Chapter 22: Forming an Opinion and Reporting on Financial

Statements

Review Questions

1. Describe the so-called culmination of the audit process.

The audit report represents the culmination of the audit process and is
the auditor's primary venue for communicating his or her opinion about a client's financial
statements with outside parties

2. What is the auditor’s primary basis for the expression of an opinion on the financial
statements?
The auditor’s primary basis for the expression of an opinion on the financial
statements are the conclusions being drawn from the audit evidence that has been reviewed
and assessed.

m
er as
3. In forming an opinion on the financial statements, what factors should the auditor

co
consider in concluding whether the financial as a whole are free from material

eH w
misstatement, whether due to fraud or error?

o.
rs e
When evaluating whether the financial statements as a whole are free of material
ou urc
misstatement, the auditor should evaluate the qualitative aspects of the company's accounting
practices, including potential bias in management's judgments about the amounts and
disclosures in the financial statements.
o

4. What should the auditor consider and evaluate in determining whether the financial
aC s

statements are prepared in all material respects in accordance with the applicable
v i y re

financial reporting framework?

The auditor shall evaluate whether the financial statements are prepared, in all
material respects, in accordance with the requirements of the applicable financial reporting
ed d

framework. This evaluation shall include consideration of the qualitative aspects of the
entity’s accounting practices, including indicators of possible bias in management’s
ar stu

judgments.
In particular, the auditor shall evaluate whether, in view of the requirements of the
applicable financial reporting framework:
sh is

(a) The financial statements adequately disclose the significant accounting policies selected
Th

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.

This study source was downloaded by 100000828414829 from CourseHero.com on 06-27-2021 03:51:52 GMT -05:00

https://www.coursehero.com/file/93485969/Chapter-22docx/
 5. In evaluating whether the financial statements achieve fair presentation, what should
the auditor take into consideration?
The auditor's evaluation about whether the financial statements achieve fair
presentation should also include consideration of the following:
a. The overall presentation, structure, and content of the financial statements
b. Whether the financial statements represent the underlying transactions and events

6. When should the auditor express on unmodified opinion or the financial statements?
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. If the auditor:
 concludes that, based on the audit evidence obtained, the financial statements as a
whole are not free from material misstatement; or
 is unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement,
the auditor shall modify the opinion in the auditor’s report in accordance with ISA 705.

m
er as
7. What course of action should the auditor take if it is found that financial statements

co
eH w
prepared are not fairly presented?

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

Redrafted).
aC s
v i y re

8. Describe the audit report to be issued by the auditor if the audit was conducted in
accordance with Philippine Standards on Auditing and the financial statements audited
were found to have been prepared in accordance with a fair presentation framework.
ed d

The auditor’s report shall describe management’s responsibility for the preparation of
the financial statements in the manner in which that responsibility is described in the terms of
ar stu

the audit engagement. The description shall include an explanation that management is
responsible for the preparation of the financial statements in accordance with the applicable
financial reporting framework; this responsibility includes the design, implementation and
sh is

maintenance of internal control relevant to the preparation of financial statements that are
free from material misstatement, whether due to fraud or error. Where the financial
Th

statements are prepared in accordance with a fair presentation framework, the explanation of
management’s responsibility for the financial statements in the auditor’s report shall refer to
“the preparation and fair presentation of these financial statements.”

9. What specific information/data are contained in the first paragraph of the standard
audit report?
The auditor's standard report identifies the financial statements audited in an opening
(introductory) paragraph, describes the nature of an audit in a scope paragraph, and expresses
the auditor's opinion in a separate opinion paragraph. The basic elements of the report are the
following:
a. A title that includes the word independent;
b. A statement that the financial statements identified in the report were audited

This study source was downloaded by 100000828414829 from CourseHero.com on 06-27-2021 03:51:52 GMT -05:00

https://www.coursehero.com/file/93485969/Chapter-22docx/
 c. A statement that the financial statements are the responsibility of the Company's
management and that the auditor's responsibility is to express an opinion on the
financial statements based on his or her audit
d. A statement that the audit was conducted in accordance with generally accepted
auditing standards and an identification of the United States of America as the country
of origin of those standards (for example, auditing standards generally accepted in the
United States of America or U.S. generally accepted auditing standards)
e. A statement that those standards require that the auditor plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement
f. A statement that an audit includes:
a. Examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements
b. Assessing the accounting principles used and significant estimates made by
management
c. Evaluating the overall financial statement presentation
g. A statement that the auditor believes that his or her audit provides a reasonable basis

m
er as
for his or her opinion
h. An opinion as to whether the financial statements present fairly, in all material

co
eH w
respects, the financial position of the Company as of the balance sheet date and the
results of its operations and its cash flows for the period then ended in conformity

o.
with generally accepted accounting principles. The opinion should include an
rs e
identification of the United States of America as the country of origin of those
ou urc
accounting principles (for example, accounting principles generally accepted in the
United States of America or U.S. generally accepted accounting principles)
i. The manual or printed signature of the auditor's firm
o

j. The date of the audit report

aC s
v i y re

10. Why is “management’s responsibility for the financial statements” paragraph in the
audit report important?
Financial statements are the representations of management. Management is
ed d

responsible for the preparation and the presentation of the financial statements in accordance
ar stu

with the applicable financial reporting framework.

11. What is the significance of the section “auditor’s responsibility” in the audit report?
sh is

The auditor's responsibility is to express an opinion on whether management has

fairly presented the information in the financial statements. To do so, the auditor collects
Th

evidence to obtain reasonable assurance that the accounts are free of material misstatement.

12. How should the auditor’s report be dated?

The auditor should date the audit report no earlier than the date on which
the auditor has obtained sufficient appropriate evidence to support the auditor's opinion.

Multiple Choice Questions

1. The auditor’s report should be dated as of the date the:

a. Report is delivered to the client.

This study source was downloaded by 100000828414829 from CourseHero.com on 06-27-2021 03:51:52 GMT -05:00

https://www.coursehero.com/file/93485969/Chapter-22docx/
 b. Auditors have accumulated sufficient evidence.
c. Fiscal period under audit ends.
d. Review of the working papers is completed.

2. 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 that some matters, either individually or in the aggregate, are
important, while other natters are not important.
d. Is responsible for expressing an opinion on the financial statements, which are
the responsibility of management.

3. For an entity’s financial statements to be presented fairly in conformity with the

requirements of the applicable financial reporting framework, which of the following

m
er as
need not be complied with?
a. The financial statements adequately disclose the significant accounting policies

co
eH w
selected and applied.
b. The financial statements should present information that is relevant, reliable,

o.
comparable, and understandable.
rs e
c. The financial statements should use appropriate technology.
ou urc
d. The financial statements should use principles approved by the Auditing and
Assurance Standards Council.
o

4. The introductory paragraph of the standard audit report states that the financial
aC s

statements and the opinion expressed about those statements are

v i y re

a. The responsibility of the auditor

b. The responsibility of management
c. The joint responsibility of management and the auditor
d. None of the above.
ed d
ar stu

5. The scope paragraph of the standard unqualified report states that the audit is designed
to
a. Discover all errors and/or irregularities.
sh is

b. Discover material errors and/or irregularities.

c. Obtain reasonable assurance whether the statements are free of material
Th

misstatement.
d. Conform to financial reporting standards.

6. In the scope paragraph of the audit report, the use of the term “reasonable assurance”
is intended to indicate that
a. No misstatements exist in the financial statements.
b. No material misstatements exist in the statements.
c. There is a possibility that material misstatements still exist in the financial
statements.
d. There is a possibility that immaterial misstatements still exist in the financial
statements.

This study source was downloaded by 100000828414829 from CourseHero.com on 06-27-2021 03:51:52 GMT -05:00

https://www.coursehero.com/file/93485969/Chapter-22docx/
 7. In the scope paragraph of the audit report, the use of the term “material
misstatements” convey that auditors are responsible to search for
a. Minor misstatements.
b. Significant misstatements.
c. Fraudulent misstatements.
d. All misstatements.

8. The audit report date is important to users because it indicates

a. The last day of the fiscal period.
b. The date on which the financial statements were filed with the Securities and
Exchange Commission.
c. The last date on which users may institute a lawsuit against either client or
auditor.
d. The last day of the auditor’s responsibility for the review of significant events
that occurred after the date of the financial statements.

9. Most auditors believe that financial statements are “presented fairly” when the

m
er as
statements are in accordance with financial reporting standards, but that it is also
necessary to

co
eH w
a. Determine that they are not in violation of PASs.
b. Examine the substance of transactions and balances for possible misinformation.

o.
c. Review the statements using the accounting principles promulgated by Securities
rs e
and Exchange Commission.
ou urc
d. Assure investors that the net income reported this year will be equaled or
exceeded in the future.
o

Problems
aC s
v i y re

Problem 1
CPA Lacsina and his associates audited the financial statements of West Company, a
computer equipment retailer. Lacsina conducted the audit in accordance with PSAs and
ed d

therefore wrote a standard audit description in his audit report. Then he received an
ar stu

emergency call to fill in as a substitute tenor in his barbershop quartet.

No one else was in the office that Saturday afternoon, so he handed you the completed
financial statements and footnotes and said: “Make sure it’s ok to write an unqualified opinion
on these statements. The working papers are on the table. I’ll check with you on Monday
sh is

morning.”
Th

Required: In general terms, what must you determine in order to write an unqualified opinion
paragraph for Lacsina’s signature?

Answer:
You must determine whether an unqualified opinion satisfies the PSA reporting standard, in
particular:
1. Determine whether the financial statements are presented in conformity with PFRS.
a. Read the footnote description of accounting policies.
b. Use a PFRS checklist.
c. Review the working papers for any indication of accounting policies not described in
the footnote or ones apparently not in conformity with PFRS.
d. Determine if:

This study source was downloaded by 100000828414829 from CourseHero.com on 06-27-2021 03:51:52 GMT -05:00

https://www.coursehero.com/file/93485969/Chapter-22docx/
 i. The accounting principles are generally acceptable, having authoritative
support.
ii. The accounting principles are appropriate in the circumstances.
iii. The financial statements are informative.
iv. The information is reasonably summarized.
v. Material adjustments have not been waived without good reasons.
2. Determine whether any accounting changes have been made and whether accounting
principles have been applied consistently.
3. Determine whether the footnote disclosures are adequate to inform users of any material
information evident in the working papers.

Problem 2
On completion of all field work on September 23, 20X6, the following report was
written by Betty Rose to the directors of Continent Corporation:
To the Board of Directors,
Continent Corporation:

m
er as
The accompanying statement of financial position of Continent Corporation and the related
statements of income and retained earnings as of July 31, 20X6, are the responsibility of

co
eH w
management. In accordance with your instructions, we have conducted a complete audit. We
planned and performed the audit to obtain reasonable assurance about whether the financial

o.
statements are free of material misstatement. An audit includes examining, on attest basis,
rs e
evidence supporting the amounts and disclosures in the financial statements. An audit also
ou urc
includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
o

In many respects this was an unusual year for the Continent Corporation. The weakening if
aC s

the economy in the early part of the year and the strike of plane employees in the summer
v i y re

led to a decline in sales and net income. After making several tests of the sales records,
nothing came to our attention that would indicate sales have not been properly recorded.
In our opinion, with the explanation given above, and with the exception of some minor
errors we consider immaterial, the aforementioned financial statements present the financial
ed d

position of Continent Corporation at July 31, 20X6, and the results of its operations, and its
ar stu

cash flows for the year then ended with conformity with pronouncements of the Accounting
Standards Council.
sh is

Betty Rose & Co., CPAs

July 31, 20X6
Th

Required: List and explain the deficiencies and omissions in Rose’s audit report.

Answer:
1. Title - The report needs a title referring to Rose as the independent auditor or independent
accountant.
2. Notice of audit - The report does not give the proper declaration of an audit of the financial
statements, especially the part about “in accordance with your instructions,” which suggest
that Rose surrendered some audit independence. The reference to a “complete audit” is ill
advised because it suggests a 100% investigation, which is contradicted by the sentence about
“tests of the sales records.”
3. Responsibilities - The report says nothing about the auditor’s responsibility for the audit
report.

This study source was downloaded by 100000828414829 from CourseHero.com on 06-27-2021 03:51:52 GMT -05:00

https://www.coursehero.com/file/93485969/Chapter-22docx/
 4. Opinion - The opinion sentence should not be modified with the phrase “with the explanation
given above.”
5. Opinion - The opinion sentence should not mention “minor errors we consider immaterial,”
but it should contain the phrase “presents fairly in all material respects.”
6. Opinion/Identification of Financial Statements - The opinion should not include reference to
cash flows because the introductory paragraph did not state that the cash flow statement was
audited. This may be a deficiency in the identification of the financial statements that were
actually audited.
7. Opinion - The opinion paragraph refers improperly to ASC pronouncements. It should refer
to “generally accepted accounting principles.”
8. Date - The date accompanying Rose’s signature should be September 23 – the day the field
work was completed – not the company’s fiscal year-end date.
9. Other - The commentary on the economy and the strike are not generally appropriate for an
audit report. Even if the auditor wanted to draw attention to these matters, their relevance for
understanding the financial statements and their manner of expression are both questionable.
10. Other - The negative assurance (concerning the recording of sales) is not permitted in audit
reports.

m
er as
co
eH w
o.
rs e
ou urc
o
aC s
v i y re
ed d
ar stu
sh is
Th

This study source was downloaded by 100000828414829 from CourseHero.com on 06-27-2021 03:51:52 GMT -05:00

https://www.coursehero.com/file/93485969/Chapter-22docx/
Powered by TCPDF (www.tcpdf.org)