Excel Professional Services, Inc. CPA Review PDF

Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao Since 1977 AT.3218 SOLIMAN/UY/RICAFRENTE The...

Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao Since 1977 AT.3218 SOLIMAN/UY/RICAFRENTE The Auditor’s Report MAY 2022 References: PSA 220, Quality Control for an Audit of Financial Statements PSA 260, Communication with Those Charged with Governance PSA 265, Communicating Deficiencies in Internal Control to Those Charged with Governance and Management PSA 450, Evaluation of Misstatements Identified during the Audit PSA 500, Audit Evidence PSA 700, Forming an Opinion and Reporting on the Financial Statements PSA 701, Communicating Key Audit Matters in the Independent Auditor’s Report PSA 705, Modifications to the Opinion in the Independent Auditor’s Report PSA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report PSA 710, Comparative Information—Corresponding Figures and Comparative Financial Statements PSA 720, The Auditor’s Responsibilities Relating to Other Information in Documents Containing Audited Financial Statements LECTURE NOTES Introduction Evaluating Misstatements At the end of the audit, the auditor shall: Misstatement is a difference between the amount, classification, presentation, or disclosure of a reported 1. Form an opinion on the financial statements (financial financial statement item and the amount, classification, statements) based on the conclusions drawn from the presentation, or disclosure that is required for the item to audit evidence obtained; and be in accordance with the applicable financial reporting 2. Express clearly that opinion through a written report. framework. Misstatements can arise from error or fraud. Misstatements may be identified at any stage of the Forming the Auditor’s Opinion audit. Misstatements may result from: 1. Unmodified (unqualified) opinion—The opinion An inaccuracy in gathering or processing data from expressed when the financial statements are prepared, which the financial statements are prepared in all material respects, in accordance with the An omission of an amount or disclosure applicable financial reporting framework. An incorrect accounting estimate arising from overlooking or clear misinterpretation of facts 2. Modified opinion—The three types of are: Judgments of management concerning accounting estimates that the auditor considers unreasonable or Qualified opinion—the auditor is satisfied that the the selection and application of accounting policies that financial statements are presented fairly, except for the auditor considers inappropriate. a specific aspect of them. Adverse opinion—the auditor does not believe the Types of Misstatements financial statements are fairly presented. Disclaimer of opinion—the auditor does not know if Factual misstatements are misstatements about which the financial statements are presented fairly. there is no doubt. Pervasive effects or possible effects on the financial Judgmental misstatements are differences arising from statements are those that, in the auditor’s judgment: the judgments of management concerning accounting estimates that the auditor considers unreasonable, or 1. Are not confined to specific elements, accounts or items the selection or application of accounting policies that of the financial statements; the auditor considers inappropriate. 2. If so confined, represent or could represent a substantial proportion of the financial statements; or Projected misstatements are the auditor’s best estimate 3. In relation to disclosures, are fundamental to users’ of misstatements in populations, involving the understanding of the financial statements. projection of misstatements identified in audit samples to the entire population from which the samples were Evaluating Audit Evidence drawn. Based on the audit procedures performed and the audit Uncorrected misstatements Any misstatements (except evidence obtained, the auditor shall evaluate, before the those clearly trivial) that the auditors find should be conclusion of the audit whether the assessments of the risks corrected; otherwise, they cannot issue an unqualified of material misstatement at the assertion level remain opinion on the financial statements. Unrecorded appropriate. The sufficiency and appropriateness of audit misstatements are combined as total likely evidence obtained primarily depend on the auditor’s misstatement in the financial statements and professional judgment. considered. Page 1 of 13 www.teamprtc.com.ph AT.3218 EXCEL PROFESSIONAL SERVICES, INC. Forming the Auditor’s Reports a. States that the audit was conducted based on PSAs; The auditor’s report shall be in writing (hard copy format or b. Refers to the section of the auditor’s report that an electronic medium). The auditor’s may be an unmodified describes the auditor’s responsibilities under the PSAs; report or a modified report, depending upon the results of c. Includes a statement that the auditor is independent of the audit. the entity in accordance with the relevant ethical requirements relating to the audit, and has fulfilled the Unmodified Auditor’s Report auditor’s other ethical responsibilities in accordance with these requirements; and With the exception of the Opinion and Basis for Opinion d. States whether the auditor believes that the audit sections, PSA 700 does not establish requirements for evidence the auditor has obtained is sufficient and ordering the elements of the auditor’s report. However, it appropriate to provide a basis for the auditor’s opinion. requires the use of specific headings, which are intended to assist in making auditor’s reports more recognizable. The Material Uncertainty Related to Going Concern (GC) elements of unmodified auditor’s report are: Applicable if the auditor considers a material Unmodified Auditor’s Report – Elements uncertainty related to going concern exists. 1. Title Example: 2. Addressee 3. Report on the Audit of the Financial Statements - Omitted if no Other Reporting Responsibilities Material Uncertainty Related to Going Concern 4. Opinion 5. Basis for Opinion We draw attention to Note X in the financial 6. Material Uncertainty Related to Going Concern (If statements, which indicates that the Company applicable) incurred a net loss of (amount) during the year ended 7. Key Audit Matters (KAP) (if applicable e.g., Listed December 31, 20X1 and, as of that date, the entities) Company’s current liabilities exceeded its total assets 8. Other Information (if applicable) by (amount). As stated in Note X, these events or 9. Responsibilities of Management and Those Charge With conditions, along with other matters as set forth in Governance for the Financial Statements Note X, indicate that a material uncertainty exists that 10. Auditor's Responsibilities for the Audits of Financial may cast significant doubt on the Company’s ability to Statements continue as a going concern. Our opinion is not 11. Other Reporting Responsibilities (ORR) - If applicable modified in respect of this matter. 12. Name of the Engagement Partner (Required only for listed entities) Key Audit Matters (KAM) 13. Signature of the auditor 14. Auditor's address Applicable to audit of listed entities, or where required 15. Date of Auditor's Report by law or regulation. KAM refer to matters that, in the auditor’s professional Title judgement, are most significant to the audit. Auditor is required to include each KAM unless (1) law Clearly indicates report of an independent auditor. or regulation precludes disclosure, or (2) in extremely Distinguishes this report from reports issued by others. rare circumstances, the auditor determines that the Signifies compliance with independence requirements. matter should not be communicated when adverse consequences of communicating the KAM would Addressee reasonably be expected to outweigh the public interest benefits of such communication. Addressed based on engagement’s circumstances. KAM is prohibited for a disclaimer of opinion, but Normally those for whom the report is prepared, often required for a qualified or adverse opinion. either to the shareholders or to TCWG. In certain limited circumstances, there may be no KAM to be communicated. The auditor’s report includes a Report on the Audit of the Financial Statements statement to that effect. Serves as the sub-title. Example: Used to separate other reporting responsibilities. Revenue Recognition Opinion The amount of revenue and profit recognized in the The first section of the auditor’s report, which also: year on the sale of [name of product] and aftermarket services is dependent on the appropriate assessment a. Identify the entity whose financial statements have of whether or not each long-term aftermarket contract been audited; for services is linked to or separate from the contract b. State that the financial statements have been audited; for sale of [name of product]. As the commercial c. Identify the title of each statement comprising the arrangements can be complex, significant judgment is financial statements; applied in selecting the accounting basis in each case. d. Refer to the notes, including the summary of significant In our view, revenue recognition is significant to our accounting policies; and audit as the Company might inappropriately account e. Specify the date of, or period covered by, each financial for sales of [name of product] and long-term service statements comprising the financial statements agreements as a single arrangement for accounting Basis for Opinion Page 2 of 13 www.teamprtc.com.ph AT.3218 EXCEL PROFESSIONAL SERVICES, INC. purposes and this would usually lead to revenue and Auditor’s Responsibilities for the Audit of the profit being recognized too early because the margin Financial Statements in the long-term service agreement is usually higher than the margin in the [name of product] sale The report must state that: agreement. the auditor’s objectives are to obtain reasonable Our audit procedures to address the risk of material assurance whether the financial statements as a whole misstatement relating to revenue recognition, which are free from material misstatement, and to issue an was considered to be a significant risk, included: auditor’s report that includes the auditor’s opinion; and Testing of controls, assisted by our own IT reasonable assurance is a high level of assurance, but specialists, including, among others, those over: is not a guarantee that an audit conducted in input of individual advertising campaigns’ terms accordance with the PSAs will always detect a material and pricing; comparison of those terms and misstatement when it exists. pricing data against the related overarching contracts with advertising agencies; and linkage The report must also: to viewer data; and Detailed analysis of revenue and the timing of its explain that misstatements can arise from fraud or error recognition based on expectations derived from describe the meaning of materiality our industry knowledge and external market data, explain that the auditor exercises professional following up variances from our expectations. judgement and maintains professional skepticism throughout the audit Other Information describe the auditor’s responsibilities in an audit. For the audit of listed entities or any other entity where The description of the auditor’s responsibilities must either the auditor has obtained other information, an ‘Other be set out in the body of the auditor’s report, in an appendix information’ section should be included in the auditor’s to the auditor’s report or by including a specific reference in report. This section should include: the body of the auditor’s report to such a description on the a statement that management is responsible for the website of an appropriate authority, where this is permitted other information by law and regulation. an identification of the other information obtained before the date of the auditor’s report (for listed Other Reporting Responsibilities (ORR) entities, also the other information expected to be obtained after the date of the auditor’s report) If the auditor is required by law to report on any other a statement that the auditor’s opinion does not cover matters, this must be done in an additional paragraph titled the other information “Report on other legal and regulatory requirements’ or a description of the auditor’s responsibilities for reading, otherwise as appropriate. considering and reporting on other information, and where other information has been obtained, either a (See “Auditor’s Report—Supplementary Information statement that the auditor has nothing to report, or a Presented with Financial Statements” below for further description of any uncorrected material misstatement discussion.) (See “Auditor’s Report—Other Information Included in an Name of the Engagement Partner and Signature of Entity’s Annual Report” below for further discussion.) the Auditor Responsibilities of MGT and TCWG for the Financial The name of the engagement partner should be identified, Statements unless such a disclosure is reasonably expected to lead to a significant personal security threat. The report must contain This part of the report describes the responsibilities of those the auditor's signature, whether this is the auditor's own who are responsible for the preparation of the financial name or the audit firm's name or both. statements. This section should describe management's responsibility including the following: In the Philippines, Securities Regulation Code (SRC) Rule 68 requires that the auditor’s report on financial statements The preparation of the financial statements. filed with the Securities and Exchange Commission (SEC), which will likewise be filed with the Bureau of Internal The implementation of internal control necessary to Revenue (BIR), be manually signed. In case of an auditing enable the preparation of financial statements that are firm, the certifying partner shall sign his/her own signature free from material misstatement, whether due to error and shall indicate that he/she is signing for the firm, the or fraud. name of which is also indicated in the report. The auditor is also required to state the signing accountant’s license number, Tax Identification No. (TIN), Privilege Tax Receipt The assessment of the entity’s ability to continue as a (PTR) No., registration number with the PRC/BOA, and going concern, the appropriateness of the going accreditation issued by the SEC. concern. Auditor’s Address The auditor’s report shall name the location in the jurisdiction where the auditor practices. Page 3 of 13 www.teamprtc.com.ph AT.3218 EXCEL PROFESSIONAL SERVICES, INC. Date of the Auditor’s Report Examples of are given below: The report must be dated no earlier than the date sufficient appropriate audit evidence was obtained on which to base Qualified Opinion the auditor's opinion on the financial statements. The company's inventories are carried in the statement of financial position at xxx. Management Modified Auditor’s Report has not stated inventories at the lower of cost and net realizable value but has stated them solely at cost, There are two ways in which the auditor’s report may be which constitutes a departure from PFRSs. The modified: (1) modifying the auditor’s opinion and (2) company's records indicate that, had management including Emphasis of Matter and Other Matter paragraph stated the inventories at the lower of cost and net without necessarily modifying the auditor’s opinion. realizable value, an amount of xxx would have been required to write the inventories down to their net Modified Auditor’s Report—Modified Opinion realizable value. Accordingly, cost of sales would have been increased by xxx, and income tax, net income The auditor modifies the following sections of the auditor’s and shareholders' equity would have been reduced by report in case a modified opinion is expressed: xxx, xxx and xxx, respectively. 1. Auditor’s opinion; 2. Basis for opinion; Adverse Opinion 3. Description of auditor’s responsibilities, in case of As explained in Note X, the Group has not consolidated disclaimer of opinion; and subsidiary XYZ Company that the Group acquired 4. Omission of KAM, in case of disclaimer of opinion. during 20X1 because it has not yet been able to determine the fair values of certain of the subsidiary’s Auditor’s Opinion material assets and liabilities at the acquisition date. This investment is therefore accounted for on a cost When the auditor modifies the audit opinion, the auditor basis. Under PFRSs, the Company should have shall use the heading “Qualified Opinion,” “Adverse consolidated this subsidiary. Had XYZ Company been Opinion,” or “Disclaimer of Opinion,” as appropriate, for the consolidated, many elements in the accompanying Opinion section, such as: consolidated financial statements would have been materially affected. The effects on the consolidated Qualified Opinion financial statements of the failure to consolidate have not been determined. Wordings are the same with unmodified opinion but with additional phrase, as follows: “…except for the effects of the matter described in the Basis for Disclaimer of Opinion Qualified Opinion section of our report…” We were not appointed as auditors of the company When the auditor expresses a qualified opinion, it until after December 31, 20X1 and thus did not would not be appropriate to use phrases such as “with observe the counting of physical inventories at the the foregoing explanation” or “subject to” in the beginning and end of the year. We were unable to Opinion section as these are not sufficiently clear or satisfy ourselves by alternative means concerning the forceful. inventory quantities held at December 31, 20X0 and Adverse Opinion 20X1 which are stated in the statement of financial position at xxx and xxx, respectively. In addition, the “In our opinion, because of the significance of the introduction of a new computerised accounts matter discussed in the Basis for Adverse Opinion receivable system in September 20X1 resulted in section of our report, the accompanying financial numerous errors in accounts receivable. As of the date statements do not present fairly…” of our audit report, management was still in the Disclaimer of Opinion process of rectifying the system deficiencies and “We do not express an opinion on the accompanying correcting the errors. We were unable to confirm or financial statements of the Company. Because of the verify by alternative means accounts receivable significance of the matter described in the Basis for included in the statement of financial position at a total Disclaimer of Opinion section of our report, we have amount of xxx as at December 31, 20X1. As a result not been able to obtain sufficient and appropriate audit of these matters, we were unable to determine evidence to provide a basis for an audit opinion on whether any adjustments might have been found these consolidated financial statements.” necessary in respect of recorded or unrecorded inventories and accounts receivable, and the elements Basis for Opinion making up the statement of profit or loss, statement of changes in equity and cash flow statement. When the auditor modifies the opinion on the financial statements, the auditor shall, in addition to the specific elements of the unmodified report: Description of Auditor’s Responsibilities, In Case of Disclaimer of Opinion 1. Amend the heading “Basis for Opinion” to “Basis for Qualified Opinion,” “Basis for Adverse Opinion,” or Include only the following: “Basis for Disclaimer of Opinion,” as appropriate; and 2. Within this section, include a description of the matter 1. A statement that the auditor’s responsibility is to giving rise to the modification. conduct an audit of the entity’s financial statements in accordance with PSAs and to issue an auditor’s report; 2. A statement that, however, because of the matter(s) described in the Basis for Disclaimer of Opinion section, Page 4 of 13 www.teamprtc.com.ph AT.3218 EXCEL PROFESSIONAL SERVICES, INC. the auditor was not able to obtain sufficient appropriate the audit, the auditor’s responsibilities or the auditor’s audit evidence to provide a basis for an audit opinion on report. the financial statements; and 3. The statement about auditor independence and other Including OM in the auditor’s report is appropriate provided ethical responsibilities. the auditor (1) is not prohibited by law or regulation, and (2) the matter has not been determined to be a KAM. Omission of KAM, In Case of Disclaimer of Opinion When the auditor includes an OM paragraph in the auditor’s Unless required by law or regulation, when the auditor report, the auditor shall include the paragraph within a disclaims an opinion on the financial statements, the separate section with the heading “Other Matter,” or other auditor’s report shall not include a KAM. appropriate heading. An example of an OM is: Modified Auditor’s Report—Emphasis of Matter (EOM) and Other Matter Other Matter (OM) The financial statements of ABC Company for the year The placement of an EOM paragraph or OM paragraph in the ended December 31, 20X0, were audited by another auditor’s report depends on (1) the nature of the auditor who expressed an unmodified opinion on those information to be communicated, and (2) the auditor’s statements on March 31, 20X1. judgment as to the relative significance of such information to intended users compared to other elements required to Auditor’s Report—Other Information Included in an be reported. Entity’s Annual Report Emphasis of Matter (EOM) Other information refers to financial or non-financial information (other than financial statements and the EOM refers to a paragraph included in the auditor’s report auditor’s report thereon) included in an entity’s annual that refers to a matter appropriately presented or report. Examples of other information include the following: disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is A report by MGT or TCWG on operations fundamental to users’ understanding of the financial Financial summaries or highlights statements. Employment data Planned capital expenditures Including an EOM in the auditor’s report is appropriate provided the auditor would not be required to (1) modify Financial ratios the opinion as a result of the matter, and (2) the matter has Names of officers and directors not been determined to be a KAM. Selected quarterly data EOM paragraphs are no longer used in relation to going The auditor shall read the other information to identity concern. Instead the auditor now uses a “Material material inconsistencies with the audited financial uncertainty” paragraph. statements. If a material inconsistency is identified, the auditor shall determine whether the audited financial When the auditor includes an EOM paragraph in the statements or other information is misstated. auditor’s report, the auditor shall: If the financial statements are materially misstated but 1. Include the paragraph within a separate section of the management refuses to correct the misstatement, the auditor’s report with an appropriate heading that auditor shall modify the audit opinion. includes the term “Emphasis of Matter”; 2. Include in the paragraph a clear reference to the matter If the other information is materially misstated and needs being emphasized and to where relevant disclosures to be revised but management refuses, the auditor shall that fully describe the matter can be found in the communicate this matter to TCWG and: financial statements. The paragraph shall refer only to information presented or disclosed in the financial Include an Other information section in the auditor's statements; and report that describes the material inconsistency, or 3. Indicate that the auditor’s opinion is not modified in Withdraw from the engagement (where this is legally respect of the matter emphasized. permitted). An example is given below. Misstatement of the other information exists when the other information is incorrectly stated or otherwise Emphasis of Matter – Effects of Fire misleading. For example, omission of a key performance indicator used by management could indicate that the other We draw attention to Note X of the financial information is misleading. statements, which describes the effects of a fire in the Company’s production facilities. Our opinion is not Auditor’s Report—Supplementary Information modified in respect of this matter. Presented with the financial statements Other Matter (OM) Supplementary information refers to information that is presented together with the financial statements that is not OM refers to a paragraph included in the auditor’s report required by the applicable financial reporting framework that refers to a matter other than those presented or used to prepare the financial statements, normally disclosed in the financial statements that, in the presented in either (1) supplementary schedules or as (2) auditor’s judgment, is relevant to users’ understanding of additional notes. The auditor’s reporting responsibilities Page 5 of 13 www.teamprtc.com.ph AT.3218 EXCEL PROFESSIONAL SERVICES, INC. depend on whether or not supplementary information is Auditor’s Report—Comparative Information considered integral part of the financial statements, as discussed below. The two types of comparative information are: Integral Part of the Financial Statements 1. Corresponding figures—comparative information where amounts and other disclosures for the prior period are The supplementary information shall be covered by the included as an integral part of the current period auditor’s opinion. The auditor’s opinion would also cover financial statements, and are intended to be read only notes or supplementary schedules that are cross-referenced in relation to the amounts and other disclosures relating from the financial statements. An example is given below. to the current period (referred to as “current period figures”). The level of detail presented in the Report on the Supplementary Information Required corresponding amounts and disclosures is dictated Under Revenue Regulations 15-2010 primarily by its relevance to the current period figures; and Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as 2. Comparative Financial Statements—comparative a whole. The supplementary information required information where amounts and other disclosures for under Revenue Regulations 15-2010 in [Note XX] to the prior period are included for comparison with the the financial statements is presented for purposes of financial statements of the current period but, if filing with the Bureau of Internal Revenue and is not audited, are referred to in the auditor’s opinion. The part of the basic financial statements. Such level of information included in those comparative information is the responsibility of management of financial statements is comparable with that of the [Name of Client]. The information has been subjected financial statements of the current period. PAS to the auditing procedures applied in our audit of the 1, Presentation of Financial Statements, requires this basic financial statements. In our opinion, the approach. The auditor shall update the previously information is fairly stated, in all material respects, in expressed opinion on the comparative financial relation to the basic financial statements taken as a statements. whole. In case that the prior period financial statements were Not Integral Part of the Financial Statements unaudited or audited by a predecessor auditor, the auditor shall state (if not prohibited) in an Other Matter paragraph Evaluate whether such supplementary information is in the auditor’s report: presented in a way that sufficiently and clearly differentiates it from the audited financial statements. One way of That the financial statements of the prior period were differentiating unaudited supplementary information is by audited by the predecessor auditor; labeling it as “unaudited.” If management refuses to do so, The type of opinion expressed and, if the opinion was the auditor shall identify the unaudited supplementary modified, the reasons therefore; and information and explain in the auditor’s report that such The date of that report. supplementary information has not been audited. This identification may most likely be done as part of Other An example of Other Matter of that is given below. Matter (OM) paragraph or in other sections of auditor’s report, as may be judged appropriate by the auditor. Other Matter The financial statements of the Company for the year ended December 31, 20X0, were audited by another auditor who expressed an unmodified opinion on those statements on March 31, 20X1. DISCUSSION QUESTIONS Forming Opinion and Report—An Overview 2. After the auditor has completed all audit procedures, it is necessary to combine the information obtained to 1. Forming the auditor’s opinion and report includes reach an overall conclusion as to whether the financial a. b. c. d. statements are fairly presented. This is a highly Determining the sufficiency subjective process that relies heavily on: and appropriateness of a. generally accepted auditing standards. audit evidence obtained. Yes Yes Yes Yes b. the Code of Professional Ethics. Evaluating the materiality of c. generally accepted accounting principles. misstatements identified. Yes Yes Yes No d. the auditor’s professional judgment. Performing necessary quality control review. Yes Yes No Yes Evaluating Materiality of Misstatements Communicating audit results with management and 3. Projected misstatements refer to those charged with Yes No No Yes a. Misstatements about which there is no doubt governance. b. Differences arising from management’s judgments concerning accounting estimates that the auditor considers unreasonable, or the selection or Page 6 of 13 www.teamprtc.com.ph AT.3218 EXCEL PROFESSIONAL SERVICES, INC. application of accounting policies that the auditor (2) Review of selected audit documentation relating to considers inappropriate significant audit judgements c. The auditor’s best estimate of misstatements in (3) Review of the engagement team's evaluation of the populations, involving the projection of firm's independence towards the audit misstatements identified in audit samples to the (4) Consideration of whether appropriate consultations entire populations from which the samples were have taken place on differences of drawn opinion/contentious matters d. Misstatements that the auditor has accumulated a. (1) and (3) during the audit and that management has not b. (2) and (4) corrected c. (1), (2) and (4) d. (2), (3) and (4) 4. Management estimates the company's allowance for doubtful accounts as P200,000, and the auditors Communicating with TCWG, MGT, and Other Parties develop an estimate that suggests that the amount should be between P230,000 and P250,000. The factual 10. All of the following matters need to be communicated (known) misstatement in this situation is: with those charged with governance in an audit of a. P0 c. P40,000 financial statements irrespective of an entity’s b. P30,000 d. P50,000 governance structure or size. In accordance with PSA 260, Communication with Those Charged with 5. Which of the following statements is correct regarding Governance, which of the following shall be the auditor's accumulation of identified misstatements? communicated in writing in case of listed entities? a. The auditor must accumulate all misstatements a. The auditor’s responsibilities in relation to the identified during the audit. financial statement audit. b. The auditor must only accumulate individually b. Planned scope and timing of the audit. material misstatements identified during the audit. c. Significant findings from the audit. c. The auditor must accumulate misstatements d. Auditor independence. identified during the audit, other than those that are clearly trivial. 11. Which of the following statements is correct concerning d. None of the above. an auditor’s required communication with those charged with governance of an audit client? 6. At the end of the audit the auditor is supposed to a. This communication is required to occur before the accumulate and evaluate the need for adjustment of auditor’s report on the financial statements is a. known uncorrected errors. issued. b. unknown projected errors. b. This communication should include discussion of c. carryover of prior year errors. any significant disagreements with management d. all of the above. concerning the financial statements. c. Any significant matter communicated to the audit 7. What is the likely aggregate misstatement when the committee should be communicated to audit results are as follows? management. Likely misstatement = P1,000 d. Significant audit adjustments proposed by the Identified misstatement found in non- auditor and recorded by management need not be representative samples = P850 communicated with those charged with governance. Misstatements found in prior year’s financial statements = P2,500 (of which P1,900 was 12. Which of the following shall be included in the written corrected in the prior year) communication of significant deficiencies in internal a. P1,850 c. P2,900 control? b. P2,450 d. P3,500 a. A description of the deficiencies and an explanation of their potential effects. 8. When expressing an unqualified opinion, the auditor b. The purpose of the audit was for the auditor to who evaluates the audit findings should be satisfied that express an opinion on the financial statements. the c. The audit included consideration of internal control a. Amount of known misstatement is documented in relevant to the preparation of the financial the management representation letter. statements in order to design audit procedures that b. Estimate of the total likely misstatement is less than are appropriate in the circumstances, but not for the a material amount. purpose of expressing an opinion on the c. Amount of known misstatement is acknowledged effectiveness of internal control. and recorded by the client. d. All of the above. d. Estimate of the total likely misstatement includes the adjusting entries already recorded by the client. The Auditor's Opinions Performing Engagement Quality Control Review 13. A client decides not to make an auditor’s proposed (EQCR) adjustments that collectively are not material and wants the auditor to issue the report based on the unadjusted 9. Which of the following is likely to be carried out as part numbers. Which of the following statements is correct of an engagement quality control review for a listed regarding the financial statement presentation? entity? a. The financial statements are free from material (1) Review of audit working paper files to ensure that misstatement, and no disclosure is required in the the audit has been performed in accordance with notes to the financial statements. professional standards and regulatory and legal b. The financial statements do not conform with GAAP. requirements Page 7 of 13 www.teamprtc.com.ph AT.3218 EXCEL PROFESSIONAL SERVICES, INC. c. The financial statements contain unadjusted misleading. The auditor should express an opinion that misstatements that should result in a qualified is opinion. a. Unqualified but not mention the departure in the d. The financial statements are free from material auditor’s report. misstatement, but disclosure of the proposed b. Unqualified and describe the departure in a separate adjustments is required in the notes to the financial paragraph. statements. c. Qualified and describe the departure in a separate paragraph. 14. The auditor’s opinions on the effectiveness of internal d. Qualified or adverse, depending on materiality, and control over financial reporting (ICFR) in an integrated describe the departure in a separate paragraph. audit in accordance with PCAOB AS include the following types except: 21. Of the two major categories of scope restrictions, (1) a. Unqualified where no material weaknesses exist. those caused by client and (2) those caused by b. Qualified opinion where one or more material conditions beyond the control of either client or auditor, weaknesses exist. the effect on the auditor’s judgment is c. Disclaimer of opinion where the audit team cannot a. the same for either. perform all of the procedures considered necessary b. More serious for 1 than for 2. and is unable to determine whether material c. More serious for 2 than for 1. weaknesses exist. d. Negligible. d. Adverse opinion where one or more material weaknesses exist. 22. Restrictions imposed by a client prohibit the observation of physical inventories, which account for 35% of all 15. In a qualified, adverse, or disclaimer report, the auditor assets. Alternative audit procedures cannot be applied, a. has not performed a satisfactory audit. although the auditor was able to examine satisfactory b. is not satisfied that the financial statements are evidence for all other items in the financial statements. presented fairly The auditor should issue a(an) c. either of the two responses a. “Except for” qualified opinion. d. none of the two responses. b. Disclaimer of opinion. c. Unqualified opinion with a separate explanatory 16. This term is used to describe the effects or possible paragraph. effects on the financial statements of a matter that, in d. Unqualified opinion with an explanation in the auditor’s the auditor’s judgment, are not confined to specific responsibility paragraph. elements, accounts or items of the financial statements, or, if confined, represent or could represent a 23. King, CPA, was engaged to audit the financial substantial proportion of the financial statements. statements of Newton Company after its fiscal year had a. Persuasive c. Pervasive ended. King neither observed the inventory count nor b. Reasonable d. Effective confirmed the receivables by direct communication with debtors, but was satisfied concerning both after 17. What audit opinions would be possible when the audited applying alternative procedures. King’s auditor’s report company refuses to record adequate amortization for most likely contained a(an) fixed assets? Assume the amount in question exceeds a. Qualified opinion. materiality. b. Disclaimer of opinion. a. Only unqualified or adverse opinions are possible. c. Unqualified opinion without mentioning the b. Only qualified or adverse opinions are possible. alternative procedures. c. Only adverse or denial opinions are possible. d. Unqualified opinion with an explanatory paragraph. d. Only qualified or unqualified opinions are possible. The Auditor's Reports 18. If the financial statements, including accompanying notes, fail to disclose information that is required by 24. Which of the following is not a classification of an PFRSs, the auditor should express either a(an) independent auditor’s report? a. “Except for qualified opinion or adverse opinion. a. Unmodified. b. Adverse opinion or a “subject to” qualified opinion. b. Modified due to modified opinions. c. “Subject to” qualified opinion or unqualified opinion c. Modified due to emphasis of matter and other with a separate explanatory paragraph. matter paragraphs without necessarily modifying d. Unqualified opinion with a separate explanatory the opinion. paragraph or an “except for” qualified opinion. d. Qualified. 19. A departure from PFRS is disclosed in a note to the Unmodified Auditor’s Report financial statements. The auditor should: a. Issue an unqualified opinion, with no explanatory 25. PSA 700 Forming an opinion and reporting on financial paragraph, since the departure from PFRSs is statements sets out the basic elements of an auditor's disclosed report. Which of the following is not included in an b. Issue an unqualified opinion, but emphasize the unmodified auditor's report? matter in an explanatory paragraph a. Management's responsibility for the financial c. Issue a qualified opinion statements d. Disclaim an opinion b. Auditors' responsibilities c. Audit opinion 20. Eagle Company’s financial statements contain a d. Deficiencies of internal controls departure from PFRSs because, due to unusual circumstances, the statements would otherwise be Page 8 of 13 www.teamprtc.com.ph AT.3218 EXCEL PROFESSIONAL SERVICES, INC. 26. Under PSA 700, the following are mandatory to be c. A statement that the auditor is independent of the included in the auditor’s report for audits of financial entity in accordance with the relevant ethical statements of listed entities but only voluntary for requirements relating to the audit, and has fulfilled entities other than listed entities, except the auditor’s other ethical responsibilities in a. A section to communicate key audit matters. accordance with these requirements; and b. Disclosure of the name of the engagement partner, d. A conclusion that whether the auditor believes that with a “harm’s way” exemption. the audit evidence the auditor has obtained is c. Material uncertainty related to going concern. sufficient and appropriate to provide a basis for the d. None of the above. auditor’s opinion. Title and Addressee Material Uncertainty Related to Going Concern 27. To distinguish it from reports that might be issued by 33. Enhanced auditor reporting on going concern (GC) others, such as by officers of the entity, the board of caused the following changes to PSAs and the auditor's directors, or from the reports of other auditors who may report to focus more on GC, except? not have to abide by the same ethical requirements as a. Explicit description of the respective responsibilities the independent auditor, the auditor’s report should of management and the auditor in all auditor’s have an appropriate reports a. Addressee c. Signature b. Separate GC section required when material b. Title d. Opinion uncertainty exists, with a heading “Material Uncertainty Related to Going Concern” 28. The audit report is normally addressed to the c. New requirement to challenge adequacy of Board of Shareholders President of the disclosures for GC “close calls” Directors entity d. None of the above a. Yes Yes Yes b. No Yes Yes 34. Which of the following is not a condition to include a c. Yes Yes No separate going concern section with a heading “Material d. Yes No No Uncertainty Related to Going Concern” in the auditor’s report? Opinion a. The use of the GC basis of accounting is appropriate. 29. The opinion section of the auditor’s report includes the b. A modified opinion is appropriate. following, except: c. Reference to the note in the financial statements a. Identification of the entity whose financial that describes the material uncertainty. statements (financial statements) have been d. A statement that these events or conditions indicate audited. that a material uncertainty exists that may cast b. Statement that the financial statements have been significant doubt on the entity’s ability to continue audited. as a going concern. c. Title of each of the financial statements that comprise the complete set of financial statements. 35. C Co has a substantial bank loan which is due to mature d. Reference to "basic financial statements" without in 20X8, and the company plans to negotiate for a new indicating the title of each of the financial loan in March 20X8. The auditors concluded that the statements. company’s use of the going concern assumption in the financial statements for the year ended 31 December 30. The opinion section of the auditor’s report includes the 20X7 is appropriate. However, they believe there is a following, except: material uncertainty related to going concern, which has a. Reference to the summary of significant accounting been appropriately disclosed in the financial policies and other explanatory notes statements. What action should the auditor take with b. Specific date and period covered by the financial regards to going concern in the auditor’s report? statements. a. Express an unmodified opinion and describe the c. Reference to Philippine Standards on Auditing. material uncertainty in the other matter paragraph d. Identifies the applicable financial reporting b. Express an unmodified opinion and describe the framework on which the financial statements are material uncertainty in the material uncertainty based. related to going concern paragraph c. Express a modified opinion and describe the 31. The auditor's standard report states that the financial material uncertainty in the emphasis of matter statements are presented fairly paragraph a. with reasonable assurance. d. Express a qualified opinion and describe the b. in all material respects. material uncertainty in the basis for qualified c. without significant errors. opinion paragraph d. on a consistent basis. Key Audit Matter Basis for Opinion 36. In the following situations the auditor should not 32. The basis for opinion section of the auditor’s report communicate KAM in the auditor’s report, except includes the following, except: a. Law or regulation precludes disclosure. a. That the audit was conducted based on PSAs. b. It is determined that the matter should not be b. A reference to the section of the auditor’s report communicated as in the case when adverse that describes the auditor’s responsibilities under consequences of communicating the KAM would the PFRSs. Page 9 of 13 www.teamprtc.com.ph AT.3218 EXCEL PROFESSIONAL SERVICES, INC. reasonably be expected to outweigh the public d. Misstatement interest benefits of such communication. c. When a disclaimer of opinion is expressed. 42. It exists when other information, not related to matters d. When a qualified or adverse opinion is expressed. appearing in the audited financial statements, is incorrectly stated or presented. 37. Under PAS 701, which of the following refers to the term a. Material inconsistency “Key Audit Matters (KAM)”? b. Material misstatement of fact a. Matters that were communicated with those c. Material weaknesses charged with governance. d. Misstatement b. Matters that required significant auditor attention. c. Matters that, in the auditor’s professional judgment, 43. If an amendment to other information in a document were of most significance in the audit of the financial containing audited financial statements is necessary statements of the current period. and the entity refuses to make the amendment, the d. It exists when the magnitude of its potential impact auditor would consider issuing: is such that, in the auditor’s judgment, clear a. Qualified or adverse opinion disclosure of the nature and implications of the b. Unqualified opinion with explanatory paragraph uncertainty is necessary for the presentation of the c. Qualified or disclaimer of opinion financial statements not to be misleading. d. Unqualified opinion. 38. PSA 701 sets out a decision framework for auditors Responsibilities of MGT and TCWG for the financial using the communications with those charged with statements governance as a starting point. From the matters communicated with those charged with governance, the 44. An entity’s management is responsible for the auditor determines those matters that required preparation and fair presentation of the financial significant auditor attention. In fulfilling this statements. Its responsibility includes the following, requirement, the auditor is always required to explicitly except consider, except? a. Designing, implementing, and maintaining internal a. Areas of higher assessed risks of material control relevant to the preparation and presentation misstatement, or significant risks identified. of financial statements. b. Areas of lower assessed risks of material b. Making accounting estimates that are reasonable in misstatement, or no significant risks identified. the circumstances and selecting and applying c. Significant auditor judgments relating to areas in appropriate accounting policies. the financial statements that involved significant c. The assessment of the entity’s ability to continue as management judgment, including accounting a going concern and the appropriateness of the estimates that have been identified as having high going concern. estimation uncertainty. d. Assessing the risks of material misstatement of the d. The effect on the audit of significant events or financial statements. transactions that occurred during the year. Auditor’s Responsibilities for the Audit of the financial 39. Which of the following is not included in the description statements of a KAM in the auditor’s report? a. Why the matter was considered to be a KAM 45. The auditor’s responsibility section of the auditor’s b. How the matter was addressed in the audit report includes the which of the following, except: c. Reference to the any related disclosure(s) a. The auditor’s objectives to obtain limited assurance. d. Standardized, highly technical language and not b. An explanation that misstatements can arise from entity-specific to promote comparability of reports fraud or error. c. A description of the meaning of materiality. Other Information d. An explain that the auditor exercises professional judgement and maintains professional skepticism 40. Which of the following best describes the auditor's throughout the audit. responsibility for "other information" included in the annual report to stockholders, which contains financial Other Reporting Responsibilities statements and the auditor's report? a. The auditor has no obligation to read the "other 46. Statement 1: The auditor’s report shall name the information." location in the country or jurisdiction where the auditor b. The auditor has no obligation to corroborate the practices. "other information" but should read the "other Statement 2: When the auditor addresses other information" to determine whether it is materially reporting responsibilities in the auditor’s report on the inconsistent with the financial statements. financial statements that are in addition to the auditor’s c. The auditor should extend the examination to the responsibility to express the opinion on the financial extent necessary to verify the "other information." statements, these other reporting responsibilities shall d. The auditor must modify the auditor's report to be addressed in a separate section in the auditor’s state that the "other information is unaudited" or report. This separate section shall be sub-titled “Report "not covered by the auditor's report." on Other Legal and Regulatory Requirements.” a. True, True 41. It exists when other information contradicts information b. False, True contained in the audited financial statements. c. False, False a. Material inconsistency d. True, False b. Material misstatement of fact c. Material weaknesses Page 10 of 13 www.teamprtc.com.ph AT.3218 EXCEL PROFESSIONAL SERVICES, INC. 47. When is the case that supplementary information is a. The partner-in-charge of engagement should be covered by the auditor’s opinion? relieved of any responsibility regarding the opinion a. The supplementary information is integral part of issued. the financial statements and is presented as a b. It is required by reporting standards. supplementary schedule. c. The firm assumes responsibility for the audit. b. The supplementary information is integral part of d. The opinion becomes more credible if signed in the financial statements and is presented as an name of the firm. additional note disclosure. c. The supplementary information is not integral part 53. Which of the following information is(are) required when of the financial statements but is presented as an an auditor’s report is issued on financial statements to additional note disclosure. be filed with the Securities and Exchange Commission? d. Both (a) and (b). 1. Audit report is manually signed. 2. Certifying partner to sign his name. 48. Which of the following is not one of the ways to report 3. Partner’s Tax Identification Number. on supplementary information that is considered 4. PRC registration number integral part of financial statements? 5. Accreditation with SEC a. In the auditor’s report as part of “Report on Other a. 1, 2, 3, 4, 5 Legal and Regulatory Requirements”. b. 1, 3, 4, 5 b. In the auditor’s report as part of “Report on the c. 2, 4, 5 Audit of Financial Statements”. d. 2, 3, 4, 5 c. As a separate independent auditor’s report on supplementary information. 54. The following statements relate to the date of the d. None of the above. auditor’s report. Which is false? a. The auditor should date the report as of the 49. Which statement is correct concerning required completion date of the audit supplementary information not considered integral part b. The date of the auditor’s report should not be earlier of the financial statements? than the date on which the financial statements are a. The auditor has no responsibility for required signed or approved by management supplementary information as long as it is outside c. The date of the auditor’s report should not be later the basic financial statements. than the date on which the financial statements are b. The auditor's only responsibility for required signed or approved by management. supplementary information is to determine that d. The date of the auditor’s report should always be such information has not been omitted. later than the date of the financial statements (i.e., c. The auditor should apply certain limited procedures the balance sheet date). to the required supplementary information, and report deficiencies in, or omissions of, such 55. The audit report date is important to users because it information. indicates the d. The auditor should apply tests of details of a. Last day of the fiscal period. transactions and balances to the required b. Last day of the auditor’s responsibility for the review supplementary information, and report any material of significant events that occurred after the date of misstatements in such information. the financial statements. c. Date on which the financial statements were filed 50. If management chooses to place supplementary with the SEC. information that is not considered integral part of the d. Last day on which users may institute a lawsuit financial statements in footnotes to the financial either client or auditor. statements, this information should be clearly marked as Modified Auditor’s Report—Modified Opinion a. Unaudited. b. Supplementary information required by the SEC. Modified Auditor’s Report—Modified Opinion c. Disclosures required by the SEC. d. Audited financial data required by GAAP. 56. In cases where the auditor expressed a modified opinion, which section of the auditor’s report is not 51. If management declines to present supplementary modified? information that is not considered integral part of the a. Auditor’s opinion financial statements required by the Securities and b. Basis for opinion Exchange Commission (SEC), the auditor should issue c. Description of auditor’s responsibilities, in case of a(n) disclaimer of opinion a. Adverse opinion. d. Responsibilities for the financial statements b. Qualified opinion with an other-matter paragraph. c. Unmodified opinion. 57. When an auditor expresses an adverse opinion he/she d. Unmodified opinion with an additional other-matter should disclose the substantive reasons for such an paragraph. opinion in an explanatory paragraph. a. Within the notes to the financial statements Name of Partner, Signature, Address and Date b. Preceding the opinion paragraph c. Following the opinion paragraph 52. When financial statements are audited by an accounting d. Preceding the introductory paragraph firm, the partner-in-charge of engagement ordinarily signs in the name of the firm because: 58. If the auditor expresses disclaimer of opinion in the auditor’s report, which section should be omitted? a. KAM Page 11 of 13 www.teamprtc.com.ph AT.3218 EXCEL PROFESSIONAL SERVICES, INC. b. Auditor’s responsibilities c. Management’s responsibilities 64. They are not presented as complete financial d. Other reporting responsibility statements capable of standing alone, but are an integral part of the current period. Modified Auditor’s Report—Emphasis of Matter a. Corresponding figures (EOM) and Other Matter (OM) b. Comparative financial statements c. Supplementary report 59. An additional paragraph reads as follows: d. Notes of financial statements On October 15, 2019, the Company emerged from 65. A client is presenting comparative (two-year) financial bankruptcy. As discussed in the Note 25 to the financial statements. Which of the following is correct concerning statements, the Company accounted for the reporting responsibilities of a continuing auditor? reorganization using “fresh accounting” and, as a result, a. The auditor should issue one audit report that is on the post-reorganization financial statements are not both presented years. comparable to the pre-organization financial b. The auditor should issue two audit reports, one on statements. Our opinion is not modified in respect of each year. this matter. c. The auditor should issue one audit report, but only The paragraph likely is intended to: on the most recent year. a. Qualify an opinion d. The auditor may issue either one audit report on b. Emphasize a matter both presented years, or two audit reports, one on c. Report an inconsistency each year. d. Indicate a departure from PFRS 66. An auditor expressed a qualified opinion on the prior 60. Statement 1: The inclusion of an emphasis of matter year's financial statements because of a lack of paragraph in the auditor's report does not affect the adequate disclosure. These financial statements are auditor's opinion on the financial statements. properly restated in the current year and presented in comparative form with the current year's financial Statement 2: An emphasis of matter paragraph is not statements. The auditor's updated report on the prior used when the issue has been covered as a key audit year's financial statements should matter. a. Be accompanied by the auditor's original report on a. True, true c. False, true the prior year's financial statements. b. True, false d. False, false b. Continue to express a qualified opinion on the prior year's financial statements. 61. Which of the following statements is correct relating to c. Make no reference to the type of opinion expressed Other Matter paragraph in the financial statements? on the prior year's financial statements. a. A paragraph that refers to a matter other in the d. Express an unqualified opinion on the restated financial statements that is relevant to financial statements of the prior year. understanding of the audit, the auditor’s responsibilities or the auditor’s report. 67. When comparative financial statements are presented, b. The auditor shall include this paragraph which refers to financial statements "taken as a whole," immediately after the Opinion paragraph. should be considered to apply to the financial statement c. The auditor shall include this paragraph of the immediately after any Emphasis of Matter a. Periods presented plus one preceding period. paragraph b. Current period only. d. The auditor shall provide a modified opinion as a c. Current period and those of the other periods result of adding Other Matter paragraph. presented. d. Current and immediately preceding period only. 62. Which of the following circumstances will the auditor least likely add an Other Matter paragraph? 68. An auditor's report on comparative financial statements a. The auditor is unable to resign from an engagement should be dated as of the date the even though the possible effect of an inability to a. Report is issued. obtain sufficient appropriate audit evidence due to b. Auditor's fieldwork is completed. a limitation on the scope of the audit imposed by c. Fiscal year ends. management is pervasive. d. Last subsequent event occurred. b. Restriction on distribution of the auditor’s report. c. Reporting on comparative information, and such 69. Mike, CPA, audited Advance Co.'s prior year financial information had not been audited or was audited by statements. These statements are presented with those a different auditor. of the current year for comparative purposes without d. Report on the pervasiveness of related party Mike's auditor's report, which expressed a qualified transactions that have been disclosed in the opinion. In drafting the current year's auditor's report, financial statements. Vic, CPA, the successor auditor, should do the following in an Other Matter paragraph Auditor’s Report—Comparative Information I. Not name Mike as the predecessor auditor. II. Indicate the type of report issued by Mike. 63. In accordance with PSA 710, comparative information III. Indicate the substantive reasons for Mike's may be qualification. a. Corresponding figures a. I only. c. II and III only. b. Comparative financial statements b. I and II only. d. I, II, and III. c. Either a or b d. Neither a nor b Page 12 of 13 www.teamprtc.com.ph AT.3218 EXCEL PROFESSIONAL SERVICES, INC. 70. When unaudited financial statements are presented in comparative form with audited financial statements in a document filed with the Securities and Exchange Commission, such statements should be Marked as State as “unaudited” in an "unaudited" Other Matter paragraph a. Yes No b. Yes Yes c. No Yes d. No No End of AT.3218 Page 13 of 13 www.teamprtc.com.ph AT.3218