ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 45  May 2023 CPA Licensure Examination AT-16

AUDITING (Auditing Theory) J. IRENEO  E. ARAÑAS  F. TUGAS  C. ALLAUIGAN

AUDITOR’S REPORT ON GENERAL PURPOSE FS

PSA 700 deals with the auditor’s responsibility to form an opinion on the financial statements. It also
deals with the form and content of the auditor’s report issued as a result of an audit of financial
statements.

The objectives of the auditor are:

1. To form an opinion on the financial statements based on an evaluation of the conclusions drawn
from the audit evidence obtained; and
2. To express clearly that opinion through a written report.

Financial statements prepared in accordance with a general purpose framework. General purpose
framework is a financial reporting framework designed to meet the common financial information
needs of a wide range of users. The financial reporting framework may be a fair presentation
framework or a compliance framework. The auditor shall evaluate whether, in view of the requirements
of the applicable financial reporting framework:
1. The financial statements adequately disclose the significant accounting policies selected and
applied;
2. The accounting policies selected and applied are consistent with the applicable financial
reporting framework and are appropriate;
3. The accounting estimates made by management are reasonable;
4. The information presented in the financial statements is relevant, reliable, comparable, and
understandable;
5. 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
6. The terminology used in the financial statements, including the title of each financial statement,
is appropriate.

THE AUDITOR’S REPORT

▪ Title
▪ Addressee
▪ Auditor’s Opinion
▪ Basis for Opinion
▪ Going Concern*
▪ Key Audit Matters (KAM)**
▪ Responsibilities of Management for the Financial Statements
▪ Auditor’s Responsibilities for the Audit of the Financial Statements
▪ Other Reporting Responsibilities
▪ Name of the Engagement Partner
▪ Signature of the Auditor
▪ Auditor’s Address
▪ Date of the Auditor’s Report

* PSA 570 deals with the auditor’s responsibilities in the audit of financial statements relating to going
concern and the implications for the auditor’s report. The auditor’s responsibilities are to obtain
sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of
management’s use of the going concern basis of accounting in the preparation of the financial
statements, and to conclude, based on the audit evidence obtained, whether a material uncertainty
exists about the entity’s ability to continue as a going concern. These responsibilities exist even if the
financial reporting framework used in the preparation of the financial statements does not include an
explicit requirement for management to make a specific assessment of the entity’s ability to continue
as a going concern.

** PSA 701 deals with the auditor’s responsibility to communicate key audit matters in the auditor’s
report. The purpose of communicating key audit matters is to enhance the communicative value of
the auditor’s report by providing greater transparency about the audit that was performed. KAM are
those matters that, in the auditor’s professional judgment, were of most significance in the audit of
the financial statements of the current period. They are selected from matters communicated with
those charged with governance.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AUDITOR’S REPORT on GENERAL PURPOSE FS AT-16
1. Which of the following PSAs refer to Forming an Opinion and Reporting on Financial Statements?
A. PSA 700 B. PSA 705 C. PSA 706 D. PSA 800

2. According to PSA 700 Revised, the objectives of the auditor are to:
I. Form an opinion on the financial statements based on an evaluation of the conclusions drawn
from the audit evidence obtained.
II. Express clearly that opinion through a written report.
A. I only B. II only C. Both I and II D. Neither I nor II

3. These refer to financial statements prepared in accordance with a general purpose framework.
A. General purpose financial statements
B. Annual report
C. Common-size financial statements
D. Uniform financial statements

4. A financial reporting framework designed to meet the common financial information needs of a
wide range of users.
A. Financial reporting rules and regulations
B. Philippine Standards on Auditing
C. General purpose framework
D. Fair presentation framework
5. Not an example of a general purpose framework
A. PFRS C. PFRS for SMEs
B. IFRS D. Cash-basis accounting

6. With respect to applicable financial reporting framework, the term “fair presentation
framework” differs from “compliance framework” in a manner that the latter does NOT:
A. Acknowledge explicitly or implicitly that, to achieve fair presentation of the financial
statements, it may be necessary for management to provide disclosures beyond those
specifically required by the framework.
B. Acknowledge explicitly that it may be necessary for management to depart from a
requirement of the framework to achieve fair presentation of the financial statements;
such departures are expected to be necessary only in extremely rare circumstances.
C. Both A and B
D. Neither A nor B

7. S1: It is common for financial statements prepared in accordance with a general purpose
framework to present an entity’s financial position, financial performance and cash flows.
S2: When the financial statements are prepared in accordance with a compliance framework, the
auditor is not required to evaluate whether the financial statements achieve fair presentation.
A. True, True B. True, False C. False, False D. False, True

8. The opinion expressed by the auditor when the auditor concludes that the financial statements
are prepared, in all material respects, in accordance with the applicable financial reporting
framework.
A. Modified opinion C. Standardized statement
B. Unqualified opinion D. Unmodified opinion

9. A qualified opinion, an adverse opinion, or a disclaimer of opinion are known as:

A. Modified opinions C. Standardized statements
B. Unqualified explanations D. Unmodified opinions
10. The expression “financial statements, taken as a whole” applies:
A. Equally to a complete set of financial statements and to an individual financial statement.
B. Only to a complete set of financial statements.
C. Equally to each item in each financial statement.
D. Equally to each material item in each financial statement.
11. The auditor’s report shall have a title that clearly indicates:
A. The name of the client audited.
B. The period covered by the financial statements.
C. That it is the report of an independent auditor.
D. When the audit was completed.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AUDITOR’S REPORT on GENERAL PURPOSE FS AT-16
12. Per PSA 700, the auditor’s report should be addressed
A. Only to the shareholders of the entity whose financial statements are being audited
B. Only to the board of directors of the entity whose financial statements are being audited
C. Either to the shareholders or the board of directors of the entity whose financial statement are
being audited
D. Either to the shareholders or the board of directors, or both, of the entity whose statements
are being audited
13. The date of the auditor’s report (choose the exception)
A. Indicates that the auditor has performed procedures for subsequent events that would
materially affect the financial statements through the date of the report
B. Should not be earlier than the date management approves the financial statements and
furnishes a written representation
C. Should be later than the date of the statement of financial position
D. Must not coincide with the date of the Management Representation Letter
14. S1: The date of the auditor’s report informs the user of the auditor’s report that the auditor has
considered the effect of events and transactions of which the auditor became aware and that
occurred up to that date.
S2: Since auditor’s report shall always be in writing, the use of an electronic medium for such
purpose is not acceptable.
A. True, True B. True, False C. False, False D. False, True
15. An auditor’s address is also presented in the auditor’s report. The address is normally
A. The principal place of business of the audit client.
B. The exact location where the auditor’s report was signed.
C. The location in the jurisdiction where the auditor practices.
D. The address of the majority shareholders of the audit client.

16. Not included in the Auditor’s Responsibilities for the Audit of the Financial Statements section
A. Objective of an audit that is to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud or error and
issue an auditor’s report that includes the auditor’s opinion
B. Statement 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
C. Misstatements can arise from fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the economic decisions of users
taken on the basis of these financial statements.
D. Auditors’ consideration of internal control relevant to the entity’s preparation and fair
presentation of the financial statements in order to design audit procedures that are appropriate
in the circumstances for the purpose of expressing an opinion on the effectiveness of the
entity’s internal control
17. Which of the following statements is a basic element of the auditor’s standard report on financial
statements?
A. The auditor evaluated the overall internal control and provides limited assurance on it.
B. The disclosures provide reasonable assurance that the financial statements are free of material
misstatement.
C. The financial statements are consistent with those of the prior period.
D. An audit includes assessing significant estimates made by management.
18. The existence of audit risk is recognized by the statement in the auditor’s standard report that the
auditor
A. Obtains reasonable assurance about whether the financial statements are free of material
misstatement.
B. Assesses the accounting principles used and also evaluates the overall financial statement
presentation.
C. Realizes some matters, either individually or in the aggregate, are important while other-
matters are not important.
D. Is responsible for expressing an opinion on the financial statements, which are the responsibility
of management.
19. Where in the auditor’s report are the name of the audit client, financial statements audited
and periods covered, and a reference to the summary of significant accounting policies first
mentioned?
A. Introduction Section C. KAM Section
B. Basis for Opinion Section D. Opinion Section
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
AUDITOR’S REPORT on GENERAL PURPOSE FS AT-16
20. Where in the auditor’s report is the auditor’s compliance with relevant auditing and ethical
standards mentioned?
A. Introduction Section C. Basis for Opinion
B. Auditor’s Responsibilities D. KAM Section
21. In order to form an opinion, the auditor shall conclude as to whether the auditor has obtained
reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error. That conclusion shall take into account:
I - The auditor’s conclusion, in accordance with PSA 330, whether sufficient appropriate audit
evidence has been obtained.
II - The auditor’s conclusion, in accordance with PSA 450, whether uncorrected misstatements
are material, individually or in aggregate.
A. I only B. II only C. Both I and II D. Neither I nor II
22. S1: The auditor shall express an unmodified opinion when the auditor concludes that the financial
statements are prepared, in all material respects, in accordance with the applicable financial
reporting framework.
S2: If financial statements prepared in accordance with the requirements of a fair presentation
framework do not achieve fair presentation, there is no need for the auditor to discuss the matter
with the client.
A. True, false B. False, true C. False, false D. True, true
23. S1: Where applicable, the auditor shall include additional paragraph related to going concern in
accordance with PSA 570.
S2: 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.
A. True, false B. False, true C. False, false D. True, true
24. Which of the following conditions or events most likely would cause an auditor to have substantial
doubt about an entity’s ability to continue as a going concern?
A. Significant related-party transactions are pervasive.
B. Usual trade credit from suppliers is denied.
C. Arrearages in preferred stock dividends are paid.
D. Restrictions on the disposal of principal assets are present.
25. S1: The identification of KAM usually starts with all matters communicated with those charged
with governance.
S2: After which, the auditor determines those that required significant audit attention.
A. True, True B. True, False C. False, False D. False, True
26. S1: KAM may be a source of significant risk areas identified in the audit.
S2: KAM may be a significant area of judgment by management.
A. True, True B. True, False C. False, False D. False, True
27. S1: KAM may be significant events or transactions that have transpired during the year.
S2: KAM should not consider the related disclosure in the financial statements.
A. True, True B. True, False C. False, False D. False, True
28. Which of the following are included in the key audit matter section of the auditor’s report?
A. Description of the KAM and its significance.
B. How it was addressed in the audit.
C. Reference to the related disclosure to the FS.
D. All of the choices
29. If supplementary information that is not required by the applicable financial reporting framework
is presented with the audited financial statements, the auditor shall
A. Withdraw from the engagement.
B. Issue a qualified opinion due to disagreement with management.
C. Issue an adverse opinion due to departure from the applicable financial reporting framework.
D. Evaluate whether such supplementary information is clearly differentiated from the audited
financial statements.
30. Supplementary information that is not required by the applicable financial reporting framework but
is nevertheless an integral part of the financial statements because it cannot be clearly
differentiated from the audited financial statements due to its nature and how it is presented shall
be
A. Covered by special citation in the management letter.
B. Covered by the auditor’s opinion.
C. Covered by a separate opinion, apart from the opinion on the financial statements.
D. Cannot be determined from the given information.
- END -
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