Lesson 4 – Major Phases of an Audit - Part III

Completing the Audit and Auditor’s Report

Overview:

Once the various business processes, controls, and related financial statement accounts
have been audited, the evidence is summarized and evaluated. Before determining the
appropriate audit report, the auditor considers a number of additional issues that may impact the
client’s system of internal control over financial reporting and financial statements. The auditors’
report should not be dated prior to the date they have gathered sufficient, appropriate evidence.
This date is often the last day of fieldwork but it may be a later date. Therefore, the auditors’
opinion on the financial statements is based on all evidence gathered by the auditors up to the
date of the audit report and any other information that comes to their attention between that date
and the issuance of the financial statements.

Reports are essential to audit and assurance engagements because they communicate
the auditor’s findings. Users of financial statements rely on the auditor’s report to provide
assurance on the company’s financial statements. The audit report is the final step in the entire
audit process. The reason for studying it now is to permit reference to different audit reports as
we study the accumulation of audit evidence. These evidence concepts are more meaningful
after you understand the form and content of the final product of the audit.

Learning Objectives:

After studying this lesson, the student should:

 Identify the nature and purposes of the procedures and tasks performed as part of
completing the audit especially procedures needed in evaluating findings, formulating an
opinion and drafting the audit report, including the tools for documentation and key
persons in-charge of the tasks both in preparation and review of the procedures.
 Understand the work being done by other teams needed for the audit.
 Describe the other audit considerations as part of completing the audit.
 Understand how to document the audit findings subsequent to audit and other post-audit
responsibilities.
 Understand what does it means to issue standard audit report with an
unmodified/unqualified opinion.

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  Identify the elements of standard audit report with an unmodified/unqualified opinion.
 Describe how to communicate Key Audit Matters, emphasis of a matter and other
paragraphs in auditor’s report.
 Know the types of modifications of opinions in auditor’s report.
 Familiarize with the other information related to issuance of auditor’s report and other
reporting considerations.
 Identify nature and purpose of auditor’s report on special-purpose audit engagements.
 Describe the nature and purposes of reports to non-audit engagements.

Course Materials:

Audit Documentation Review

The work of the audit staff is primarily accomplished through a review of the audit
working papers. The seniors on audit engagements typically perform their review of the audit
working papers as the papers are completed. While audit partners and managers will generally
communicate with seniors and other staff members throughout the audit, their review of the
working papers generally is not completed until near (or after) completion of fieldwork. The audit
partner and manager will devote special attention to those accounts that have a higher risk of
material misstatement. Also, a final consideration will be made of whether the results of
procedures performed throughout the audit, including while completing the audit, identify
conditions and events that indicate there could be substantial doubt about the company’s ability
to continue as a going concern.

There are three reasons why an experienced member of the audit firm must thoroughly
review audit documentation at the completion of the audit:
1. To evaluate the performance of inexperienced personnel. A considerable portion of most
audits is performed by audit personnel with fewer than four or five years of experience.
These people may have sufficient technical training to conduct an adequate audit, but their
lack of experience affects their ability to make sound professional judgments in complex
situations.
2. To make sure that the audit meets the CPA firm’s standard of performance. Within any
CPA firm, the quality of staff performance varies considerably, but careful review by top-
level personnel in the firm helps to maintain a uniform quality of auditing.
3. To counteract the bias that often enters into the auditor’s judgment. Auditors must
attempt to remain objective throughout the audit, but they may lose proper perspective on a
long audit when complex problems need to be solved.

Most firms have a policy requiring an engagement quality review for publicly traded
companies and for privately held companies whose financial statements are expected to be
widely distributed. The engagement quality reviewer should be independent and should
understand the audit approach, findings, and conclusions for critical audit areas and should
review the audit report, financial statements, and footnotes for consistency.

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Using the Work of Others

Work of Internal Auditor

Favorable conclusions about competence and objectivity enable external auditors to rely
on the work completed by the internal audit department related to gaining an understanding of
and testing of a company’s internal control system. By relying in part on the work of the internal
audit department, external auditors may be able to reduce the nature, timing, or extent of their
own procedures for these accounts. Take note, however, that this utilization of internal auditors’
work cannot be a complete substitute for the external auditors’ own procedures.

Work of Audit Specialists/Auditor’s Expert

Audit specialists are persons skilled in fields other than accounting and auditing—
actuaries, appraisers, attorneys, and geologists—who are not members of the audit team.
Auditors are not expected to be experts in all fields of knowledge that can contribute information
to the financial statements. When an audit specialist is engaged, auditors must know about his
or her professional qualifications, experience, reputation, and much as possible its
independence to the company subjected to audit. Provided that some additional auditing work is
done on the data that the audit specialist uses in reaching its conclusions, auditors may rely on
the work of an audit specialist in connection with audit decisions. Normally, audit specialists are
not referred to in the auditor’s report unless the audit specialist’s findings cause the auditors’
report to be modified (e.g., because of a GAAP departure).

Other Audit Considerations

Auditing accounting estimates and related disclosures

Determining whether all necessary estimates have been developed and accounted for
properly requires knowledge of the client’s business and the applicable generally accepted
accounting principles. When evaluating the reasonableness of accounting estimates, the
auditors obtain an understanding of how management developed the estimates and then use
one or more of these three basic approaches:
1. Review and test management’s process of developing the estimates, which often involves
evaluating the reasonableness of the steps performed by management.
2. Independently develop an estimate of the amount to compare to management’s estimate.
3. Review subsequent events or transactions bearing on the estimate.

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Auditing fair value measurements and related disclosures

In planning and performing audit procedures related to fair value measurements, the
auditors should obtain an understanding of the company’s process for determining fair value
measurements and disclosures, including relevant controls. In addition, the auditors should:
• Evaluate whether management’s assumptions related to inputs are reasonable and
reflect, or are not inconsistent with, market information.
• If management relies on historical financial information in the development of an input
consider the extent to which such reliance is justified.
• Evaluate whether the company’s method for determining fair value measurements is
applied consistently and, if so, whether the consistent application is appropriate given
the current situation.

Review of related party transactions

Related party transactions have often been used to facilitate fraudulent financial
reporting. Accordingly, auditors should determine the business purpose of any significant and
unusual related party transactions that they encounter. Even if the transactions are recorded
appropriately, the auditors also must be concerned that material related party transactions are
adequately disclosed in the client’s financial statements or the related notes. The primary
challenge for the auditors is identifying any related party transactions that management has not
disclosed, because they may be recorded in the accounting records with all other transactions.
Common methods of determining related parties include making inquiries of management and
reviewing SEC filings to check stockholders’ listings, and minutes of the meeting obtained from
the client.

Initial audit engagements – Opening Balances/Different prior-year auditors

In the first audit of the client, the auditors should obtain sufficient appropriate evidence
about whether the opening balances for the various accounts contain misstatements that
materially affect the current period’s financial statements. The auditors need to determine
whether the prior period’s closing balances were properly brought forward to the current period,
and whether those balances reflect the application of appropriate accounting policies. When
satisfactory prior year audits of the business have been performed by a predecessor auditor, the
successor auditors will ordinarily have communicated with the predecessor about matters such
as management integrity, disagreements that the predecessor may have had with management,
communications with the audit committee, and the predecessor’s understanding of the reason
for the change of auditors. Current auditors also discuss as agreed with the predecessor
auditors, the contents of the predecessor auditors’ working papers. Based on this evaluation,

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the successor auditors will decide whether it is necessary to perform additional procedures
specifically designed to obtain evidence regarding the opening balances.

Take note that the successor auditors must ask management of the prospective client to
authorize the predecessor auditors to respond fully to the successor’s inquiries. If a prospective
client is reluctant to authorize communications with the predecessor auditors, the successor
auditors should seriously consider the implications in deciding whether to accept the
engagement.

Completing the Engagement

Procedures regarding litigation, claims, contingent liability and other potential

unrecorded liabilities

• A letter of audit inquiry (referred to as a legal letter) sent to the client’s attorneys is the
primary means of obtaining or corroborating information about litigation, claims, and
assessments. The auditor should ask management to send a legal letter to the attorneys,
requesting that they provide the following but not limited to this information:
 A list and evaluation of any pending or threatened litigation to which the attorney has
devoted substantial attention. The list may be provided by the client.
 A list of unasserted claims and assessments considered by management to be
probable of assertion and reasonably possible of unfavorable outcome.
 A request that the attorney describe and evaluate the outcome of each pending or
threatened litigation. This should include the progress of the case, the action the entity
plans to take, the likelihood of unfavorable outcome, and the amount or range of
potential loss.

Refusal by a client’s attorney to furnish information in a legal letter is a limitation on the

scope of the audit sufficient to preclude an unqualified opinion.

• In general, loss contingencies that are judged to be remote are neither accrued in the
financial statements nor disclosed in the footnotes. The auditor may identify contingent
liabilities while conducting various audit procedures. Examples of procedures that may help
the auditor identify contingent liabilities include
 Reading the minutes of meetings of the board of directors and stockholders.
 Reviewing contracts, loan agreements, leases, and letters from government agencies.
 Reviewing income tax liability, tax returns, and BIR audit reports.
 Confirming or otherwise documenting guarantees and letters of credit obtained from
financial institutions or other lending agencies.
 Inspecting other documents such legal letter reply.

• Long-term commitments are usually identified through inquiry of client personnel during the
audit of the revenue and purchasing processes and through review of the minutes of board
meetings. In most cases, such commitments are disclosed in a footnote to the financial
statements.

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• The search for unrecorded liabilities includes procedures performed near the date of the
auditors’ report, such as examining subsequent cash disbursements. These procedures are
designed to detect liabilities that existed at year-end but were omitted from the liabilities
recorded in the client’s financial statements.

Going Concern Consideration

As auditors gather evidence throughout the engagement, they may encounter

information that raises questions as to the client’s ability to continue as a going concern, such
as negative trends, including recurring operating losses, working capital deficiencies, negative
cash flow from operations, indications of financial difficulties, and other internal and external
events which have negative impact to the company’s operations and stability. Going-concern
status is a significant issue for users of financial statements, because assets and liabilities are
normally recorded and classified on the assumption that the company will continue to operate. If
the auditors’ evaluation suggests substantial doubt on the company’s going concern, auditors
should obtain information about management’s plans to mitigate the effect of these factors and
assess the likelihood that these plans can be effectively implemented. If after evaluating the
information and management’s plans, the auditors conclude that the substantial doubt is
resolved, they may issue a standard report. If on the other hand, substantial doubt still exists
about the company’s ability to continue as a going concern for a period of one year from the
balance sheet date, the auditors should add an emphasis-of-matter paragraph to their
unmodified opinion or issue a disclaimer of opinion.

Final Analytical Procedures

The objective of conducting analytical procedures near the end of the engagement is to
help the auditor assess the conclusions reached on the financial statement components and
evaluate the overall financial statement presentation. This involve reviewing the adequacy of the
evidence gathered in response to unexpected fluctuations in the account balances identified
during the planning of the audit and identifying any unusual or unexpected balances not
previously considered. These final analytical procedures may indicate that more evidence is
needed for certain account balances. The auditor performs final analytical procedures to
consider the overall reasonableness of the financial statement amounts.

Evaluating financial statement presentation and disclosures

The client prepares a draft of the financial statements, including footnotes. The auditor
reviews the financial statements to ensure compliance with accounting standards, proper
presentation of accounts, and inclusion of all necessary disclosures. Most public accounting
firms use some type of financial statement disclosure checklist to assist the auditor in this
process.

Report of Subsequent Events for audit

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 Evidence not available at the close of the period under audit often becomes available
before the auditors finish their fieldwork and issue their audit report. The CPA’s opinion on the
fairness of the financial statements may be changed considerably by these subsequent events.
The term subsequent event refers to an event occurring after the date of the balance sheet but
prior to the date of the auditors’ report (the date on which the auditors have obtained sufficient
appropriate audit evidence to support their opinion). Subsequent events are divided into two
broad categories: (1) those providing additional evidence about facts existing on or before the
balance sheet date (“recognized subsequent events”/Type I), and (2) those involving facts
coming into existence subsequent to the balance sheet date (“nonrecognized subsequent
events”/Type II).

For the period after year-end through the date of the auditors’ report, the auditors should
perform audit procedures to obtain sufficient appropriate audit evidence that all subsequent
events that require adjustment or disclosures in the financial statements have been identified.
During this period, the auditors should determine that proper cutoffs of cash receipts and
disbursements and sales and purchases have been made, and they should examine data to aid
in the evaluation of assets and liabilities as of the balance sheet date. In addition, the auditors
should:

1. Obtain an understanding of management’s procedures to ensure that subsequent events

are identified.
2. Inquire of management (and those charged with governance) about whether subsequent
events have occurred.
3. Read available minutes of directors, stockholders, and appropriate committee meetings that
have been held after the date of the financial statements and inquire about matters
discussed at any such meeting for which minutes are not yet available. In completing the
audit, the auditors should determine that they have considered all minutes, including those
for meetings subsequent to year-end.
4. Read the company’s latest subsequent interim financial statements, if any.

Generally, the auditors’ responsibility for performing procedures to gather evidence as to

subsequent events extends only through the date of the audit report. However, even after
completing normal audit procedures, the auditors are responsible for evaluating subsequent
events that come to their attention prior to the report release date. When material subsequent
events are identified, auditors are required to ensure that the financial statement disclosure of
these events reflects all current information and is according to relevant accounting standards.

When a subsequent event is recorded or disclosed in the financial statements after the
date on which the auditor has obtained sufficient appropriate audit evidence but before the
issuance of the financial statements, the auditor must consider the dating of the auditor’s report.
This is the concept of dual-dating.

Final assessment of audit results

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 The auditors will request that management record any adjustments required to correct
misstatements. When management refuses to correct these misstatements, the auditors should
evaluate their importance. Any known material misstatements must be corrected, or the auditors
cannot issue an unqualified opinion on the financial statements. In evaluating whether an
individual misstatement is material, the auditors consider both quantitative and qualitative
factors.

Prior to evaluating the effect of uncorrected misstatements, the auditors should reassess
materiality to confirm whether it remains appropriate in the context of the client’s actual financial
results. They will consider the quantitative and qualitative effects of uncorrected misstatements
on relevant classes of transactions, accounts, and disclosures. If the auditors estimate that the
total of known and likely misstatements is material to the financial statements, they will conclude
that the risk of material misstatement is too high to issue an unqualified opinion on the financial
statements. The auditors should also evaluate whether the accumulated results of their
procedures and observations affect the assessments of the risks of material misstatement made
earlier in the engagement.

Client Approval of Adjusting Entries and Disclosures

During the course of the audit, the auditors may suggest various adjustments and
disclosures concerning the financial statements. However, because they are the representations
of management, the financial statements are not modified to reflect these items until
management approves them. Since the auditors’ responsibility is to express an opinion on the
financial statements, unresolved differences between auditor and client with respect to such
differences may result in modification of the auditors’ report. If any adjusting entries are not
recorded; management must represent to the auditors (in the representation letter) that
management believes the adjustments are not material. These adjustments are called
uncorrected misstatements/passed adjustments.

Communication of Audit Matters with those Charged with Governance

The auditors communicate certain matters related to the conduct of the audit to those
individuals responsible for oversight of the entity’s strategic direction and its financial reporting
process, referred to as those charged with governance” such as the board of directors, and the
audit committee in particular. The intent of this communication is to ensure that the audit
committee or other responsible body receives additional information on the scope and results of
the audit. The communication should address the following matters but not limited to:

 The auditor’s responsibility under PSAs.

 Significant accounting policies.
 Management judgments and accounting estimates.
 Significant audit adjustments.
 The auditor’s judgments about the quality of the entity’s accounting principles.

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  Disagreements with management.
 Consultation with other accountants.
 Major issues discussed with management before the auditor was retained.
 Difficulties encountered during the audit.
 Fraud involving senior management and fraud that causes material misstatement of
the financial statements.

This communication should be in writing, and the report should indicate that it is
intended solely for the use of those charged with governance and, if applicable, management.
The auditor must also communicate in writing to management and the audit committee all
significant deficiencies and material weaknesses identified during the audit. The written
communication should be made prior to the issuance of the auditor’s report on internal control
over financial reporting. In addition, the auditor normally prepares a management letter. The
general intent of a management letter is to make recommendations to the client based on
observations during the audit; the letter may include suggested improvements in various areas,
such as organizational structure, efficiency issues, internal controls, and financial reporting
practices.

Obtain Management Representation Letter

The auditors obtain written representations (or management representations) to confirm

certain matters and corroborate other evidence obtained during the audit. The representations
take the form of a letter on the client’s letterhead addressed to auditors and signed by principal
officers of the client (normally the chief executive officer [CEO] and chief financial officer [CFO]).
The primary purpose of the representation letter is to have the client’s principal officers
acknowledge that they are primarily responsible for the fairness of the financial statements.
Since the financial statements must reflect all material subsequent events, the representation
letter should be dated as of the date of the audit report.

Although representations should be limited to matters that are material, professional

standards note that materiality guidelines do not apply for representations not related to
amounts included in the financial statements or for management’s acknowledgement regarding
its responsibility for designing, implementing, and maintaining internal control to prevent and
detect fraud.

Clearly, written representations provide an important part of auditors’ overall ability to

support the opinion on the financial statements. As a result, management’s refusal to furnish
representations constitutes a scope limitation, which requires a qualification in the auditor’s
report on the entity’s financial statements or a disclaimer of opinion. Auditors should be very
skeptical of any situation in which the client’s management refuses to furnish representations.

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Drafting the audit report

After the preceding procedures have been performed, the auditors will ordinarily be in a
position to issue their audit report. When the auditors have obtained reasonable assurance that
the financial statements follow generally accepted accounting principles and the audit has been
performed in conformity with auditing standards, including no significant scope limitations, an
unqualified opinion will ordinarily be issued.
Post-audit Responsibilities

Subsequent discovery of facts existing at audit report date

When facts are encountered that may affect the auditor’s previously issued report, the
auditor should consult with his or her attorney because legal implications may be involved and
actions taken by the auditor may involve confidential client–auditor communications. The auditor
should determine whether the facts are reliable and whether they existed at the date of the audit
report. The auditor should discuss the matter with an appropriate level of management and
request cooperation in investigating the potential misstatement.

If the client refuses to cooperate and make the necessary disclosures, the auditor should
notify the board of directors and take the following steps, if possible:
1. Notify the client that the auditor’s report must no longer be associated with the financial
statements.
2. Notify any regulatory agencies having jurisdiction over the client that the auditor’s report can
no longer be relied upon.
3. Notify each person known to the auditor to be relying on the financial statements. Notifying a
regulatory agency such as the SEC is often the only practical way of providing appropriate
disclosure.

Subsequent discovery of omitted audit procedures

The omission of appropriate audit procedures in a particular engagement might be

discovered during a peer review or other subsequent review of the auditors’ working papers. In
addressing this problem, the auditors should assess the importance of the omitted procedures
to their previously issued opinion. If they believe that the omitted procedures impair their ability
to support their previously issued opinion, and their report is still being relied upon by third
parties, they should attempt to perform the omitted procedures or appropriate alternative
procedures. Because of the legal implications of these situations, the auditors should consider
consulting their legal counsel.

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 Reports on Audited Financial Statements

The auditors’ report on the financial statements expresses an opinion on whether the
financial statements present the entity’s financial position, results of operations, and cash flows
in accordance with GAAP (or other applicable financial reporting framework). The report should
be titled independent auditor’s report (or other suitable title stressing the independence of the
auditors). It is addressed to the client, who is the person or group that engaged the auditors.
The report is typically addressed to the board of directors and shareholders but may also be
addressed to an individual lender, creditor, or investor who requested the audit.

Applicable Financial Reporting Framework

The auditor’s judgment regarding whether the financial statements are presented fairly,
in all material respects, is made in the context of the applicable financial reporting framework.
As discussed in PSA 210, “Terms of Audit Engagements,” without an acceptable financial
reporting framework, the auditor does not have suitable criteria for evaluating the entity’s
financial statements. PSA 200 describes the auditor’s responsibility to determine whether the
financial reporting framework adopted by management in preparing the financial statements is
acceptable.

Forming an Opinion on the Financial Statements

The auditor should evaluate the conclusions drawn from the audit evidence obtained as
the basis for forming an opinion on the financial statements. The auditor evaluates whether,
based on the audit evidence obtained, there is reasonable assurance about whether the
financial statements taken as a whole are free from material misstatement. This involves
concluding whether sufficient appropriate audit evidence has been obtained to reduce to an
acceptably low level the risks of material misstatement of the financial statements and
evaluating the effects of uncorrected misstatements identified. This evaluation includes
considering whether, in the context of the applicable financial reporting framework:

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 a) The financial statements adequately disclose the significant accounting policies
selected and applied;
b) The accounting policies selected and applied are consistent with the applicable
financial reporting framework and are appropriate;
c) The accounting estimates made by management are reasonable;
d) The information presented in the financial statements is relevant, reliable,
comparable, and understandable;
e) 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; and
f) The terminology used in the financial statements, including the title of each financial
statement, is appropriate.

Elements of the Auditor’s Report in an Audit Conducted in Accordance with PSA

PSA 700 (Revised) set out the requirements relating to the following elements of the
auditor’s report with an unmodified opinion:

1. Title
The auditor’s report should have a title that clearly indicates that it is the report of an
independent auditor. A title indicating the report is the report of an independent auditor, for
example, “Independent Auditor’s Report,” affirms that the auditor has met all of the relevant
ethical requirements regarding independence and, therefore, distinguishes the independent
auditor’s report from reports issued by others.

2. Addressee
The auditor’s report should be addressed as required by the circumstances of the engagement.
Ordinarily, the auditor’s report on general purpose financial statements is addressed to those for
whom the report is prepared, often either to the shareholders or to those charged with
governance of the entity whose financial statements are being audited.

3. Auditor’s Opinion
The first section of the auditor’s report shall include the auditor’s opinion, and shall have the
heading “Opinion.” The Opinion section of the auditor’s report shall also disclose the identity of
the entity whose financial statements have been audited; that the financial statements have
been audited; the title of each statement comprising the financial statements; reference to the
notes, including the summary of significant accounting policies; and the date of, or period
covered by, each financial statement comprising the financial statements.

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When expressing an unmodified opinion on financial statements prepared in accordance with a
fair presentation framework, the auditor’s opinion shall, unless otherwise required by law or
regulation, use the following phrase:

In our opinion, the accompanying financial statements present fairly, in all material
respects, […] in accordance with [the applicable financial reporting framework].

If the reference to the applicable financial reporting framework in the auditor’s opinion is
not to PFRSs issued by the Financial Reporting Standards Council, the auditor’s opinion
shall identify the jurisdiction of origin of the framework.

4. Basis for Opinion

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

a) States that the audit was conducted in accordance with Philippine Standards on
Auditing;
b) Refers to the section of the auditor’s report that describes the auditor’s responsibilities
under the PSAs;
c) 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 responsibilities in accordance with these requirements. The statement shall identify
the jurisdiction of origin of the relevant ethical requirements [Code of Ethics for Professional
Accountants in the Philippines (Philippine Code of Ethics)] or refer to the International
Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants
(IESBA Code); and
d) States whether the auditor believes that the audit evidence the auditor has obtained is
sufficient and appropriate to provide a basis for the auditor’s opinion.

5. Key Audit Matters

For audits of complete sets 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. This is
further discussed below.

6. Responsibilities of Management for the Financial Statements

This section of the auditor’s report shall describe management’s responsibility for:

a) 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

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b) Assessing the entity’s ability to continue as a going concern and whether the use of the going
concern basis of accounting is appropriate as well as disclosing, if applicable, matters relating to
going concern. The explanation of management’s responsibility for this assessment shall
include a description of when the use of the going concern basis of accounting is appropriate.

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. 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.

7. 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.

The Auditor’s Responsibilities for the Audit of the Financial Statements section of the
auditor’s report shall further:
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

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 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.

8. 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.

9. Name of the Engagement Partner

The name of the engagement partner shall be included in the auditor’s report for audits of
complete sets of general purpose 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.

10. Signature of the Auditor

The auditor’s signature is either in the name of the audit firm, the personal name of the auditor
or both, as appropriate for the particular jurisdiction. In addition to the auditor’s signature, in
certain jurisdictions, the auditor may be required to declare in the auditor’s report the auditor’s
professional accountancy designation or the fact that the auditor or firm, as appropriate, has
been recognized by the appropriate licensing authority. In some cases, law or regulation may
allow for the use of electronic signatures in the auditor’s report.

11. Auditor’s Address

The auditor’s report shall name the location in the jurisdiction where the auditor practices.

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12. Date of the Auditor’s Report
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: all the statements that comprise the financial statements,
including the related notes, have been prepared; and those with the recognized authority have
asserted that they have taken responsibility for those financial statements.

COMMUNICATING KEY AUDIT MATTERS IN THE INDEPENDENT AUDITOR’S REPORT

The purpose of communicating key audit matters (KAM) is to enhance the
communicative value of the auditor’s report by providing greater transparency about the audit
that was performed. Communicating KAM provides additional information to intended users of
the financial statement 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. However, KAM is not:
a. 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. 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)
c. A substitute for reporting in accordance with PSA 570 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. A separate opinion on individual matters.

In determining KAM, 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.

The auditor shall determine which of the matters determined were of most significance in
the audit of the financial statements of the current period that should form part of KAM. In
documenting the KAM in auditor’s report, it shall disclose why the matter was considered to
be one of most significance in the audit and therefore determined to be a key audit matter,

16
 how the matter was addressed in the audit, and include a reference to the related
disclosure(s) if any, in the financial statements.

EMPHASIS OF MATTER PARAGRAPHS AND OTHER MATTER PARAGRAPHS

a) 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. Circumstances that needs for this type of
paragraph are as follows:
• When a financial reporting framework prescribed by law or regulation would be
unacceptable but for the fact that it is prescribed by law or regulation.
• To alert users that the financial statements are prepared in accordance with a
special purpose framework.
• When facts become known to the auditor after the date of the auditor’s report and
the auditor provides a new or amended auditor’s report (i.e., subsequent events).
• An uncertainty relating to the future outcome of exceptional litigation or regulatory
action.
• A significant subsequent event that occurs between the date of the financial
statements and the date of the auditor’s report.
• Early application (where permitted) of a new accounting standard that has a
material effect on the financial statements.
• A major catastrophe that has had, or continues to have, a significant effect on the
entity’s financial position.

The auditor shall include an Emphasis of Matter paragraph in the auditor’s report
provided:
• The auditor would not be required to modify the opinion in accordance with
PSA 705 (Revised) as a result of the matter; and
• When PSA 701 applies, the matter has not been determined to be a key audit
matter to be communicated in the auditor’s report.

b) 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 auditor shall include an Other Matter
paragraph in the auditor’s report, provided:
• This is not prohibited by law or regulation; and
• When PSA 701 applies, the matter has not been determined to be a key audit
matter to be communicated in the auditor’s report.

MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

The auditor shall modify the opinion in the auditor’s report when:
a) The auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement; or

17
 b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that
the financial statements as a whole are free from material misstatement.

Types of Modification to the Auditor’s Opinion

1. Qualified Opinion
“When reporting in accordance with a fair presentation framework, the accompanying
financial statements present fairly, in all material respects [...] in accordance with [the
applicable financial reporting framework] except for the possible effects of the matter(s)
…”

The auditor shall express a qualified opinion when the auditor, having obtained sufficient
appropriate audit evidence, concludes that misstatements, individually or in the
aggregate, are material, but not pervasive, to the financial statements; or the auditor is
unable to obtain sufficient appropriate audit evidence on which to base the opinion, but
the auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be material but not pervasive.

Pervasive, in the context of misstatements, means to describe the effects on the

financial statements of misstatements or the possible effects on the financial statements
of misstatements, if any, that are undetected due to an inability to obtain sufficient
appropriate audit evidence.

2. Adverse Opinion
“When reporting in accordance with a fair presentation framework, the accompanying
financial statements do not present fairly [...] in accordance with [the applicable financial
reporting framework]”

The auditor shall express an adverse opinion when the auditor, having obtained
sufficient
appropriate audit evidence, concludes that misstatements, individually or in the
aggregate, are both material and pervasive to the financial statements.

3. Disclaimer of Opinion
(the auditor does not express an opinion on the accompanying financial statements; and
because of the significance of the matter(s) such are described in the Basis for
Disclaimer of Opinion section)

The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient
appropriate audit evidence on which to base the opinion, and the auditor concludes that
the possible effects on the financial statements of undetected misstatements, if any,
could be both material and pervasive.

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 The auditor shall disclaim an opinion when, in extremely rare circumstances involving
multiple uncertainties, the auditor concludes that, notwithstanding having obtained
sufficient appropriate audit evidence regarding each of the individual uncertainties, it is
not possible to form an opinion on the financial statements due to the potential
interaction of the uncertainties and their possible cumulative effect on the financial
statements.

The table below illustrates how the auditor’s judgment about the nature of the matter giving
rise to the modification.

PSA 450 defines a misstatement as a difference between the amounts, classification,

presentation, or disclosure of a reported financial statement item and the amount,
classification, presentation, or disclosure that is required for the item to be in accordance
with the applicable financial reporting framework. Accordingly, a material misstatement of
the financial statements may arise in relation to:
a) The appropriateness of the selected accounting policies;
b) The application of the selected accounting policies; or
c) The appropriateness or adequacy of disclosures in the financial statements.

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; or
c) Limitations imposed by management.

Report on Comparatives
For purposes of the PSAs, the following terms have the meanings attributed below:

19
 a. Comparative information – The amounts and disclosures included in the financial
statements in respect of one or more prior periods in accordance with the applicable
financial reporting framework.

b. Corresponding figures – Comparative information where amounts and other disclosures

for the prior period are included as an integral part of the current period financial
statements, and are intended to be read only in relation to the amounts and other
disclosures relating to the current period (referred to as “current period figures”).

c. Comparative financial statements – Comparative information where amounts and other

disclosures for the prior period are included for comparison with the financial statements
of the current period but, if audited, are referred to in the auditor’s opinion.

The auditor shall determine whether the financial statements include the comparative
information required by the applicable financial reporting framework and whether such
information is appropriately classified. For this purpose, the auditor shall evaluate whether: the
comparative information agrees with the amounts and other disclosures presented in the prior
period or, when appropriate, have been restated; and the accounting policies reflected in the
comparative information are consistent with those applied in the current period or, if there have
been changes in accounting policies, whether those changes have been properly accounted for
and adequately presented and disclosed. If the auditor becomes aware of a possible material
misstatement in the comparative information while performing the current period audit, the
auditor shall perform such additional audit procedures as are necessary in the circumstances to
obtain sufficient appropriate audit evidence to determine whether
a material misstatement exists.

Prior Period Financial Statements Audited by a Predecessor Auditor

If the financial statements of the prior period were audited by a predecessor auditor and
the auditor is permitted by law or regulation to refer to the predecessor auditor’s report on the
corresponding figures and decides to do so, the auditor shall state in an Other Matter paragraph
in the auditor’s report: that the financial statements of the prior period were audited by the
predecessor auditor; the type of opinion expressed by the predecessor auditor and, if the
opinion was modified, the reasons therefore; and the date of that report.

Prior Period Financial Statements Not Audited

If the prior period financial statements were not audited, the auditor shall state in an
Other Matter paragraph in the auditor’s report that the corresponding figures are unaudited.
Such a statement does not, however, relieve the auditor of the requirement to obtain sufficient
appropriate audit evidence that the opening balances do not contain misstatements that
materially affect the current period’s financial statements.

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Audit of Group Financial Statements

The auditor should consider whether the auditor’s own participation is sufficient to be
able to act as the principal auditor. When planning to use the work of another auditor, the
principal auditor should consider the professional competence of the other auditor in the context
of the specific assignment. The principal auditor should perform procedures to obtain sufficient
appropriate audit evidence, that the work of the other auditor is adequate for the principal
auditor’s purposes, in the context of the specific assignment. The principal auditor should
consider the significant findings of the other auditor.

When the principal auditor concludes that the work of the other auditor cannot be used
and the principal auditor has not been able to perform sufficient additional procedures regarding
the financial information of the component audited by the other auditor, the principal auditor
should express a qualified opinion or disclaimer of opinion because there is a limitation in the
scope of the audit. When the principal auditor bases the audit opinion on the financial
statements taken as a whole solely upon the report of another auditor regarding the audit of one
or more components, the principal auditor’s report should state this fact clearly and should
indicate the magnitude of the portion of the financial statements audited by the other auditor.

Auditor’s Responsibilities related to Other Information

The auditor shall determine, through discussion with management, which document(s)
comprises the annual report, and the entity’s planned manner and timing of the issuance of
such document(s).

The auditor shall read the other information and, in doing so shall consider whether there
is a material inconsistency between the other information and the financial statements. If the
auditor concludes that a material misstatement of the other information exists, the auditor shall
request management to correct the other information. If management: agrees to make the
correction, the auditor shall determine that the correction has been made; or refuses to make
the correction, the auditor shall communicate the matter with those charged with governance
and request that the correction be made.

If the auditor concludes that a material misstatement exists in other information obtained
prior to the date of the auditor’s report, and the other information is not corrected after
communicating with those charged with governance, the auditor shall take appropriate action,
including:
a) Considering the implications for the auditor’s report and communicating with those charged
with governance about how the auditor plans to address the material misstatement in the
auditor’s report.

21
b) Withdrawing from the engagement where withdrawal is possible under applicable law or
regulation.

If the date the auditor concludes that a material misstatement exists in other information
obtained after the of the auditor’s report, the auditor shall:
a) If the other information is corrected, perform the procedures necessary in the
circumstances; or
b) If the other information is not corrected after communicating with those charged with
governance, take appropriate action considering the auditor’s legal rights and obligations, to
seek to have the uncorrected material misstatement appropriately brought to the attention of
users for whom the auditor’s report is prepared.

OTHER SERVICES AND REPORTS

Auditor’s report on Special Purpose Audit Engagements

Special reports are reports resulting from the audit of, or application of agreed-upon
procedures to historical financial data other than financial statements prepared in conformity
with PFRS.

These reports apply on the following:

 Financial statements prepared in accordance with a comprehensive basis of

accounting other than generally accepted accounting principles in the Philippines;
 Specified accounts, elements of accounts, or items in a financial statement (hereafter
referred to as reports on a component of financial statements);
 Compliance with contractual agreements; and
 Summarized financial statements.

The auditor should review and assess the conclusions drawn from the audit evidence
obtained during the special purpose audit engagement as the basis for an expression of
opinion. The report should contain a clear written expression of opinion.

Before undertaking a special purpose audit engagement, the auditor should ensure there
is agreement with the client as to the exact nature of the engagement and the form and content
of the report to be issued. The auditor’s report on a special purpose audit engagement, except
for a report on summarized financial statements*, should include the following basic elements,
ordinarily in the following layout:

a) title;
b) addressee;

22
 c) opening or introductory paragraph
• identification of the financial information audited; and
• a statement of the responsibility of the entity’s management and the
responsibility of the auditor;
d) a scope paragraph (describing the nature of an audit)
• the reference to the PSAs applicable to special purpose audit engagements; and
• a description of the work the auditor performed;
e) opinion paragraph containing an expression of opinion on the financial information;
f) date of the report;
g) auditor’s address; and
h) auditor’s signature.

*The auditor’s report on summarized financial statements should include the following basic
elements ordinarily in the following layout:
a) title;
b) addressee;
c) an identification of the audited financial statements from which the summarized
financial statements were derived;
d) a reference to the date of the audit report on the unabridged financial statements
and the type of opinion given in that report;
e) an opinion as to whether the information in the summarized financial statements is
consistent with the audited financial statements from which it was derived. When
the auditor has issued a modified opinion on the unabridged financial statements
yet is satisfied with the presentation of the summarized financial statements, the
audit report should state that, although consistent with the unabridged financial
statements, the summarized financial statements were derived from financial
statements on which a modified audit report was issued;
f) a statement, or reference to the note within the summarized financial statements,
which indicates that for a better understanding of an entity’s financial performance
and position and of the scope of the audit performed, the summarized financial
statements should be read in conjunction with the unabridged financial statements
and the audit report thereon;
g) date of the report;
h) auditor’s address; and
i) auditor’s signature.

The auditor should consider whether any significant interpretations of an agreement on

which the financial information is based are clearly disclosed in the financial information.

Examination of Prospective Financial Information

Prospective financial information means financial information based on assumptions

about events that may occur in the future and possible actions by an entity. It is highly
subjective in nature and its preparation requires the exercise of considerable judgment.

23
Prospective financial information can be in the form of a forecast, a projection or a combination
of both, for example, a one year forecast plus a five-year projection.

A “forecast” means prospective financial information prepared on the basis of

assumptions as to future events which management expects to take place and the actions
management expects to take as of the date the information is prepared (best-estimate
assumptions). A “projection” means prospective financial information prepared on the basis of:
(a) hypothetical assumptions about future events and management actions which are not
necessarily expected to take place, such as when some entities are in a start-up phase or are
considering a major change in the nature of operations; or (b) a mixture of best-estimate and
hypothetical assumptions.

Management is responsible for the preparation and presentation of the prospective

financial information, including the identification and disclosure of the assumptions on which it is
based. The auditor may be asked to examine and report on the prospective financial
information to enhance its credibility whether it is intended for use by third parties or for internal
purposes.

The auditor should not accept, or should withdraw from, an engagement when the
assumptions are clearly unrealistic or when the auditor believes that the prospective financial
information will be inappropriate for its intended use. The auditor should consider the extent to
which reliance on the entity’s historical financial information is justified.

When the auditor believes that the presentation and disclosure of the prospective
financial information is not adequate, the auditor should express a qualified or adverse opinion
in the report on the prospective financial information, or withdraw from the engagement as
appropriate.

When the auditor believes that one or more significant assumptions do not provide a
reasonable basis for the prospective financial information prepared on the basis of best-
estimate assumptions or that one or more significant assumptions do not provide a reasonable
basis for the prospective financial information given the hypothetical assumptions, the auditor
should either express an adverse opinion in the report on the prospective financial information,
or withdraw from the engagement.

When the examination is affected by conditions that preclude application of one or more
procedures considered necessary in the circumstances, the auditor should either withdraw from
the engagement or disclaim the opinion and describe the scope limitation in the report on the
prospective financial information.

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Engagements to Review Financial Statements

The objective of a review of financial statements is to enable an auditor to state whether,

on the basis of procedures which do not provide all the evidence that would be required in an
audit, anything has come to the auditor's attention that causes the auditor to believe that the
financial statements are not prepared, in all material respects, in accordance with generally
accepted accounting principles in the Philippines (negative assurance).

The auditor should plan and perform the review with an attitude of professional
skepticism recognizing that circumstances may exist which cause the financial statements to be
materially misstated. For the purpose of expressing negative assurance in the review report, the
auditor should obtain sufficient appropriate evidence primarily through inquiry and analytical
procedures to be able to draw conclusions.

The review report should contain a clear written expression of negative assurance. The
auditor should review and assess the conclusions drawn from the evidence obtained as the
basis for the expression of negative assurance. Based on the work performed, the auditor
should assess whether any information obtained during the review indicates that the financial
statements are not presented fairly, in all material respects, in accordance with generally
accepted accounting principles in the Philippines.

The review report should:

a) state that nothing has come to the auditor's attention based on the review that causes
the auditor to believe the financial statements are not presented fairly, in all material
respects in accordance with generally accepted accounting principles in the Philippines
(negative assurance); or
b) if matters have come to the auditor's attention, describe those matters that impair a fair
presentation, in all material respects in accordance with generally accepted accounting
principles in the Philippines, including, unless impracticable, a quantification of the
possible effect(s) on the financial statements, and either:
i. express a qualification of the negative assurance provided; or
ii. when the effect of the matter is so material and pervasive to the financial statements
that the auditor concludes that a qualification is not adequate to disclose the
misleading or incomplete nature of the financial statements, give an adverse statement
that the financial statements are not presented fairly, in all material respects in
accordance with generally accepted accounting principles in the Philippines; or
c) if there has been a material scope limitation, describe the limitation and either:
i. express a qualification of the negative assurance provided regarding the possible
adjustments to the financial statements that might have been determined to be
necessary had the limitation not existed; or

25
 ii. when the possible effect of the limitation is so significant and pervasive that the auditor
concludes that no level of assurance can be provided, not provide any assurance.

Engagements to Perform Agreed-Upon Procedures regarding Financial Information

An engagement to perform agreed-upon procedures may involve the auditor in

performing certain procedures concerning individual items of financial data (for example,
accounts payable, accounts receivable, purchases from related parties and sales and profits of
a segment of an entity), a financial statement (for example, a balance sheet) or even a complete
set of financial statements.

The objective of an agreed-upon procedures engagement is for the auditor to carry out
procedures of an audit nature to which the auditor and the entity and any appropriate third
parties have agreed and to report on factual findings. As the auditor simply provides a report of
the factual findings of agreed-upon procedures, no assurance is expressed. Instead, users of
the report assess for themselves the procedures and findings reported by the auditor and draw
their own conclusions from the auditor’s work.

Independence is not a requirement for agreed-upon procedures engagements. Where

the auditor is not independent, a statement to that effect would be made in the report of factual
findings.

The report is restricted to those parties that have agreed to the procedures to be
performed since others, unaware of the reasons for the procedures, may misinterpret the
results. The report on an agreed-upon procedures engagement needs to describe the purpose
and the agreed-upon procedures of the engagement in sufficient detail to enable the reader to
understand the nature and the extent of the work performed.

Engagements to Compile Financial Information

The objective of a compilation engagement is for the accountant to use accounting

expertise, as opposed to auditing expertise, to collect, classify and summarize financial
information. This ordinarily entails reducing detailed data to a manageable and understandable
form without a requirement to test the assertions underlying that information. The procedures
employed are not designed and do not enable the accountant to express any assurance on the
financial information. However, users of the compiled financial information derive some benefit
as a result of the accountant's involvement because the service has been performed with
professional competence and due care.

26
 Independence is not a requirement for a compilation engagement. However, where the
accountant is not independent, a statement to that effect would be made in the accountant's
report.

A compilation engagement would ordinarily include the preparation of financial

statements (which may or may not be a complete set of financial statements) but may also
include the collection, classification and summarization of other financial information. In all
circumstances when an accountant's name is associated with financial information compiled by
the accountant, the accountant should issue a report.

In all circumstances when an accountant's name is associated with financial information

compiled by the accountant, the accountant should issue a report. The generally accepted
accounting principles in the Philippines and any known departures therefrom should be
disclosed within the financial information, though their effects need not be quantified. If the
accountant becomes aware of material misstatements, the accountant should try to agree
appropriate amendments with the entity. If such amendments are not made and the financial
information is considered to be misleading, the accountant should withdraw from the
engagement.

The financial information compiled by the accountant should contain a reference such as
"Unaudited," "Compiled without Audit or Review" or "Refer to Compilation Report" on each page
of the financial information or on the front of the complete set of financial statements.

Multiple Choice Questions

1. Which of the following is not a procedure normally performed while completing the audit?
a. Obtain a lawyer's letter.
b. Obtain a representations letter.
c. Perform an overall review using analytical procedures.
d. Obtain confirmation of capital stockholdings from shareholders.

2. Which of the following types of matters do not generally require disclosure in the financial
statements?
a. General risk contingencies.
b. Commitments.
c. Loss contingencies.
d. Liabilities to related parties.

3. Which of the following is not correct relating to representation letters?

a. They are ordinarily dated as of the date of the audit report.
b. They are signed by members of top management.
c. They must be obtained for audits.
d. They often serve as a substitute for the application of other procedures.

27
4. One reason why the independent auditors perform analytical procedures on the client's
operations is to identify:
a. Weaknesses of a material nature in internal control.
b. Non-compliance with prescribed control procedures.
c. Improper separation of accounting and other financial duties.
d. Unusual transactions.

5. The auditors' primary means of obtaining corroboration of management's information

concerning litigation is a:
a. Letter of audit inquiry to the client's lawyer.
b. Letter of corroboration from the auditor's lawyer upon review of the legal
documentation.
c. Confirmation of claims and assessments from the other parties to the litigation.
d. Confirmation of claims and assessments from an officer of the court presiding over
the litigation.

6. A successor auditor has accepted an engagement that was previously performed by a

predecessor auditor and, prior to accepting the engagement, has communicated with the
predecessor. When the successor believes that the predecessor has performed satisfactory
previous audits, which of the following is correct?
a. A second communication is required and must include details of previous audits.
b. Ordinarily the successor auditors may be able to accept the opening balances of the
current year with a minimum of verification work.
c. Absent ongoing litigation, a predecessor must provide all working papers requested
by the predecessor.
d. The client should be informed of the need to perform a detailed audit of all opening
balances.

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

8. Which of the following material events occurring subsequent to the balance sheet date
would require an adjustment to the financial statements before they could be issued?
a. Loss of a plant as a result of a flood.
b. Sale of long-term debt or capital stock.
c. Settlement of litigation in excess of the recorded liability.
d. Major purchase of a business that is expected to double the sales volume.

9. In evaluating an entity's accounting estimates, one of the auditor's objectives is to determine

whether the estimates are
a. Prepared in a satisfactory control environment.
b. Consistent with industry guidelines.
c. Based on verifiable objective assumptions.
d. Reasonable in the circumstances.

28
10. In auditing an asset valued at fair value, which of the following potentially provides the
auditor with the strongest evidence?
a. A price for a similar asset obtained from an active market.
b. An appraisal obtained discounting future cash flows.
c. Management's judgment of the cost to purchase an equivalent asset.
d. The historical cost of the asset.

11. Which of the following least likely indicates the existence of previously unidentified related
parties?
a. Transactions which have abnormal terms of trade, such as unusual prices, interest
rates, guarantees, and repayment terms.
b. Transactions which lack an apparent logical business reason for their occurrence.
c. Transactions in which substance does not differ from form.
d. Unrecorded transactions such as the receipt or provision of management services at
no charge.

12. An expert may be:

a b c d
Engaged by the entity Yes No Yes Yes
Engaged by the auditor No Yes Yes Yes
Employed by the entity Yes No No Yes
Employed by the auditor No Yes No Yes

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

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

15. It exists when other information contradicts information contained in the audited financial
statements.
a. Material misstatement of fact c. Material inconsistency
b. Material error d. Material deviation

16. In evaluating the assumptions on which the estimate is based, the auditor would need to pay
particular attention to assumptions which are

29
 a. Reasonable in light of actual results in prior periods.
b. Consistent with those used for other accounting estimates.
c. Consistent with management’s plans which appear appropriate.
d. Subjective or susceptible to material misstatement.

17. Which statement is incorrect regarding auditing fair value measurements and disclosures?
a. The auditor should obtain sufficient appropriate audit evidence that fair value
measurements and disclosures are in accordance with GAAP in the Philippines.
b. Many measurements based on estimates, including fair value measurements, are
inherently imprecise.
c. The auditor's consideration of such assumptions is based on information available to
the auditor at the time of the audit.
d. The auditor is responsible for predicting future conditions, transactions or events
which, had they been known at the time of the audit, may have had a significant effect
on management's actions or management's assumptions underlying the fair value
measurements and disclosures.

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

19. If an accounting change has no material effect on the financial statements in the current
year but the change is reasonably certain to have a material effect in later years, the change
should be
a. Treated as a consistency modification in the auditor’s report for the current year.
b. Disclosed in the notes to the financial statements of the current year.
c. Disclosed in the notes to the financial statements and referred to in the auditor’s report
for the current year.
d. Treated as a subsequent event.

20. Which statement is incorrect regarding corresponding figures?

a. The corresponding figures are not presented as complete financial statements
capable of standing alone.
b. The level of detail presented in the corresponding amounts and disclosures is dictated
primarily by its relevance to the current period figures.
c. The auditor’s report refers only to the financial statements of the current period.
d. The auditor’s report refers to each period that financial statements are presented.

21. Examples of unqualified opinions which contain modified wording (without adding an
emphasis of matter paragraph) include:
a. the use of other auditors.
b. material uncertainties.

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 c. substantial doubt about the audited company continuing as a going concern.
d. lack of consistent application of GAAP.

22. Browny Co.’s financial statements adequately disclose uncertainties that concern future
events, the outcome of which are not reasonably estimable. The auditor’s report should
include a(n):
a. unqualified opinion.
b. disclaimer of opinion.
c. qualified opinion.
d. adverse opinion.

23. In which situation would the auditor be choosing between “except for” qualified opinion and
an adverse opinion?
a. The auditor lacks independence.
b. A client-imposed scope restriction.
c. A circumstance-imposed scope restriction.
d. Lack of full disclosure required by footnotes.

24. Statement 1: KAM may be significant events that have transpired during the year.
Statement 2: KAM should not consider the related disclosure in the financial statements.
a. Both statements are true.
b. Both statements are false.
c. First statement is true and second statement is false.
d. First statement is false and second statement is true.

25. The auditors' primary means of obtaining corroboration of management's information

concerning litigation is a:
a. Letter of audit inquiry to the client's lawyer.
b. Letter of corroboration from the auditor's lawyer upon review of the legal
documentation.
c. Confirmation of claims and assessments from the other parties to the litigation.
d. Confirmation of claims and assessments from an officer of the court presiding over
the litigation.

26. Which of the following best describes the auditor's responsibility for "other information"
included in the annual report to stockholders which contains financial statements and the
auditor's report?
a. The auditor has no obligation to read the "other information."

b. The auditor has no obligation to corroborate the "other information," but should read
the "other information" to determine whether it is materially inconsistent with the financial
statements.
c. The auditor should extend the examination to the extent necessary to verify the "other
information."
d. The auditor must modify the auditor's report to state that the "other information is
unaudited" or "not covered by the auditor's report."

27. Comparative financial statements include the financial statements of a prior period which
were examined by a predecessor auditor whose report is not presented. If the predecessor
auditor's report was qualified, the successor auditor must

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 a. Obtain written approval from the predecessor auditor to include the prior year's
financial statements.
b. Issue a standard comparative audit report indicating the division of responsibility.
c. Express an opinion on the current year statements alone and make no reference to
the prior year statements.
d. Disclose the reasons for any qualification in the predecessor auditor's opinion.

28. In which of the following circumstances may the auditor issue the standard audit report?
a. The financial statements are affected by a departure from a generally accepted
accounting principle.
b. Substantial doubt exists concerning the ability of the entity to continue as a going
concern.
c. The principal auditor assumes responsibility for the work of another auditor.
d. Unable to obtain sufficient appropriate audit evidence during the course of audit.

29. Which of the following best describes the reference to the expression "taken as a whole" in
the audit report?
a. It applies equally to a complete set of financial statements and to each individual
financial statement.
b. It applies only to a complete set of financial statements.
c. It applies equally to each item in each financial statement.
d. It applies equally to each material item in each financial statement.

30. Reports on debt compliance and similar engagements may be issued as a separate report
or as part of a report that expresses the auditor’s opinion on the financial statements. When
they are issued as a part of the report on the financial statements, it is done by:
a. adding a middle paragraph before the opinion paragraph.
b. adding a paragraph after the opinion paragraph.
c. adding an additional phrase or sentence within the opinion paragraph.
d. adding a paragraph between the introductory and scope paragraphs.

31. Which of the following is not an element of examining a forecast?

a. Evaluating the preparation of the prospective financial statements.
b. Understanding internal controls.
c. Evaluating the support underlying the assumptions.
d. Issuing an examination report.

32. An accountant’s standard report on a compilation of a projection should not include a:

a. statement that a compilation of a projection is limited in scope.
b. separate paragraph that describes the limitations on the presentation’s usefulness.
c. disclaimer of responsibility to update the report for events occurring after the report’s
date.
d. statement that the accountant expresses only limited assurance that the results may
be achieved.

33. Which of the following is not a distinction between a compilation and a review?
a. The CPA must be independent as a prerequisite to performing a review engagement,
but need not be independent to perform a compilation.
b. In conducting a review, the CPA must obtain an understanding of the client's internal
control system; but this is not necessary for a compilation engagement.

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 c. Analytical procedures are applied in a review engagement, but are not required in a
compilation.
d. A compilation offers no assurance, whereas a review provides limited assurance.

34. Accepting an engagement to compile a financial projection for a publicly held company
most likely would be inappropriate if the projection were to be distributed to
a. A bank with which the entity is negotiating for a loan.
b. A labor union with which the entity is negotiating a contract.
c. The principal stockholder, to the exclusion of the other stockholders.
d. All stockholders of record as of the report date.

35. Which of the following is correct relating to an engagement to apply agreed-upon

procedures to prospective financial statements?
a. Use of the report is restricted to the specified users.
b. Such engagements are permissible for forecasts but not for projections.
c. Responsibility for the adequacy of the procedures performed is taken by the
practitioner.
d. Such engagements are not permissible under the professional standards.

36. The party responsible for assumptions identified in the preparation of prospective financial
statements is usually:
a. A third-party lending institution.
b. The client's management.
c. The reporting accountant.
d. The client's independent auditor.

37. Which of the following procedures is usually the first step in reviewing the financial
statements of a nonpublic entity?
a. Make preliminary judgments about risk and materiality to determine the scope and
nature of the procedures to be performed.
b. Obtain a general understanding of the entity's organization, its operating
characteristics, and its products or services.
c. Assess the risk of material misstatement arising from fraudulent financial reporting
and the misappropriation of assets.
d. Perform a preliminary assessment of the operating efficiency of the entity's internal
control activities.

38. An audit report should be dated as of

a. the date the report is delivered to the entity audited.
b. the balance sheet date of the latest period reported on.
c. the date a letter of audit inquiry is received from the entity's attorney of record.
d. the date of the last day of fieldwork.

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