor from communicating key audit matters when the auditor
disclaims an opinion on the financial statements, unless such reporting is required by law or regulation.

• REQUIREMENTS
✓ Determining Key Audit Matters
- (PSA 701 Paragraph 9) The auditor shall determine, from the matters communicated with those
charged with governance, those matters that required significant auditor attention in performing the
audit. In making this determination, the auditor shall take into account the following:
a. Areas of higher assessed risk of material misstatement, or significant risks identified in accordance
with PSA 315 (Revised).
b. Significant auditor judgments relating to areas in the financial statements that involved significant
management judgment, including accounting estimates that have been identified as having high
estimation uncertainty.
c. The effect on the audit of significant events or transactions that occurred during the period.

- (PSA 701 Paragraph 10) The auditor shall determine which of the matters determined in accordance
with paragraph 9 were of most significance in the audit of the financial statements of the current
period and therefore are the key audit matters.

✓ Communicating Key Audit Matters

- The auditor shall describe each key audit matter, using an appropriate subheading, in a separate section
of the auditor’s report under the heading “Key Audit Matters,” unless the circumstances in paragraphs
14 or 15 of PSA 701 apply. The introductory language in this section of the auditor’s report shall state
that:
a. Key audit matters are those matters that, in the auditor’s professional judgment, were of most
significance in the audit of the financial statements [of the current period]; and
b. These matters were addressed in the context of the audit of the financial statements as a
whole, and in forming the auditor’s opinion thereon, and the auditor does not provide a
separate opinion on these matters.

5
PSA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report
6
PSA 570 (Revised), Going Concern, paragraphs 22–23
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✓ The auditor shall not communicate a matter in the Key Audit Matters section of the auditor’s
report when the auditor would be required to modify the opinion in accordance with PSA 705
(Revised) as a result of the matter.

✓ Descriptions of Individual Key Audit Matters

- (PSA 701 Paragraph 13) The description of each key audit matter in the Key Audit Matters section
of the auditor’s report shall include a reference to the related disclosure(s), if any, in the financial
statements and shall address:
a. Why the matter was considered to be one of most significance in the audit and therefore
determined to be a key audit matter; and
b. How the matter was addressed in the audit.

✓ Circumstances in Which a Matter Determined to Be a Key Audit Matter Is Not Communicated in the
Auditor’s Report
- (PSA 701 Paragraph 14) The auditor shall describe each key audit matter in the auditor’s report
unless:
a. Law or regulation precludes public disclosure about the matter; or
b. In extremely rare circumstances, the auditor determines that the matter should not be
communicated in the auditor’s report because the adverse consequences of doing so would
reasonably be expected to outweigh the public interest benefits of such communication. This
shall not apply if the entity has publicly disclosed information about the matter.

✓ Interaction between Descriptions of Key Audit Matters and Other Elements Required to Be Included
in the Auditor’s Report
- (PSA 701 Paragraph 15) A matter giving rise to a modified opinion in accordance with PSA 705
(Revised), or a material uncertainty related to events or conditions that may cast significant doubt
on the entity’s ability to continue as a going concern in accordance with PSA 570 (Revised), are
by their nature key audit matters. However, in such circumstances, these matters shall not be
described in the Key Audit Matters section of the auditor’s report and the requirements in
paragraphs 13–14 (of PSA 701) do not apply. Rather, the auditor shall:
a. Report on these matter(s) in accordance with the applicable PSA(s); and
b. Include a reference to the Basis for Qualified (Adverse) Opinion or the Material Uncertainty
Related to Going Concern section(s) in the Key Audit Matters section.
✓ Form and Content of the Key Audit Matters Section in Other Circumstances
- If the auditor determines, depending on the facts and circumstances of the entity and the audit,
that there are no key audit matters to communicate or that the only key audit matters
communicated are those matters addressed by paragraph 15, the auditor shall include a statement
to this effect in a separate section of the auditor’s report under the heading “Key Audit Matters.”
✓ Communication with Those Charged with Governance
- The auditor shall communicate with those charged with governance:
a. Those matters the auditor has determined to be the key audit matters; or
b. If applicable, depending on the facts and circumstances of the entity and the audit, the auditor’s
determination that there are no key audit matters to communicate in the auditor’s report.
✓ Documentation
- The auditor shall include in the audit documentation:
(a) The matters that required significant auditor attention as determined in accordance with
paragraph 9, and the rationale for the auditor’s determination as to whether or not each of these
matters is a key audit matter in accordance with paragraph 10;

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(b) Where applicable, the rationale for the auditor’s determination that there are no key audit
matters to communicate in the auditor’s report or that the only key audit matters to
communicate are those matters addressed by paragraph 15; and
(c) Where applicable, the rationale for the auditor’s determination not to communicate in the
auditor’s report a matter determined to be a key audit matter.

PSA 705
MODIFICATIONS TO THE OPINION IN THE INDEPENDENT
AUDITOR’S REPORT

FOCUS NOTES:
• Types of Modified Opinions
a. a qualified opinion,
b. an adverse opinion
c. disclaimer of opinion.

• Circumstances When a Modification to the Auditor’s Opinion Is Required

a. auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are
not free from material misstatement.
b. auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement.

• Determining the Type of Modification to the Auditor’s Opinion

Auditor’s Judgment about the Pervasiveness of the

Effects or Possible Effects on the Financial
Statements

Nature of Matter Giving Material but Not Material and Pervasive

Rise to the Modification Pervasive

Financial statements are Qualified opinion Adverse opinion

materially misstated
Inability to obtain sufficient
appropriate audit evidence Qualified opinion Disclaimer of opinion

The term “fair presentation framework” is used to refer to a financial reporting framework that requires
compliance with the requirements of the framework and:
(i) Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it
may be necessary for management to provide disclosures beyond those specifically required by the
framework; or
(ii) Acknowledges explicitly that it may be necessary for management to depart from a requirement of the
framework to achieve fair presentation of the financial statements. Such departures are expected to be
necessary only in extremely rare circumstances.
The term “compliance framework” is used to refer to a financial reporting framework that requires
compliance with the requirements of the framework, but does not contain the acknowledgements in (i) or (ii)
above.

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MODIFIED OPINION (PHRASE TO BE USED):

Qualified Adverse Disclaimer Fair Compliance

opinion opinion Of opinion Presentation framework
Due to Due to framework
material inability to
misstatements obtain
sufficient
appropriate
evidence
“except for the effects of the matter(s) x
described in the Basis for ______
Opinion paragraph, the financial x
statements present fairly, in all material
respects…”

“except for the effects of the matter(s) x x

described in the Basis for _____
Opinion paragraph, the financial
statements have been prepared, in all
material respects…”

“except for the possible effects of the x x

matter(s) described in the Basis for
______ Opinion paragraph, the
financial statements present fairly, in all
material respects…”

“except for the possible effects of the x x

matter(s) described in the Basis for
_____ Opinion paragraph, the financial
statements have been prepared, in all
material respects…”

“because of the significance of the x x

matter(s) described in the Basis for
_____ Opinion paragraph, the financial
statements do not present fairly…”

“because of the significance of the x x

matter(s) described in the Basis for
_____ Opinion paragraph,the financial
statements have not been prepared, in
all material respects…”

“because of the significance of the x x x

matter(s) described in the Basis for
_____ of Opinion paragraph, we have
not been able to obtain sufficient
appropriate audit evidence to provide a
basis for an audit opinion.
Accordingly, we do not express an
opinion on the financial statements.”

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PSA 706
EMPHASIS OF MATTER PARAGRAPHS AND OTHER
MATTER PARAGRAPHS IN THE INDEPENDENT
AUDITOR’S REPORT

FOCUS NOTES:

 Emphasis of Matter paragraph – A paragraph included in the auditor’s report that refers to a matter
appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such
importance that it is fundamental to users’ understanding of the financial statements.

 Other Matter paragraph – A paragraph included in the auditor’s report that refers to a matter other than
those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to
users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.

 The objective of the auditor, having formed an opinion on the financial statements, is to draw users’
attention, when in the auditor’s judgment it is necessary to do so, by way of clear additional
communication in the auditor’s report, to:

a. A matter, although appropriately presented or disclosed in the financial statements, that is of such
importance that it is fundamental to users’ understanding of the financial statements; or
b. As appropriate, any other matter that is relevant to users’ understanding of the audit, the auditor’s
responsibilities or the auditor’s report.
 Requirements
➢ Emphasis of Matter Paragraphs in the Auditor’s Report
If the auditor considers it necessary to draw users’ attention to a matter presented or disclosed in the
financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to
users’ understanding of the financial statements, the auditor shall include an Emphasis of Matter
paragraph in the auditor’s report provided:
(a) The auditor would not be required to modify the opinion in accordance with PSA 705 (Revised) as
a result of the matter; and
(b) When PSA 701 applies, the matter has not been determined to be a key audit matter to be
communicated in the auditor’s report.

When the auditor includes an Emphasis of Matter paragraph in the auditor’s report, the auditor shall:

(a) Include the paragraph within a separate section of the auditor’s report with an appropriate heading
that includes the term “Emphasis of Matter”;
(b) Include in the paragraph a clear reference to the matter being emphasized and to where relevant
disclosures that fully describe the matter can be found in the financial statements. The paragraph
shall refer only to information presented or disclosed in the financial statements; and
(c) Indicate that the auditor’s opinion is not modified in respect of the matter emphasized.

➢ Other Matter Paragraphs in the Auditor’s Report

If the auditor considers it necessary to communicate a matter other than those that are presented or
disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’
understanding of the audit, the auditor’s responsibilities or the auditor’s report, the auditor shall
include an Other Matter paragraph in the auditor’s report, provided:
(a) This is not prohibited by law or regulation; and
(b) When PSA 701 applies, the matter has not been determined to be a key audit matter to be
communicated in the auditor’s report.
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When the auditor includes an Other Matter paragraph in the auditor’s report, the auditor shall include
the paragraph within a separate section with the heading “Other Matter,” or other appropriate heading.

➢ Communication with Those Charged with Governance

If the auditor expects to include an Emphasis of Matter or an Other Matter paragraph in the auditor’s
report, the auditor shall communicate with those charged with governance regarding this expectation
and the wording of this paragraph.

➢ Placement of Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Auditor’s Report
The placement of an Emphasis of Matter paragraph or Other Matter paragraph in the auditor’s report
depends on the nature of the information to be communicated, and the auditor’s judgment as to the
relative significance of such information to intended users compared to other elements required to be
reported in accordance with PSA 700 (Revised). For example:
Emphasis of Matter Paragraphs
When the Emphasis of Matter paragraph relates to the applicable financial reporting framework,
including circumstances where the auditor determines that the financial reporting framework
prescribed by law or regulation would otherwise be unacceptable, the auditor may consider it
necessary to place the paragraph immediately following the Basis for Opinion section to provide
appropriate context to the auditor’s opinion.
When a Key Audit Matters section is presented in the auditor’s report, an Emphasis of Matter
paragraph may be presented either directly before or after the Key Audit Matters section, based on
the auditor’s judgment as to the relative significance of the information included in the Emphasis
of Matter paragraph. The auditor may also add further context to the heading “Emphasis of Matter”,
such as “Emphasis of Matter – Subsequent Event”, to differentiate the Emphasis of Matter
paragraph from the individual matters described in the Key Audit Matters section.
Other Matter Paragraphs
When a Key Audit Matters section is presented in the auditor’s report and an Other Matter
paragraph is also considered necessary, the auditor may add further context to the heading “Other
Matter”, such as “Other Matter – Scope of the Audit”, to differentiate the Other Matter paragraph
from the individual matters described in the Key Audit Matters section.
When an Other Matter paragraph is included to draw users’ attention to a matter relating to Other
Reporting Responsibilities addressed in the auditor’s report, the paragraph may be included in the
Report on Other Legal and Regulatory Requirements section.
When relevant to all the auditor’s responsibilities or users’ understanding of the auditor’s report,
the Other Matter paragraph may be included as a separate section following the Report on the Audit
of the Financial Statements and the Report on Other Legal and Regulatory Requirements.

 List of PSAs Containing Requirements for Emphasis of Matter Paragraphs

• PSA 210, Agreeing the Terms of Audit Engagements – paragraph 19(b)
• PSA 560, Subsequent Events – paragraphs 12(b) and 16
• PSA 800 (Revised), Special Considerations—Audits of Financial Statements Prepared in Accordance
with Special Purpose Frameworks – paragraph 14

 List of PSAs Containing Requirements for Other Matter Paragraphs

• PSA 560, Subsequent Events – paragraphs 12(b) and 16
• PSA 710, Comparative Information—Corresponding Figures and Comparative Financial Statements
– paragraphs 13–14, 16–17 and 19
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MULTIPLE CHOICE:
1. It contains a clear expression of auditor’s opinion on the Financial Statements.
a. auditor’s opinion c. audit plan
b. auditor’s report d. audit objectives

2. Financial statements prepared in accordance with a financial reporting framework that is designed to meet
the common information needs of a wide range of users.
a. general-purpose financial statements c. summarized financial statements
b. condensed financial statements d. interim financial statements

3. Which of the following is NOT true for a financial reporting framework that is classified as a fair
presentation framework?
a. requires compliance with the requirements of the framework.
b. it may be necessary for management to provide disclosures beyond those specifically required by the
framework.
c. it may be necessary for management to depart from a requirement of the framework to achieve fair
presentation of the financial statements.
d. It does not permit management to provide disclosures beyond the requirements of the framework and
it does not permit management to depart from a requirement of the framework.

4. Responsible for financial statements.

a. auditor c. internal auditor
b. entity’s management d. audit committee

5. Responsible for expression of opinion on the financial statements.

a. auditor c. internal auditor
b. entity’s management d. audit committee

6. Phrase to express unmodified opinion on the financial statements that used fair presentation framework.
a. “are presented accurately”
b. “present fairly, in all material respects…in accordance with”
c. “are prepared, in all material respects, in accordance with…”
d. “give an absolute assurance”

7. Phrase to express unmodified opinion on the financial statements that used compliance framework.
a. “give a true and fair view”
b. “are presented accurately”
c. “present fairly, in all material respects….in accordance with”
d. “are prepared, in all material respects, in accordance with…”
e. “give an absolute assurance”

8. The criteria for evaluating the fairness of the financial statements.

a. Financial Reporting Framework c. International Standards on Auditing
b. Philippine standards on Auditing d. Corporate Governance Act

9. Basis for forming an opinion on the financial statements.

a. assertions b. audit c. audit plan
evidence d. audit risk

10. Which of the following is the correct titling of the audit report?
a. Auditor’s report on financial statements
b. Independent Auditor’s Report
c. Auditor’s Report
d. Report of Auditor

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11. Ordinarily, the auditor’s report is addressed to:

a. Chief Executive Officer
b. Chief Financial Officer
c. Shareholders or To Those Charged With Governance or Both
d. Internal Auditor

12. The financial statements audited are identified in:

a. Title
b. Auditor’s responsibility section
c. Opinion Section
d. Explanatory paragraph

13. The first section of the audit report, the Opinion Section, contains the Opinion and also the following,
EXCEPT:
a. The entity whose financial statements have been audited.
b. Statement that the financial statements have been audited.
c. Responsibility to express opinion.
d. The title of each statement comprising the financial statements.
e. Reference to the notes including summary of significant accounting policies.
f. The date of, or period covered by, each financial statement comprising the financial statements.

14. An unmodified opinion cannot be expressed when

a. The auditor has obtained reasonable assurance.
b. Sufficient appropriate evidence has been obtained.
c. The financial statements are free from material statements.
d. The auditor is not independent.

15. The Basis for Opinion section of the auditor’s report shall be placed
a. After the opinion section
b. Before the opinion section
c. In the Key Audit Matters section
d. Other reporting responsibility section

16. The Basis for Opinion section of the auditor’s report following the opinion section shall include:
a. Statement that the audit was conducted in accordance with Philippine Standards on Auditing.
b. Reference to the section of the auditor’s report that describes the auditor’s responsibilities under the
PSAs.
c. Statement that the auditor is independent of the entity in accordance with the relevant ethical
requirements relating to the audit, and has fulfilled the auditor’s other ethical responsibilities in
accordance with these requirements. The statement shall identify the jurisdiction of origin of the
relevant ethical requirements.
d. Statement whether the auditor believes that the audit evidence that auditor has obtained is sufficient
and appropriate to provide a basis for the auditor’s opinion.
e. All of the above.

17. Those matters, that in the auditor’s professional judgment, were of most significance in the audit of
financial statements of the current period. They are selected from matters communicated with those
charged with governance.
a. Key Audit Matters
b. Matters of Governance Interest
c. Other Information
d. Other Matter

18. Key Audit Matters (KAM) section is required in

a. Audit of complete set of general purpose financial statements of listed entity.
b. All audits in accordance with PSA.
c. Audits of MSMEs.
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d. All of the above.

19. Other information as defined in PSA 720 includes

a. The financial or non-financial information (other than financial statements and the auditor’s report
thereon) included in an entity’s annual report.
b. Only the financial information (other than financial statements and auditor’s report thereon) included
in an entity’s annual report.
c. Only the non-financial information (other than financial statements and auditor’s report thereon)
included in an entity’s annual report.
d. The entity’s annual report.

20. Management’s responsibility for the preparation and fair presentation of the Financial Statements which
should be included in the auditor’s report does not include:
a. To express an opinion on the financial statements.
b. Preparing the financial statements in accordance with the applicable financial reporting framework.
c. Responsibility for internal control
d. Assessing the entity’s ability to continue as a going concern.

21. Which of the following should not be included or not stated in the Auditor’s Responsibility section of
auditor’s report?
a. Responsibility to obtain reasonable assurance and express an opinion on the financial statements
based on the audit.
b. Responsibility to exercise professional judgment and professional skepticism.
c. Responsibility to perform test of controls.
d. Responsibility to obtain understanding of internal control.

22. Report on other legal and regulatory requirements should be included in the auditor’s report:
a. in the opinion paragraph.
b. in a separate emphasis of matter paragraph after the opinion paragraph.
c. in a separate section of the Auditor’s Report
d. before the opinion paragraph.

23. The auditor’s report should be dated:

a. as of balance sheet date.
b. no earlier than the date on which the auditor has obtained sufficient appropriate evidence.
c. no earlier than the date of the financial statements.
d. no earlier than the date of issuance of financial statements.

24. The opinion expressed by the auditor when he concludes that the financial statements are prepared or are
presented fairly, in all material respects, in accordance with the applicable financial reporting framework.
a. Unmodified opinion
b. Qualified opinion
c. Adverse opinion
d. Disclaimer of opinion

25. The opinion expressed by the auditor when he concludes that the financial statements are materially
misstated or when he was not able to obtain sufficient appropriate evidence and in his judgment the effect
or possible effect on the financial statement is material but not pervasive.
a. Unmodified opinion
b. Qualified opinion
c. Adverse opinion
d. Disclaimer of opinion

26. The opinion expressed by the auditor when he concludes that the financial statements are materially
misstated and in his judgment the effect on the financial statement is material and pervasive.
a. Unmodified opinion
b. Qualified opinion
c. Adverse opinion
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d. Disclaimer of opinion

27. The opinion expressed by the auditor when he was not able to obtain sufficient appropriate evidence and
in his judgment possible effect on the financial statement is material and pervasive.
a. Unmodified opinion
b. Qualified opinion
c. Adverse opinion
d. Disclaimer of opinion

28. When an auditor lacks independence with respect to a client, the auditor should issue
a. a disclaimer of opinion.
b. an adverse opinion.
c. a qualified opinion with explanatory paragraph.
d. an unqualified opinion.

29. Under which of the following set of circumstances might the auditors disclaim an opinion?
a. The financial statements contain a departure from generally accepted accounting principles, the effect
of which is material
b. The principal auditors decide to make reference to the report of another auditor who audited a
subsidiary
c. There has been a material change between periods in the method of application of accounting
principles
d. There are significant scope limitations on the audit

30. The auditor’s inability to obtain sufficient appropriate audit evidence is also referred to as:
a. Limitation on the scope of the audit.
b. Limitation of audit.
c. Limitation of internal control.
d. Limitation of assurance.

31. The auditor’s inability to obtain sufficient appropriate audit evidence (also referred to as a limitation on
the scope of the audit) may arise from:
a. Circumstances beyond the control of the entity.
b. Circumstances relating to the nature or timing of the auditor’s work.
c. Limitations imposed by management.
d. All of the above.

32. Which of the following scope limitations is a management-imposed limitation?

a. The entity’s accounting records have been destroyed.
b. The accounting records of a significant component have been seized indefinitely by governmental
authorities.
c. The timing of the auditor’s appointment is such that the auditor is unable to observe the counting of
the physical inventories.
d. The auditor determines that performing substantive procedures alone is not sufficient, but the entity’s
controls are not effective.
e. Management prevents the auditor from observing the counting of the physical inventory.

33. The existence of audit risk is recognized by the statement in the auditor’s standard report that the auditor
a. Obtains a reasonable assurance about whether the financial statements are free of material
misstatements
b. Assessing the accounting principles used and also evaluates the overall financial statement presentation
c. Realizes some matters, either individually or in the aggregate, are important while other matters are
not important
d. Is responsible for expressing an opinion on the financial statements that are responsibility of
management

34. An auditor may reasonably issue a qualified opinion for a

Scope Limitation Unjustified accounting change
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a. Yes No
b. No Yes
c. Yes Yes
d. No No

35. An auditor was unable to obtain sufficient competent evidential matter concerning certain transactions due
to an inadequacy in the entity’s accounting records. The auditor would choose between issuing a (n)
a. Qualified opinion and an unqualified opinion with explanatory paragraph
b. Unqualified opinion with an explanatory paragraph and adverse opinion
c. Adverse opinion and disclaimer of opinion
d. Disclaimer of opinion and a qualified opinion

36. Which of the following phrases should be included in the opinion paragraph when an auditor expresses a
qualified opinion?
When read in conjunction with Note X With the foregoing explanation
a. Yes No
b. No Yes
c. Yes Yes
d. No No

37. When an auditor expresses an adverse opinion, the opinion paragraph should include
a. The principal effects of the departure from generally accepted accounting principles
b. A direct reference to a separate paragraph disclosing the basis for the opinion
c. The substantive reasons for the financial statements being misleading
d. A description of the uncertainty or scope limitation that prevents an unqualified opinion

38. Cheng, CPA was engaged to audit the financial statements of Essex Company after its fiscal year had
ended. The timing of Cheng’s appointment as auditor and the start of field work made confirmation of
accounts receivable by direct communication with the debtors ineffective. However, Cheng applied other
procedures and was satisfied as to the reasonableness of the account balances. Cheng’s auditor’s report
most likely contained a (n)
a. Unqualified opinion
b. Unqualified opinion with explanatory paragraph
c. Qualified opinion due to a scope limitation
d. Qualified due to a departure from generally accepted auditing standards

39. A limitation on the scope of an audit sufficient to preclude an unqualified opinion will usually result when
management
a. Is unable to obtain audited financial statements supporting the entity’s investment in a foreign
subsidiary
b. Refuses to disclose in the notes to the financial statements related- party transactions authorized by the
board of directors
c. Does not sign an engagement letter specifying the responsibilities of both the entity and the auditor
d. Fails to correct a reportable condition communicated to the audit committee after the prior year’s audit

40. When the auditor is unable to determine the amounts associated with the illegal acts of client personnel
because of an inability to obtain adequate evidence, the auditor should issue a(an):
a. "Subject to" qualified opinion
b. Disclaimer of opinion
c. Adverse opinion
d. Unqualified opinion with a separate explanatory paragraph

41. A limitation on the scope of the audit sufficient to preclude an unmodified opinion will always result
when management:
a. Asks the auditor to report on the balance sheet and not on the other basic financial statements
b. Refuses to permit its lawyer to respond to the letter of audit inquiry
c. Discloses material related party transactions in the notes to the financial statements
d. Knows that confirmation of accounts receivable is not feasible
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42. In which of the following circumstances would an adverse opinion be appropriate?

a. The auditor is not independent with respect to the enterprise being audited.
b. The statements are not in conformity with generally accepted accounting principles because they omit
a statement of changes in financial position.
c. The statements are not in conformity with generally accepted accounting principles regarding pension
plans.
d. A client-imposed scope limitation prevents the auditor from complying with generally accepted
auditing standards

43. An auditor decides to issue 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
a. A client – imposed scope limitation
b. A departure from generally accepted auditing standards
c. The possible effects on the financial statements
d. Inadequate disclosure of necessary information

44. Determine whether the following will be written in emphasis of matter paragraph or other matter paragraph.
a. The financial reporting framework prescribed by law or regulation is unacceptable.
b. Highlight the existence of a material uncertainty relating to the event or condition that may cast
significant doubt on the entity’s ability to continue as a going concern
c. To alert users of the auditor’s report that the financial statements are prepared in accordance with a
special purpose framework and that, as a result, the financial statements may not be suitable for another
purpose.
d. To state that the financial statements of the prior period were audited by the predecessor auditor.
e. To state that the corresponding figures are unaudited.
f. To describe material inconsistencies.

45. An audit of the Wynning Company, a diamond mining company, brings to light the fact that its equipment
has been marked up to the owners expectation of market values. Such a situation will most likely result in
which type of report?
a. Disclaimer.
b. Review.
c. Adverse.
d. Unqualified with explanatory language.

46. In which one of the following instances would an auditor issue an adverse opinion?
a. Management declines to present earnings per share in the income statement.
b. There is substantial doubt about the entity's ability to continue as a going concern.
c. There is a material dollar misstatement that overshadows the entire financial statement.
d. The client does not allow the auditor to send confirmations to its three largest clients.

47. When an auditor lacks independence with respect to a client, the auditor should issue
a. a disclaimer of opinion.
b. an adverse opinion.
c. a qualified opinion with explanatory paragraph.
d. an unqualified opinion.

48. A scope restriction is least likely to result in a(an):

a. Qualified opinion
b. Disclaimer of opinion
c. Adverse opinion
d. Standard unqualified opinion

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49. An audit client has refused to allow the auditors to perform a generally accepted auditing procedure. The
circumstance would normally result in the issuance of:
a. A disclaimer of opinion
b. An adverse opinion
c. An "except for" qualification of the report
d. An unqualified report with explanatory language

50. Under which of the following set of circumstances might the auditors disclaim an opinion?
a. The financial statements contain a departure from generally accepted accounting principles, the effect
of which is material
b. The principal auditors decide to make reference to the report of another auditor who audited a
subsidiary
c. There has been a material change between periods in the method of application of accounting
principles
d. There are significant scope limitations on the audit

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