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754

CHAPTER 11
Other Reporting
Responsibilities

PSASOO
Special Considerations-Audits of Financial Statements Pre·
pared in Accordance with Special Purpose Frameworks

1. Financial statements prepared in accordance with a financial


reporting framework designed to meet the financial infor-
mation needs of specific users are referred to as
A. Special purpose financial statements
B. Special purpose framework
C. General purpose financial statements
D. Specific purpose financial statements

Special purpose financial statements are financial state-


ments prepared in accordance with a special purpose
framework.
11 Other Reporting Responsibilities 755
cHApfER

S ecial purpose framework is a financial reporting


f ~rnework designed to meet the financial information
:eeds of specific users.

The following are examples of spedal purpose frameworks,


2. t
excep
A A tax basis of accounting for a set of financial statements
· that accompany an entity's tax return.
B. The cash receipts and disbursements basis of accounting
for cash flow information that an entity may be request-
ed to prepare for creditors.
c. Philippine Financial Reporting Standards (PFRS) promul-
gated by the Financial Reporting Standards Council
(FRSC).
o. The financial reporting provisions of a contract (for ex-
ample, a financing agreement).

The following financial reporting frameworks are often


identified as the applicable financial reporting framework in
legislative and regulatory requirements governing the prep-
aration of general purpose financial statements:
• International Financial Reporting Standards (IFRS)
promulgated by the International Accounting Stand-
ards Board (IASB).
• International Public Sector Accounting Standards
(IPSAs) promulgated by the International Public Sec-
tor Accounting Standards Board.
• Philippine Financial Reporting Standards (PFRS)
promulgated by the Finan<:;ial Reporting Standards
Council (FRSC).

3. An auditor's report on financial statements prepared in ac-


cordance with the financial reporting provisions of a contract
· ·: • -t·~~ - : ; ., . ;. -·
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756 CPA EXAMINATION REVIEWER: AUDITING THEORY

(that is, a special purpose framework) to comply with the


provisions of that contract should include all of the following,
except
A. An opinion as to whether the financial statements are
presented fairly, in all material respects, in accordance
with the financial reporting provisions of the contract.
B. A statement that indicates the basis of accounting used.
C. An opinion as to whether the basis of accounting used is
appropriate under the circumstances.
D. Reference to the note to the financial statements that
describes the basis of presentation.

The auditor's report on financial statements prepared in ac-


cordance with the financial reporting provisions of a con-
tract should include a statement that indicates the basis of
accounting used or should refer to the note to the financial
statements giving that information.

The opinion should state whether the financial statements


are prepared, in all material respects, in accordance with the
identified basis of accounting: There is no requirement to
express an opinion on the propriety of the basis of account·
ing used.

The following is an example of an auditor's report on a com·


plete set of financial statements prepared in, accordance
with the financial reporting provisions of a contract:

We have audited the accompanying financial statement~ ?f AB~


Company, which comprise the statement of financial pos1tton as e
Ijnco111 •
December 31 , 20X 1, and the statement of comprehensive the
statement of changes in equity and statement of cash flows fol~ 1·es
· po IC
year then ended, and a.summa'?' of significant ~ccount1ng have
and other explanatory mformat1on. The financial statement5 rtillu
been prepared by management based on the financial repo :J
•·

TER
cHAP
11 Other Reporting Responsibilities 757

provisions of S~ction Z of the contract dated January l 20X I be-


tween ABC Company and DEF Company ("the contract;').

Management's Responsibility for the Financial Statements

Management is responsible for the preparation of these financial


statements in accordance with the financial reporting provisions of
Section Z of the contract, and for such internal control as manage-
ment detennines is necessary to enable the preparation of financial
statements that are free from material misstatement whether due to
fraud or error. '

Auditor's Responsibility

Our responsibility is to express an op1111on on these financial


statements based on our audit. We conducted our audit in accord-
ance with Philippine Standards on Auditing. Those standards re-
quire that we comply with ethical requirements and plan and per-
fonn the audit to obtain reasonable assurance about whether the fi-
nancial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence


about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditor's judgment, including
the assessment of the risks of material misstatement of the finan-
cial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the
entity's preparation of the financial statements 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. An audit also includes eval'uating the ap-
propriateness of accounting policies used and the reasonableness
of accounting estimates made by management, as well as evaluat-
ing the overall presentation of the financial statements.
--
758 CPA EXAMINATION REVIEWER: AUDITING THEORY

We believe that the audit evidence we have obtained is sufficient


and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements of ABC Company for the


year ended December 31, 20X I are prepared, in all material re-
spects, in accordance with the financial reporting provisions of
Section Z of the contract.

Basis of Accounting and Restriction on Distribution and Use

Without modifying our opinion, we draw attention to Note X to the


financial statements which describes the basis of accounting. The
financial statements are prepared to assist ABC Company to com-
ply with the financial reporting provisions of the contract referred
to above. As a result, the financial statements may not be suitable
for another purpose. Our report is intended solely for ABC Com-
pany and DEF Company and should not be distributed to or used
by parties other than ABC Company or DEF Company.

4. When an auditor reports on financial statements prepared


on an entity's income tax basis, the auditor's report should
A. State the basis of presentation of the financial state-
ments.
B. Disclaim an opinion on whether the statements were ex-
amined in accordance with Philippine Standards on Au-
diting (PSAs). e
C. Not express an opinion on whether the statements ~~
presented in accordance with the tax basis of accounti g
used. ·ons
D. Include an explanation of how the results of opera~s of
differ from the cash receipts and disbursements basr
accounting.
R 11 Other Reporting Responsibilities 759
ctiApTE

The auditor's report should state the basis of accounting


used or should refer to the note te theJinancial statements
giving that information.

Answer B is incorrect because the audit should be conduct-


ed in accordance with Philippine Standards on Auditing
(PSAs) .

Answer C is incorrect because the auditor should express an


opinion on whether the financial statements are prepared,
in all material respects, in accordance with the identified
basis of accounting.

Answer D is incorrect because the auditor's report only re-


fers to the note to the financial statements that explains the
basis of accounting used.

s. An auditor is reporting on a statement of cash receipts and


disbursements. This statement is best referred to in the
opinion paragraph by which of the following descriptions?
A. "Results of operations arising from cash transactions."
B. "Cash receipts and disbursements."
C. "Income statement resulting from cash transactions."
D. "Statement of cash flows."

The opinion paragraph of a report on a statement of cash


receipts and disbursements states, "In our opinion, the fi-
nancial statement presents fairly, in all material respects,
the cash receipts and disbursements of ABC Company for ·
the year ended December 31, 20Xl in accordance with the
cash receipts and disbursements basis of accounting de-
scribed in Note X."

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760 CPA EXAMINATION REVIEWER: AUDITING THEORY

6. In an audit of special purpose financial statements, the audi-


tor shall obtain an understanding ~f
I. The purpose for which the financial statements are pre-
pared.
II. The intended users.
III. The steps taken by management to determine that the
applicable financial reporting framework is acceptable in
the circumstances.
A. I only
B. II and III only
C. I and II only
D. I, II, and III

7. An auditor's report on financial statements prepared on the


cash receipts and disbursements basis of accounting should
include all of the following, except
A. A statement that the audit was conducted in accordance
with Philippine Standards on Auditing.
B. A reference to the note to the financial statements that
describes the cash receipts and disbursements basis of
accounting.
C. A statement that the cash receipts and disbursements
basis of accounting is not a comprehensive basis of ac-
counting.
D. An opinion as to whether the financial statements are
P~esented fairly, in all material respects, in accordance
with the cash receipts and disbursements basis of ac·
counting_.

Answers A, B, and D are incorrect because a statement t~at


the audit was conducted in accordance with Philippine
s.tand~rds on Auditing (PSAs), a reference to the note to.the
financial statements that describes the basis of presentation,
11 Other Reporting Responsibilities 761
cl'IApTER

and an opinion a~ to whet~er the statements are fairly pre-


sented should be included m the auditor's report.

psA805 . . .
cial Cons1derat1ons-Aud1ts of Single Financial State-
S~~ts and Specific Elements, Accounts or Items of a Finan-
~al statement .

8. A CPA is permitthed to accept a separate engagement (not in


conjunction wit an audit of financial statements) to audit an
entity's
Schedule of Schedule of
Accounts Receivable Profit Participation
A. Yes No
B. No Yes
c. Yes Yes
D. No No
An audit engagement to express an opinion on one or more
components of a financial statement (for example, accounts
receivable, inventory, or a schedule of profit participation)
may be undertaken as a separate engagement or in conjunc-
tion with an audit of the entity's financial statements.

9. Which of the following statements is correct with respect to


an auditor's report expressing an opinion on a specific ele-
ment on a financial statement?
A. The auditor who has expressed an adverse opinion on
the financial statements as a whole can never express an
unmodified opinion on a specific element in these finan-
cial statements.
B. The materiality determined for a specific element of a fi-
nancial statement may be lower than the materiality de-
762 CPA EXAMINATION REVIEWER: AUDITING THEORY

termined for the entitY's complete set of financial state-


ments.
C. Such a report can only be issued if the auditor is also
engaged to audit the entire set of financial statements.
D. The attention devoted to the specific element is usually
less than it would be if the financial statements as a
whole were audited.

Answer A is incorrect because, when an adverse opinion or


a disclaimer of opinion has been expressed on the entire set
of financial statements, it would be appropriate to express
an unmodified opinion on the specific element only if:
• The auditor is not prohibited by law or regulation
from doing so;
• That opinion is expressed in an auditor's report that
is not published together with the auditor's report
containing the adverse opinion or disclaimer of opin·
ion; and
• The specific element does not constitute a major por·
tion of the entity's complete set of financial state·
men ts.

Answer C is incorrect because an engagement to audit one


or more components of financial statements may be under·
taken as a separate engagement or in conjunction with an
audit of the entity's financial statements.

Answer D is incorrect because a special purpose audit e.n~


gagement to report on one or more components of ftn~nc~e
statements will ordinarily be more extensive than if. t
. with a
same component(s) were to be audited in connection
r~port on the financial statements taken as·a whole.
ER
cHAPT
11 Other Reporting Responsibilities 763

10 An auditer may express an opinion on an entity's accounts


· receivable balance even if the auditor has disclaimed an
opinion on the financial statements taken as a whole provid-
ed the
A. Report on the. acc?unts receivable is presented separate-
ly from the d1scla1mer of opinion on the financial state-
ments.
B. Auditor also reports on the current asset portion of the
entity's statement of financial position.
c. Use of the report on the accounts receivable is restricted.
o. Report on the accounts receivable discloses the reason
for the disclaimer of opinion on the financial statements.

The standard states that when an adverse opinion or dis-


claimer of opinion on the entire financial statements has
been expressed, the auditor should report on elements of
the financial statements orily if those elements are not so ex-
tensive as to constitute a major portion of the financial
statements.

Because an engagement to audit a financial statement ele-


ment does not result in a report on the financial statements
taken as a whole, a separate report should be presented
containing the auditor's opinion on the financial statement
element audited.
!:i·

lz, Answer B is incorrect because a report may be presented on


one, or more financial statement elements audited.

& Answer C is incorrect because the standard does not require


" restriction on the distribution of the report on the financial
1- statement element audited
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764 CPA EXAMINATION REVIEWER: AUDITING THEORY

Answer D is incorrect because a separate report on the ele-


ment audited should be presented. Moreover, the report
need not describe the reason for the disclaimer of opinion
on the financial statements.

11. When an auditor is requested to express an opinion on the


rental and royalty income of an entity, the auditor may
A. Accept the engagement provided the auditor will comply
with relevant ethical requirements, including those per-
taining to independence, relating to financial statement
audit engagements and all PSAs relevant to the audit.
B. Accept the engagement provided distribution of the audi-
tor's report is ·limited to the entity's management.
C. Not accept the engagement unless also engaged to audit
the full financial statements of the entity.
D. Not accept the engagement because to do so would be
tantamount to agreeing to express a piecemeal opinion.

Answer B is incorrect because the standard does not require


restrictions on the distribution and use of the auditor's re-
port.

Answer C is incorrect because this engagement may be ~n­


dertaken as a separate engagement or in conjunction with
an audit of the entity's financial statements.

Answer D is incorrect because the auditor is allowed to ex·


press an opinion on one or more financial statement ele·
ments 1'f he/she has not expressed an adverse opin · 1·on •or
disclaimer of opinion on the financial statements taken as a
ten·
whole or if the elements to be reported on are not so ex .
. . . . I state
s1ve as to constitute a major portion of the frnancia
men ts.
11 Other Reporting Responsibilities 765
cHApfER

The following statements are ordinarily included in the sepa-


12· rate auditor's report on an entity's compliance with contrac-
tual agreements, except
A. "We conducted our audit in accordance with Philippine
Standards on Auditing."
a. "In our opinion, the financial statements of the Company
are presented fairly, in all material respects, in accord-
ance with Philippine Financial Reporting Standards."
c. "An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the fi-
nancial statements."
o. "We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opin-
ion."

The auditor's report should include a statement that, in the


auditor's opinion, the entity has complied with particular
provisions of the contractual agreement.

PSA810
Engagements to Report on Summary Financial Statements

13. An auditor may report on summary financial statements that


are derived from complete audited financial statements if the
A. Auditor indicates whether the information in the sum-
mary financial statements is consistent with the audited
financial statements from which it was derived.
B. Summary financial statements are distributed only to
management and the board of directors.
C. Auditor describes the additional review procedures per-
formed on the summary financial statements.
D. Summary financial statements are presented_ in compara-
tive form with the prior year's summarized financial
statements.
..
766 CPA EXAMINATION REVIEWER: AUDITING THEORY

According to the standard, the auditor's report on summary


financial statements shall include the following basic ele-
ments:
1. A title clearly indicating it is the report of an independ-
ent auditor;
2. An addressee;
3. An introductory paragraph that;
a) Identifies the summary financial statements on
which the auditor is reporting, including the title of
each statement included in the summary financial
statements;
b) Identifies the audited financial statements;
c) Refers to the auditor's report on the audited financial
statements, the date of that report, and the fact that
an unmodified opinion is expressed on the audited
financial statements;
d) If the date of the auditor's report on the summary~­
nancial statements is later than the date of the audi·
tor's report on the audited financial statements,
states that the summary financial statements and the
audited financial statements do not reflect the effects
of events that occurred subsequent to the date of the
auditor's report on the audited financial statements;
and
e) A statement indicating that the summary financial
statements do not contain all the disclosures re· red
1
quired by the .financial reporting framework app
in the preparation of the audited financial state·
ments, and that reading the summary financial d'ted1
statements is not a substitute for reading the au
financial statements.
11 Other Reporting Responsibilities 767
cH-ApTER

4. A descriptfi.on o'. management's responsibility for the


summary manc1a 1 statements, explaining that manage-
ment is responsible for the preparation of the summary
financial statements in accordance with the applied cri-
teria.
5. A statement that the auditor is responsible for express-
ing an opinion on the summary financial statements
based on the procedures required by the PSA.
6. A paragraph clearly expressing an opinion.
7. The auditor's signature.
8. The date of the auditor's report.
9. The auditor's address.

14. In the auditor's report on summary financial statements that


are derived from an entity's audited financial statements, a
CPA should indicate that the
A. CPA has audited and expressed an opinion on the com-
plete financial statements.
B. CPA expresses limited assurance that the financial
statements are presented in accordance with PFRS.
C. Summary financial statements are not fairly presented in
all material respects.
D. Summary financial statements are prepared in accord-
ance with special purpose financial reporting framework..

PSRE 2400
Engagements to Review Financial Statements

15. In a review engagement, the practitioner and the client


should agree on the terms of the engagement. The agreed
terms would be recorded in an engagement letter or other
768 CPA EXAMINATION REVIEWER: AUDITING THEORY

suitable form such as a contract. The engagement letter


should include all of the following, except
A. A provision that the engagement cannot be relied upon
to disclose errors, fraud, or illegal acts.
B. A provision that any errors, fraud, or noncompaance with
laws and regulations that come to the practitioner's at-
tention need not be reported.
C. A sample of the report expected to be rendered.
D. The objective of the service to be performed.

Although a review engagement cannot be relied upon to dis-


close whether fraud, errors, or noncompliance with laws
and regulations exist, the engagement letter should indicate
to the client that the practitioner will inform management
or the board of directors of any material matters that will
come to the practitioner's attention.
Matters that would be included in the engagement letter in-
clude:
• The objective of the service to be performed .
• Management's responsibility for the financial state-
ments.
• The scope of the review, including reference to PSRE
2400.
• Unrestricted access to whatever records, documen·
tation, and other information requested in connec·
tion with the review.
• A sample of the report expected to be rendered .
• The fact that the engagement cannot be relied upon
to disclose errors, illegal acts, or other irregularities.
for example, fraud or defalcations that may exist.
• A statement that the audit is not to be performe dand.
that an audit opinion will not be rendered. To ern
11 Other Reporting Responsibilities 769
ct-IApfER

phasize this point and to avoid confusion, the practi-


tioner may also consider pointing out that a review
engagement will not satisfy any statutory or third
party requirements for an audit.

Which of the following procedures should a practitioner per-


16. . t
form during an engagemen to review an entity's financial
statements?
A. Examining cash disbursements in the subsequent period
for unrecorded liabilities.
B. Sending bank confirmation letters to the entity's financial
institutions.
c. Obtaining a client representation letter from members of
management.
D. Communicating material internal control weaknesses
during the assessment of control risk.

A review of financial statements consists principally of in-


quiries and analytical procedures. When considered appro-
priate, the practitioner should obtain written representa-
tions from members of management who have responsibil-
ity for financial and accounting matters.

Answers A, B, and D are incorrect because examining subse-


quent cash disbursements, sending confirmation requests to
financial institutions, and communicating material weak-
nesses in internal control are performed in an audit.

17. Which of the following procedures is a practitioner least like-


ly to perform during a review engagement?
A. Comparing the financial statements with anticipated re-
sults in budgets and forecasts.
B. Studying the relationships of financial statement ele-
ments expected to conform to predictable patterns.
... - .... ....,

770 CPA EXAM/NATION REVIEWER: AUDITING THEORY

C. Inquiring of management about actions taken at the


board of directors' meetings.
D. Observing the safeguards over access to and use of as-
sets and records.

A review does not include performance of the following


procedures:
• Obtaining an understanding of internal control or as-
sessfng control risk.
• Testing accounting records or responses to inquiries
by obtaining corroborating evidence.
• Other tests ordinarily performed in an audit.

Procedures for the review of financial statements will ordi-


narily include:

• Obtaining an understanding of the entity's business


and the industry in which it operates.
• Inquiries concerning the entity's accounting princtples
and practices.
• Inquiries concerning the entity's procedures for re-
corping, classifying, and summarizing transactions, ~c­
cumulating information for disclosure in the financial
statements.and preparing financial statements.
• Inquiries concerning all material assertions in the fi-
nancial statements.
• Analytical procedures designed to identify relation~
ships and individual items that appear unusual. sue
procedures would include:
with
Comparison of the financial statements
statements for prior periods.

\\ '

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11 Other Reporting Responsibilities 771
C~p'ffR

• Comparison of the financial statements with antic-


ipated results and financial position.
• Study of the relationships of the elements of the fi-
nancial statements that would be expected to con-
form to a predictable pattern based on the entity's
experience or industry norm.

• Inquiries concerning actions taken at meetings of


shareholders, the board of directors, committees of
the board of directors and other meetings that may
affect the financial statements. ·

• Reading the financial statements to consider, on the


basis of infdrmation coming to the auditor's atten-
tion, whether the financial statements appear to con-
form with the basis of accounting indicated.

• Obtaining reports from other auditors, if any and if


considered necessary, who have been engaged to
audit or review the financial statements of compo-
nents of the entity.
• Inquiries of persons having responsibility for finan-
cial and accounting matters concerning, for example:
Whether all transactions have been recorded.
Whether the financial statements have been pre-
. pared in accordance with the·basis of accounting
indicated.
• Changes in the entity's business activities and ac-
counting principles and practices.
Matters as to which questions have arisen in the
course of applying the foregoing procedures.
• Obtaining written representations from man-
agement when considered appropriate.·
772 CPA EXAMINATION REVIEWER: AUDITING THEORY

18. Which of the following inquiries or analytical procedures or-


dinarily 1s performed in an engagement to review an entity's
financial statements?
A. Inquiries concerning the entity's procedures for recording
and summarizing transactions.
B. Analytical procedures designed to test the accounting
records by obtaining corroborating evidential matter.
C. Analytical procedures designed to test management's as-
sertions regarding continued existence.
D. Inquiries of the entity's attorney concerning contingent
liabilities.

19. Which of the following procedures is usually performed by


the practitioner in a review engagement of an entity?
A. Sending a letter of inquiry to the entity's lawyer.
B. Confirming a significant percentage of receivables by di-
rect commµnication with debtors.
C. Comparing the financial statements with statements for
comparable prior periods.
D. Communicating material weaknesses in the design or
implementation of internal control.

20. ~hich of_ the fol~owing procedures most likely would not be
included 1~ a review engagement of an entity?
A. Assessing control risk.
B. Considering whether the financial statements are in ac-
e cord~n.ce with Philippine Financial Reporting Standards.
· Obta!~mg a management representation letter.
D. Inquinng about subsequent events.
21. When provid' 1· • t-
, mg 1m1ted assurance that the· financial sta e
rnents of a t" . ·
d n e~ ity require no material modifications to be in
~cor an~~ with Philippine Financial Reporting Standards,
e pract1t1oner should
R 11 Other Reporting Responsibilities 773
ct-1.APIE

A. confirm with the entity's lawyer that material loss con-


tingencies are disclosed.
B. Understand t~e accounting principles of the industry in
which the entity operates.
c. Develop audit programs to determine whether the enti-
ty's financial statements are fairly presented.
o. Assess the risk that a material misstatement could occur
in a financial statement assertion.

22. Which of the following would not be included in a practi-


tioner's report based upon a review of an entity's financial
statements?
A. A statement that the financial statements are the re-
sponsibility of the company's management.
B. A statement describing the principal procedures per-
formed.
c. A statement that the review was conducted in accord-
ance with Philippine Standards on Auditing. ·
D. A statement describing the practitioner's conclusions
based upon the results of the review.

The review report includes a statement that the review was


conducted in accordance with the Philippine Standard on
Review Engagements 2400. Moreover, the report indicates
that a review consists principally of inquiries and analytical
procedures and provides less assurance than an audit.

An example of an unmodified review report follows:

INDEPENDENT PRACTITIONER'S REVIEW REPORT

We have reviewed the accompanying financial statements of ABC


Company that comprise the statement of financial position as at
December 3 J 20X 1 and the statement of comprehensive income, ·
' ' '
statement of changes in equity and statement of cash .flows for the
774 CPA EXAMINATION REVIEWER: AUDITING THEORY

year then ended, and a summary of significant accounting policies


and other explanatory information.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presenta-


tion ·of these financial statements in accordance with Philippine Fi-
nancial Reporting Standards, and for such internal control as man-
agement determines is necessary to enable the preparation of fi-
nancial statements that are free from material misstatement,
whether due to fraud or error.

Practitioner's Responsibility

Our responsibility is to express a conclusion on the accompanying


financial statements based on our review. We conducted our re-
view in accorda.ncc with Philippine Standard on Review Engage-
ments (PSRE) 2400, Engagements to Review Historical Financial
Statements. PSRE 2400 requires us to conclude whether anything
has come to our attention that causes us to believe that the finan-
cial statements, taken as a whole, are not prepared in all mate~ial
1
respects in accordance with the applicable financial reporting
framework. This Standard also requires us to comply with relevant
ethical requirements.

A review of financial statements in accordance with PSRE 24oo


consists primarily of making inquirie~ of management and others
within the entity involved in financial and accounting matters, apd
plying analytical procedures, and evaluating the sufficie~cy an_
appropriateness of evidence obtained. A review also requires pers
formance of additional procedures when the practitioner becom.: 1
aware of matters that cause the practitioner to believe the financi
statements as a whole may be materially misstated.
· w is
We believe that the evidence we have obtained in our re.vie
sufficient and appropriate to provide a basis for our conclustoll·
11 Other Reporting Responsibilities 775
cHApiER

The proce~ures pe~formed in ~ review are substantially less than


those performed m an audit conducted in accordance with
Philippine Standards on Auditing. Accordingly, we do not express
an audit opinion on these financial statements.

conclusion

Based on our review, nothing has come to our attention that causes
us to believe that these financial statements do not present fairly, in
all material respects, the financial position of ABC Company as at
December 3 I, 20X I, and its financial performance and cash flows
for the year then ended, in accordance with Philippine Financial
Reporting Standards.

23. The date of the review report should


A. Not be earlier than the date on which the financial
statements were approved by management.
B. Be earlier than the date on which the financial state-
ments were approved by management.
c. Coincide with the date of the financial statements.
D.. Not be later than the date of the financial statements.

According. to the standard, a practitioner should date the re-


view report as of the date the review is completed, which
includes performing procedures relating to events occurring
up to the date of the report. However, since the practition-
er's responsibility is to report on the financial statements as
prepared and presented by management, the practitioner
should not date the report earlier than the date on which
the financial statements were approved by management.

24. During an engagement to review the financial statements of


an entity, a practitioner becomes aware of a material depar-
ture from PFRS. If the practitioner decides to modify the re-
776 CPA EXAMINATION REVIEWER: AUDITING THEORY

view report because management will not revise the finan-


cial statements, the practitioner should
A. Express negative assurance on accounting principles not
conforming with Philippine Financial Reporting Stand-
ards.
B. Express positive assurance on accounting principles con-
forming with Philippine Financial Reporting Standards.
C. Express a qualified opinion.
D. Express a qualification of the negative assurance provid-
ed or give an adverse statement that the financial
statements are not presented fairly, in all material re-
spects, in accordance with PFRS.

If the practitioner becomes aware of a material departure


from PFRS, he/she should describe the nature of the depar·
ture in a separate paragraph, including, unless impractica-
ble, a quantification of the possible effect(s) on the financial
statements. In addition, the practitioner should either:
a) Express a qualification of the negative assurance
provided in the report; or
b) When the effect of the departure is so material and
pervasive that a qualification is believed to be inade·
quate to disclose the misleading or incomplete na-
. . · adve~e
ture of the fmancial statements, give an e-
statement that the financial statements are no~ prce
sented fairly, in all material respects, in accor an
with Philippine Financial Reporting Standards.
ro-
- h · · r shoul d P
Answer A is incorrect because t e pract1t10~e edures
vi de negative assurance when his/her review proc review
did not disclose material departures from PFRS. The titian·
report should state that nothing has come to the prac racti-
er's attention based on the re view that causes thee~eoted
tioner to believe the financial statements are not pr
11 Other Reporting Responsibilities 777
ctv\p'fER

fairly, in all mate.rial respects, in accordance with Philippine


Financial Reportmg Standards.

The Standard gives the following examples of review re-


ports modified because of departures from PFRS.

Qualification for a Departure from Pf RS


We have reviewed the accompanying financial statements of
ABC Company that comprise the statement of financial posi-
tion as at December 3 I, 20X I, and the statement of compre-
hensive income, statement of changes in equity and statement
of cash flows for the year then ended, and a summary of signif-
icant accounting policies and other explanatory information.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation of these finan-


cial statements in accordance with Philippine Financial Report-
ing Standards, and for such internal control as management de-
termines is necessary to enable the preparation of financial
statements that are free from material misstatement, whether
due to fraud or error.

Practitioner's Responsibility

Our responsibility is to express a conclusion on the accompa-


nying financial statements based on our review. We conducted
our review in accordance with Philippine Standard on Review
Engagements (PSRE) 2400, Engagements to Review Historical
Financial Statements. PSRE 2400 requires us to conclude
whether anything has come to our attention that causes us to
believe that the financial statements, taker. as a whole, are not
prepared in all material respects in accordance with the appli-
cable financial reporting framework. This Standard also re-
quires us to comply with relevant ethical requirements.
..
778 CPA EXAMINATION REVIEWER: AUDITING THEORY

A review of financial statements in accordance with PSRE


2400 ~onsists primarily of making inquiries of management
and others within the entity involved in financial and account-
ing matters, applying analytical procedures, and evaluating the
sufficiency and appropriateness of evidence obtained. A re-
view also requires performance of additional procedures when
the practitioner becomes aware of matters that cause the practi-
tioner to believe the financial statements as a whole may be
materially misstated.

We believe that the evidence we have obtained in our review is


sufficient and appropriate to provide a basis for our qualified
conclusion.

The procedures performed in a review are substantially less


than those performed in an audit conducted in accordance with
Philippine Standards on Auditing. Accordingly, we do not ex-
press an audit opinion on these financial statements.

Basis for Qualified Conclusion

The company's inventories are carried in the statement of fi-


nancial position at xxx. Management has not stated the inven-
tories at the lower of cost and net realizable value but has stat-
ed them solely at cost, which constitutes a departure from the
requirements of the Philippine Financial Reporting Standards.
The company's records indicate that, had management stated
the inventories at the lower of cost and net realizable value, an
amount of xxx would have been required to write the invento-
ries down to their net realizable value. Accordingly, cost of
sales would have been increased by xxx, and income tax, net
income and shareholders' equity would have been reduced by
xx.x, xxx and xxx, respectively.
\

"' 11 Other Reporting Responsibilities 779


cfiApTE,....
l1ty

Qualified Conclusion

Except for the eff~cts of the matter described in the Basis for
Qualified Conclusion ~aragraph, based on our review, nothing
has come to our attention that causes us to believe that the fi-
nancial statements. of ABC Company are not prepared, in all
material respects, m accordance with Philippine Financial Re-
porting Standards.

Adverse Report for a Departure from PFRS

We have reviewed the accompanying consolidated financial


statements of ABC Company that comprise the consolidated
statement of financial position as at December 3 I, 20X I, and
the consolidated statement of comprehensive income, state-
ment of changes in equity and statement of cash flows for the
year then ended, and a summary of significant accounting pol-
icies and other explanatory information.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation of these consol-


idated financial statements in accordance with Philippine Fi-
nancial Reporting Standards, and for such internal control as
management determines is necessary to enable the preparation
of financial statements that are free from material misstate-
ment, whether due to fraud or error.

Practitioner's ~esponsibility

Our responsibility is to express a conclusion on these consoli-


dated financial statements based on our review. We conducted
our review in accordance with Philippine Standard on-Review
Engagements (PSRE) 2400, Engagements to Review Historical
Financial Statements. PSRE 2400 requires us to conclude
780 CPA EXAMINATION REVIEWER: AUDITING THEORY

whether anything has come to our attention that causes us to


believe that the consolidated financial stateJ!lents, taken as a
whole, are not prepared in all material respects in accordance
with the applicable financial reporti.ng framework. This Stand-
ard also requires us to comply with relevant ethical require-
ments.

A review of consolidated financial statements in accordance


with PSRE 2400 consists primarily of making inquiries of
management and others within the entity involved in financial
and accounting matters, applying analytical procedures, and
evaluating tlie sufficiency and appropriateness of evidence ob-
tained. A review also requires. performance of additional pro-
cedures when the practitioner becomes aware of matters that
cause the practitioner to believe the financial statements as a
whole may be materially misstated.

We believe that the evidence we have obtained in our review is


sufficient and appropriate to provide a basis for our adverse
conclusion.

The procedures perfom1ed in a review are substantially less


than those performed in an audit conducted in accordance with
Philippine Standards on Auditing. Accordingly, we do not ex-
press an audit opinion on these consolidated financial state-
ments.

Basis for Adverse Conclusion

As explained in Note X, the company has not consolidated the


financial statements of subsidiary XYZ Company it acquired
during 20X 1 because it has not yet been able to ascertain th_e
fair values of certain of the subsidiary ' s material assets and li-
abilities at the acquisition date. This investment is therefore
accounted for on a cost basis. Under Philippine Financial Re-
porting Standards, the subsidiary should have been consolidat-
11 Other Reporting Responsibilities 781
cW'pri:R
d because it is controlled by the company. Had XYZ been
e solidated, many elements in the accompanying financial
co~ements would have been materially affected. The effects on
sta consolidated financial statements of the failure to consoli-
1
ne
date have not been determme· d.

Ad-verse Conclusion

Due to the signifi~ance of the matter discussed in the Basis for


Adverse Conclusion paragraph, we conclude that the consol i-
dated financial statements do not present fairly the financial
position of ABC Company and its subsidiaries as at December
31 20X I, and (of) their financial performance and cash flows
fo;the year then ended in accordance with Philippine Financial
Reporting Standards

25. If there has been a significant limitation on the practitioner's


review of an entity's financial statements, the practitioner
should describe the limitation and
I. Express a qualification of the negative assurance.
II. Provide no assurance.
A. I only
B. II only
C. Either I or II
D. Neither I nor II

The Standard provides that if there has been a materia]


scope limitation, the review report should describe the limi-
tation and either:
a) Express a qualification of the negative assurance
provided regarding the possible adjustments to the
financial statements that might have been deter-
mined to be necessary had the limitation not existed;
or


-
782 CPA EXAMINATION REVIEWER: AUDITING THEORY

b) When the possible effect of the limitation is so signif-


icant and pervasive that the practitioner concludes
that no level of assurance can be provided, not pro-
vide any assurance.

26. For the purpose of expressing negative assurance in the re-


view report, the practitioner should obtain sufficient appro-
priate evidence primarily through
A. Inquiry and confirmation
B. Analytical procedures and substantive tests of details of
transactions and account balances
C. Confirmation and tests of controls
D. Inquiry and analytical procedures

27. PSRE 2400 (Engagements to Review Financial Statements),


as amended by the AASC in February 2008, applies to
A. Reviews of any historical financial information of an audit
client.
B. Reviews of any historical financial information by a prac-
titioner other than the entity's auditor.
C. Reviews of historical financial or other information by a
practitioner other. than the entity's auditor.
D. Reviews of historical financial or other information of an
audit client.

PSRE 2400 (Engagements to Review Financial Statemen.ts)


and PSRE 2410 (Review of Interim Financial Information
Performed by the Independent Auditor of the Ent~ty) .we~~
amended by the AASC in February 2008. The obJecttve
the amendments made is to clarify to which engagemen:s
each of the standards is to be applied. The effect of t e
amendments is summarized as follows:
11 Other Reporting Responsibilities 783
cHApTE R

• PSRE 2400 applies to reviews of historical financial


information by a practitioner other than the entity's
auditor.
• PSRE 2410 applies to reviews of historical financial
information by the entity's auditor.
• Reviews of other historical information fall under
PSAE 3000 (Revised), Assurance Engagements other
than Audits or Reviews of Historical Financial Infor-
mation.

28 . A practitioner's review of an entity's financial statements


does not provide assurance that he/she will become aware
of all significant matters that would be disclosed in an audit.
However, if the practitioner has become aware that infor-
mation coming to his/her attention may be materially mis-
stated, the practitioner should
A. Carry out additional or more extensive procedures as are
necessary to achieve limited assurance.
B. Withdraw immediately from the engagement.
c. Perform a complete audit and issue a modified auditor's
report.
D. Downgrade the engagement to a compilation and issue
the appropriate report.

According to PSRE 2400, if the practitioner has reason to be-


lieve that the information subject to review may be materi-
ally misstated, he/she should carry out additional or more
extensive procedures as are necessary to be able to expres~
negative assurance or to confirm that a modified report is
required.
784 CPA EXAMINATION REVIEWER: AUDITING THEORY

PSRE2410
Review of Interim Financial Information Performed by the In-
dependent Auditor of the Entity

29. Which of the following statements concerning the objective


of an engagement to review interim financial information is
correct?
A. To obtain reasonable assurance that the interim financial
information is free from material misstatement.
B. To enable the auditor to express a conclusion whether,
on the basis of the review, anything has come to the au-
ditor's attention that causes the auditor to believe that
the interim financial information is not prepared, in all
material respects, in accordance with an applicable fi-
nancial reporting framework.
C. To provide a basis for expressing an opinion whether the
interim financial information is presented fairly, in all ma-
terial respects, in accordance with an applicable financia~
reporting framework.
D. The objective of a review of interim financial information
is similar to that of an audit conducted in accordance
with PSAs.

According to· PSRE 2410, "The objective of an engagement to


review interim financial information is to enable the auditor
to express a conclusion whether, on the basi.s of the review.
anything has come to the auditor's attention that causes th.e
15
auditor to believe that the interim financial information
not prepared, in all material respects, in accordance with an
applicable financial reporting framework."
. .I
Answer A is incorrect because a review of interim financi~
in~ormation, in contrast to an audit, is n~t d~sign~d t~ ~r~
tam reasonable assurance that the interim fmanc1al in
TER 11 Other Reporting Responsibilities 785
cHAP

mation is free from material misstatement. A review con-


sists of making inquiries, primarily of persons responsible
for financial a~d accounting matters, and applying analytical
and other review procedures. It does not provide all of the
evidence that would be required in an audit.

Answer C is incorrect because a review of interim financial


information does not provide a basis for expressing an opin-
ion whether the financial information is presented fairly, in
all material respects, in accordance with an applicable fi-
nancial reporting framework.

Answer D is incorrect because the objective of a review of


interim financial information differs significantly from that
of an audit conducted in accordance with PSAs.

30. Which of the following procedures ordinarily should be ap-


plied when an independent auditor conducts a review of in-
terim financial information of an entity?
A. Verify changes in key account balances.
B. Perform cut-off tests for cash receipts and disburse-
ments.
C. Read the minutes of the board of directors' meetings.
D. Inspect the open purchase order file.

A review of interim financial information includes reading


the minutes of meetings of shareholders, those charged with
governance, and other appropriate committees to identify
matters that may affect the interim financial information. It
also involves inquiring about matters dealt with at meetings
for which minutes are not available that may affect the in-
terim financial information.
. . . .. .
- ~ .
, . ·..;
· . '! -
. , ::, ~<·'.:'~:..~~~ !i:i~'?·~

786 CPA EXAMINATION REVIEWER: AUDITING THEORY

Answers A, B, and Dare incorrect because verifying changes


in key account balances, performing cut-off tests, and in-
specting open purchase order file are verification proce-
dures ordinarily performed in an audit.

31. An independent auditor who conducts a review of an entity's


interim financial information should have an understanding
of the entity and its environment, including its internal con-
trol, as it relates to the preparation of both annual and inter-
im financial information. This enables the auditor to
I. Identify the types of potential misstatements and con-
sider the likelihood of their occurrence.
II. Select the inquiries, analytical and other review proce-
dures.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

32. The following procedures are urdinarili performed in an en-


gagement to review interim financial information, except
A. Tests of the accounting records through inspection, ob-:
servation, or confirmation.
B. Obtaining an understanding of the entity and its envi-
ronment, including its internal control, as it relates to the
preparation of both annual and interim financial infor-
mation.
C. Inquiring of members of management responsible for fi-
nancial and accounting matters. .
D. Communicating with other auditors who are perforrnin9
a review of the interim financial information of the re-
porting entity's significant components.
R 11 Other Reporting Responsibilities 787
cHAPTE
procedures for performing a review of interim financial in-
formation are ordinarily limi~d to making inquiries, pri-
marily of persons responsible for financial and accounting
matters, and applying analytical and other review proce-
dures. A review ordinarily does not require tests of the ac-
counting records through inspection, observation, or con-
firmation.

Answers B, C, and D are incorrect because they describe


procedures that are ordinarily performed in an engagement
to review interim financial information.

The following procedures are ordinarily performed in con-


ducting a review of interim financial information:
• Reading the minutes of the meetings of shareholders,
those charged with governance, and other appropri-
ate committees to identify matters that may affect
the interim financial information, and inquiring
about matters dealt with at meetings for which
minutes are not available that may affect the interim
financial information.
• Considering the effect, if any, of matters giving rise to
modification of the audit or review report, account-
ing adjustments or unadjusted misstatements, at the
time of the previous audit or reviews.
• Communicating, where appropriate, with other audi-
tors who are performing a review of the interim fi-
nancial information of the reporting entity's signifi-
cant components.
• Inquiring of members of management responsible
for financial and accounting matters.
788 CPA EXAMINATION REVIEWER: AUDITING THEORY

• Applying analytical procedures to the interim finan-


cial information designed to identify relationships
and individual items that appear to be unusual and
that may reflect a material misstatement in the inter-
im financial information.
• Reading the interim financial information, and con-
sidering whether anything has come to the auditor's
attention that causes the auditor to believe that the
interim financial information is not prepared, in all
material respects, in accordance with applicable fi-
nancial reporting framework.

PSRS 4400
Engagements on Agreed-upon Procedures

33. A report may be based upon applying agreed-upon proce-


dures to specified elements, accounts, or items of a financial
statement. The users of the report should participate in es-
tablishing the procedures to be performed. If the auditor
cannot discuss the procedures with all the parties who will
receive the report, he/she may
I. Discuss the procedures to be 2pplied with appropriate
representatives of the parties involved.
IL Review relevant correspondence from the parties in·
valved.
III. Distribute a draft of the type of r~port that will be is·
sued to the parties involved.
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III
R 11 Other Reporting Responsibilities 789
cHApTE .

psRS 4400 (Engagements on Agreed-upon Procedures)


states, "In certain circumstances, for example, when the
procedures have b~en agreed to between the regulator, in-
dustry representatives and representatives of the account-
ing profession, the auditor may not be able to discuss the
procedures with all th~ parties who will receive the repo:t.
In such cases, the auditor may consider, for example, dis-
cussing the procedures to be applied with appropriate rep-
resentatives of the parties involved, reviewing relevant cor-
respondence from such parties or sending them a draft of
the type of report that will be issued."

34. An auditor may accept an engagement to perform specified


procedures on the specific subject matter of specified ele-
ments, accounts, or items of a financial statement if
A. The report does not list the procedures performed.
B. The financial statements are prepared in accordance with
a special purpose framework.
c. Use of the report is restricted.
D. The auditor is also the entity's continuing auditor.

PSRS 4400 states that the report is restricted to those par-


ties that have agreed to the procedures to be performed
since others, unaware of the reasons for the procedures,
may misinterpret the results.

Answer A is incorrect because the report should include a


listing of the specific procedures performed.

Answer B is incorrect because the financial statements need


not be prepared in accordance with a special purpose
framework.
,•···- -".- ~- · _ _: - - ··~. ·· - ~;:;::;;:;;;;::~.:.;;::;~~;,:;,,.._,,...r-;,.,-x_,..
. ,;o..,;wA~,1;;:;..~;;;..,
. .,~
~,..:?~.:
.
. - .
' -~ '.

. '-·•· . .. "'.:
. .,_ .. _ ... ~~
~..a:Ci
·...~+~P!lllill·--~~·-, .:_ :_ ~~: -c~(~~:~~J.i~~<=:~~~~'.

790 CPA EXAMINATION REVIEWER: AUDITING THEORY

Answer D is incorrect because the auditor need not be the


entity's continuing auditor.

35. The distribution of which of the following types of reports is


unrestricted?
A) Audits and reviews
B) Reviews and agreed-upon procedures
C) Examinations and agre.ed-upon procedures
D) Audits, examinations, reviews, and agreed-upon proce-
dures

36. The report on an agreed-upon procedures engagement


should contain
A. Identification of the purpose for which the agreed-upon
procedures were performed.
B. An expression of positive assurance based ·on the specific
procedures performed.
C. A statement that the auditor is independent of the entity.
D. A general description of the procedures performed.

According to PSRS 4400, the report on an agreed-upon pro-


cedures engagement needs to describe the purpose and the
agreed-upon procedures of the engagement in sufficient de-
tail to enable the users of the report to understand the na-
ture and extent of the work performed.

Answer B is incorrect because the report should include a


statement that the procedures performed do not constitu~e
either an audit or a review and, as such, no assurance 15
expressed.

Answer C is incorrect because the re!'.)ort should cont~in ~


1
statement that the auditor is not independent of the entity
such is the case.
~ 11 Other Reporting Responsibilities 791
cf'IAPTf

Answer D is incm_-rect because the report should include a


listing of the specific procedures performed.

37 An agr~ed-upon ~rocedur~s engagement may involve the


· auditor in performing certain procedures concerning
I. Individual items of financial data.
II. A financial statement.
III. A complete set of financial statements.
A. 1 and II only
B. II and III only
c. I and III only
D. I, II, and III

PSRS (Philippine Standards on Related Services) 4400 [En-


gagements to Perform Agreed-upon Procedures Regarding
Financial Information] states, "An engagement to perform
agreed-upon procedures may involve the auditor in per-
forming certain procedures concerning individual items of
financial data (for exampie, accounts payable, accounts re-
ceivable, purchases from related parties and sales and prof-
its of a segment of an entity), a financial statement (for ex-
ample, a statement of financial position) or even a complete
set of financial statements."

38. Negative assurance may be expressed when an accountant


is engaged to report agreed-upon procedures to specified
I. Elements of a financial statement.
II. Accounts of a financial statement.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
-;. _ -- - '·-c-~~ '~- -- ·-·-·-- -
.. --,....:::::...._: ...:.
Uf9 I µ~ 44Q..,.. \ .... 24*' :o::ij .-:e/''- ~ - ;o

·~ -

792 CPA EXAMINATION REVIEWER: AUDITING THEORY

According to PSRS 4400, the objective of an agreed-upon


procedures engagement is for the auditor to carry out pro-
cedures of an audit nature to which the auditor and the enti-
ty and any appropriate third parties have agreed and to re-
port on factual findings. The accountant does not provide
negative or other forms of assurance. Users of the report
assess for themselves the procedures and findings of the ac-
countant and draw their own conclusions.

39. An accountant may accept an engagement to apply agreed-


upon procedures that are not sufficient to express an opin-
ion on one or more financial statements provided that
A. The accountant is also the entity's continuing auditor.
B. Distribution of the accountant's report is restricted.
C. The financial statements are prepared in accordance with
a special purpose financial reporting framework.
D. The accountant's report does not enumerate the proce-
dures performed.

An accountant may accept an agreed-upon procedures en-


gagement provided that the parties involved have a clear
understanding of the procedures to be performed and the
report is to be restricted to those parties that have agreed to
the procedures to be performed. This is to prevent misin-
terpretation of the results by those who are unaware of the
reasons for the procedures performed.

Answer A is incorrect because the accountant need not be


the entity's continuing auditor.

Answer B is incorrect because the financial statements n~ed


not be prepared using a special purpose financial reporting
framework.
11 Other Reporting Responsibilities
ctlApTER 793

Answer D is inco~re.ct because the accountant's report


should include a hstmg of the specific p~ocedures per-
formed.

Which of the following is least likely to be included in an


40. agreed-upon ~rocedures engagement report?
A. Jdent1ficat1on of the purpose for which the agreed-upon
procedures were performed.
B. A summa1y of procedures performed.
c. Limited assurance on the information presented.
o. use of the report is restricted.

The accountant's report should includt a statement that the


procedures performed do not constitute either an audit or a
review and, as such, no assurance is expressed.

According to PSRS 4400, the report of factual findings


should contain:
a) Title;
b) Addressee (ordinarily the client who engaged the audi-
tor to perform the agreed-upon procedures);
c) Identification of specific financial or non-financial in-
formation to which the agreed-upon procedures have
been applied;
d) A statement that the procedures performed were those
agreed-upon with the recipient;
e) A statement that the engagement was performed in ac-
cordance with the Philippine Standard on Related Ser-
vices applicable to agreed-upon procedures engage-
ments;
D A statement that the auditor is not independent if such is
the case;
794 CPA EXAMINATION REVIEWER: AUDITING THEORY

g) Identif_ication of the purpose for which the agreed-upon


procedures were performed;
h) A listing of the agreed-upon procedures performed;
i) A description of the auditor's factual findings including
sufficient details of errors and exceptions found;
j) A statement that the procedures performed do not con-
stitute either an audit or a review and, as such, no assur-
ance is expressed;
k) A statement that had the auditor performed additional
procedures, an audit or a review, other matters might
have come to light that would have been reported;
l) A statement that the report is restricted to those parties
that have agreed to the procedures to be performed;
m) A statement (when applicable) that the report relates
only to the elements, accounts, items or financial and
non-financial information specified and that it does not
extend to the entity's financial statements taken as a
whole;
n) Date of the report;
o) Auditor's address; and
p) Auditor's signature.

PSRS 4410
Engagements to Compile Financial Information
untant
41. When performing a compilation engagement, the acco
is required to
A. Assess internal controls. rabilitY
1
B. Make inquiries of management to assess the re
and completeness of the information provided.
R 11 Other Reporting Responsibilities 795
ct-1.APTE

c. verify matters and explanations.


o. obtain a gener~I knowledge of the business and opera-
tions of the entity.

According to PSRS 4410 (Engagements to Compile Financial


Information), "The accountant should obtain a general
knowledge of the business and operations of the entity and
should be familiar with the accounting principles and prac-
tices of the industry in which the entity operates and with
the form and content of the financial information that is ap-
propriate in the circumstanc~s."

The stanqard further provides that, "The accountant ordi-


narily obtains knowledge of these matters through experi-
ence with the entity or inquiry of the entity's personnel."

PSRS 4410, par. 13, provides that the accountant is not or-
dinarily required to: ·
a) make any inquiries of management to assess the re-
liability and completeness of the information pro-
vided;
b) assess internal controls;
c) verify any matters; or
d) verify any explanations.

42. Independence is a requirement for which of the following


engagements?
Agreed-upon
Comgilation Review Procedures
A. No Yes No
B. No No No
c. Yes No Yes
0. Yes Yes Yes
796 CPA EXAMINATION REVIEWER: AUDITING THEORY

Independence is not a requirement for compilation and


agreed-upon procedures engagements. However, where the
accountant or auditor is not independent, a statement to
that effect would be made in th~ report.

43. Which _of the following engagements requfre compliance with


the requirements of the Code of Ethics for Professional Ac-
countants in the Philippines?
Agreed-upon
ComQilation . Review Procedures
A. Yes Yes No
B. No No Yes
c. No No No
D. Yes Yes Yes

44. An accountant who performs a compilation engagement


A. Should read th2 compiled information and consider
whether it appears to be appropriate in form and free
from obvious material misstatements.
B. Should use his/her auditing expertise in testing the as-
sertions underlying the compiled financial information.
C. Include in his/her report a listing of the specific proce-
dures performed.
D. Need not obtain an acknowledgment from management
of its responsibility for the appropriate presentation of
the financial information.

45. Each pag_e of the financial information compiled by the· ac-


countant should include the following reference, except
A. "Unaudited"
B. "Compiled without Audit or Review"
C. "Refer to Compilation Report"
D. "Compiled, Negative Assurance Expressed"
ER 11 Other Reporting Responsibilities 797
cHAP1
According to PSRS 4410 (Engagements to Compile Financial
Information), the financial information compiled by the ac-
countant 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.

46. The objective of a compilation engagement is


A. For the accountant to use accounting expertise, as op-
posed to auditing expertise, to collect, classify, and
summarize financial information.
B. For the auditor to carry out procedures of an audit na-
ture to which the auditor and the entity and any appro-
priate third parties have agreed and to report on factual
findings.
c. To enable an auditor to state, on the basis of the proce-
dures which do not provide all the evidence that would
be required in an audit, anything has.come to the audi-
tor's attention that causes the auditor to believe that the
financial statements are not prepared, in all material re-
spects, in accordance with an identified financial report-
ing framework.
D. For the auditor to provide a high, but not absolute,· level
of assurance that the financial information is fre·e of ma-
terial misstatement.

PSRS 4410, (Engagements to Compile Financial Infor-


mation) states, "The objective of a compilation engagement
is for the accountant to use accounting exper~ise, as op-
posed to auditing expertise, to collect, classify and summa-
rize financial information."
798 CPA EXAMINATION REVIEWER: AUDITING THEORY

Answer B is incorrect because it describes the objective of


an agreed-upon procedures engagement.

Answer C is incorrect because it describes negative (or lim-


ited) assurance provided in a review engagement.

Answer D is incorrect because an audit provides a high, but


not absolute level of assurance that the financial infor-
matioH is free of material misstatement.

47. When compiling an entity's financial statements, an account-


ant would be least likely to .
A. Obtain an acknowledgment from management of its re-
sponsibility for the financial statements.
B. Perform analytical procedures designed to identify rela-
tionships that appear to be unusual.
C. Plan the work.
D. Read the compiled financial statements and consider
whether they appear to include adequate disclosure.

Analytical procedures are necessary in review and audit en-


gagements, not in .compilation engagements.

Answer A is incorrect because, according to PSRS 4410, the


accountant should obtain an acknowledgment from man-
agement of its responsibility for the appropriate presenta-
tion and of its approval of the financial information .

.Answer C is incorrect because the work should be planned


to ensure that an effective engagement will be performed.

Answer D is incorrect because the accountant should read


the compiled financial statements and consider whether

R 11 Other Reporting Responsibilities 799


ct!APT~

theY are free from obvious material misstatements, includ-


ing:
• Mistakes in the applicatipn of PFRS.
• Nondisclosure of PFRS and any known departures
therefrom.
• Nondisclosure of any other significant matters of
which the accountant has become aware.

When compiling the financial statements of an enticy, an ac-


48· countant should
A. Understand the accounting princ;iples and practices of
the entity's·industry.
s. Inquire of key personnel concerning related parties and
subsequent events.
c. Perform ratio analyses of the financial data of compara-
ble periods.
o. Review agreements with financial institutions for re-
strictions on cash balances.

PSRS 4410 states, "The accountant should obtain general


knowledge of the business and operations of the entity and
should be familiar with the accounting principles and prac-
tices of the industry in which the entity operates and with
the form and content of the financial information that is ap-
propriate in the circumstances."

Answers B and D are incorrect because inquiries concerning


related parties and subsequent events, and procedures to
obtain corroborating evidence about restrictions on cash
balances are appropriate in an audit.

Answer C is incorrect because analytical procedures such as


ratio analyses are appropriate in review and audit engage-
ments.
- - ---~- -,,. _..._ -.....- ~ ...
. ,. - . .--- -·r--:--.. . - .. --~

. 800 CPA EXAMINATION REVIEWER: AUDITING THEORY

49. Which of the following should not be included in an ac-


countant's report based upon the compilation of an entity's
financial statements?
A. A statement that a compilation of the company's finan-
cial statements was made in accordance with the PSA
applicable to compilation engagements.
B. A statement that management is responsible for the fi-
nancial statements.
C. A statement that the accountant has not audited or re-
viewed the statements.
D. A statement that the accountant does not express an
opinion but provides only negative assurance on the
statements.

The accountant's report should indicate that since no audit


or review was performed, no assurance is expressed.

PSRS 4410 gives the following exa~ple of a compilation re-


port:

We have compiled the accompanying financial :;tatements


of ABC Company based on information you have provid-
ed . These financial statements comprise the statement of
financial position of ABC Company as at December 31,
20X 1, the statement of comprehensive income, statement
of changes in equity and statement of cash flows for the
year then ended, and a summary of significant accounting
policies and other explanatory infonnation.

We performed this compilation engagement in accordance


with Philippine Standard on Related Services 4410, Com-
pilation Engagements.

We have applied ~ur expertise in accounting and tinan~ial


reporting to assist you in the preparation and presentation
ER 11 Other Reporting Responsibilities 801
cHAPT
of thes~ financial. statements in accordance with Philippine
Financial R~portmg ~tandards. We have complied with
relevant e~h1c~I. requirements, including principles of in-
.tegrity, 0~1ect1v1ty, professional competence and due care.

These financial statements and the accuracy and complete-


ness of the information used to compile them are your re-
sponsibility.

Since a compilation engagement is not an assurance en-


gagement, we are not required to verify the accuracy or
completeness of the infonnation you provided to us to
compile these financial statements. Accordingly, we do
not express an audit opinion or a review conclusion on
whether these financial statements are prepared in accord-
ance with PFRS.

so. In performing a compilation of financial statements of an


entity, the accountant decides that modification of the report
is not adequate to indicate deficiencies in the financial
statements taken as a whole, and the client is not willing to
correct the deficiencies. The accountant should therefore
A. Express an adverse audit opinion.
B. Express a qualification of the negative assurance.
C. Withdraw from the engagement.
D. Perform a review of the financial statements.

PSRS 4410 states that if the accountant becomes aware that


information supplied by management is incorrect, incom-
plete, or· otherwise unsatisfactory, he/she should request
management to provide additional information or correct
the deficiencies. The accountant should withdraw from the
engagement if management refuses to do so.
802 CPA EXAMINATION REVIEWER: AUDITING THEORY

Answers A and B are incorrect because the accountant


should not express any form of assurance on compiled fi-
nancial statements.

Answer D i's incorrect because the accountant has no re-


sponsibility to upgrade the engagement to a review.

PSAE3400
The Examination of Prospective Financial Information

51. "Prospective financial information" means financial infor-


mation based on assumptions about events that may occur
in the future and possible actions by an entity. It can be in
the form of a projection, a forecast, or a combination of
both. A forecast
A. Presents estimates given one or more hypothetical as-
sumptions.
B. Is based on · assumptions reflecting conditions expected
to exist and courses of action expected to be taken.
C. Unlike ·a projection, may contain a range.
D. Is based on the most conservative estimates.

According to PSAE (Philippine Standards on Assurance En-


gagements) 3400 [The Examination of Prospective Financial
Information], a "forecast" means prospective financial in-
formation prepared on the basis of assumptions as to future
events which managel.llent expects to take place and ac-
tions management expects to take as of the date the infor·
mation is prepared (best-estimate assumptions).

A "projection," as defined in the standard, means prospec-


tive financial information prepared on the basis of:
R 11 Other Reporting Responsibilities 803
cW'f''fE

a) Hypothetical assumptions about future events and


man,a gement actions which are not necessarily ex-
pected to take place, such as when some entities are
in a st_art-up phase or are considering a major
change m the nature of operations; or
b) A mixture of best-estimate and hypothetical assump-
tions.

Answer A is incorrect because, as indicated above, a projec-


tion (not a forecast) is based on hypothetical assumptions
about future events and management actions which are not
necessarily expected to take place.

Answer C is incorrect because both forecasts and projec-


tions can be expressed in terms of a range.

Answer Dis incorrect because a forecast is based on the en-


tity's best-estimate assumptions.

52. The party responsible for assumptions identified in the prep-


aration of prospective financial statements is usually
A. The client's management.
B. The client's independent auditor.
C. The reporting accountant.
D. A third-party lending institution.

According to PSAE 3400, management is responsible for


the preparation and presentation of the prospective finan-
cial information, including the identification and disclosure
of the assumptions on which it is based. The auditor exam-
ines and reports on the prospective financial information to
enhance its credibility whether it is intended for use by
third parties or for internal purposes.
804 CPA EXAMINATION REVIEWER: AUDITING THEORY

Answers B, C, and D are incorrect because the party respon-


sible for assumptions identified in the preparation of pro-
spective financial information is usually the entity's man-
agement.

53. Given one or more hypothetical assumptions, a responsible


party may prepare, to the best of its knowledge and belief,
an entity's expected financial position, result of operations,
and cash flows. Such prospective financial statements are
known as
A. Partial presentations
B. Financial projections
C. Financial forecasts
D. Pro forma financial statements

Financial projections are prepared on the basis of hypothet-


ical assumptions which are not necessarily expected to take
place.

54. An examination of a financial forecast is a professional ser-


vice that involves
A. Assuming responsibility to update management on key
events for one year after the report's date.
B. Compiling or assembling a financial forecast that is based
on management's assumptions.
C. Limiting the distribution of the accountant's report to
management and the board of directors.
D. Evaluating the preparation of a financial forecast and the
support underlying management's assumptions.

Prospective financial information includes financial for~·


casts and projections. The examination of prospective f~­
nancial information requires the accountant to obtain suffi·
cient appropriate evidence as to whether:
11 Other Reporting Responsibilities 805
ctlApiER

a) Management's best-estimate assumptions on which


the prospective financial information is based are
not unreasonable and, in the case of hypothetical as-
sumptions, such assumptions are consistent with the
purpose of the information;
b) The prospective financial information is properly
prepared on the basis of the assumptions.
c) The prospective financial information is properly
presented and all material assumptions are ade-
quately disclosed, including a clear indication as to
whether they are best-estimate assumptions or hy-
pothetical assumptions; and
d) The prospective financial information is prepared on
a consistent basis with historical financial state-
ments, using appropriate accounting principles.

Answer A is incorrect because the accountant does not have


responsibility to update management on key events after
the report~s date.

Answer B is incorrect because an examination of a financial


forecast entails evaluation of its preparation and the sup-
port underlying management's assumptions.

Answer C is incorrect because there is no requirement to re-


strict distribution of forecasts.

55. The accountant sh0uld not accept, or should withdraw from,


an engagement to examine prospective financial' information
when
I. The assumptions are clearly unrealistic.
IL The accountant believes that the prospective financial
information will be inappropriate for its intended use.
806 CPA EXAMINATION REVIEWER: AUDITING THEORY

A. I only
B. II only
C. Either I or II
D. Neither I nor II

PSAE 3400 states, "The auditor should ·not accept, or should


withdraw from, an engagement when the assumptions are
clearly unrealistic or when the auditor believes that the pro-
spective financial information will be inappropriate for its
intended use."

56. When the examination of prospective financial infurmation is


affected by conditions that preclude application of one or
more procedures considered necessary in the circumstances,
the auditor should withdraw from the engagement or
A. Disclaim the opinion
B. Express an adverse opinion
C. Express a qualified opinion
D. Issue an unmodified report

A limitation on the scope of the accountant's examination of


prospective financial information may lead to either with-
drawal of the accountant from the engagement or disclaim-
er of the opinion.

57. When the accountant believes that the presentation and dis-
closure of the prospective financial information is not ade-
quate, the auditor should
I. Express a qualified or adverse opinion.
II. Withdraw from the engagement.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
11 Other Reporting Responsibilities 807
cf'i.ApTEfl. .

pSAE 34?0 states,. "When the auditor believes that the


resentation and disclosure of the prospective financial in-
formation is not adequate, the auditor should express a
qualified ?r adver~e opinio~ in the report on the prospective
financial mformat1on, or withdraw from the engagement as
appropriate."

The report on an examination of prospective financial infor-


58· mation should include
A. A statement that the accountant is responsible for the
prospective financial information, including the assump-
tions on which it is based.
B. A statement of positive assurance as to whether the as-
sumptions provide a reasonable basis for the prospective
financial information.
c. Appropriate caveats concerning the achievability of the
results indicated by the prospective financial information.
o. A statement that the examination was conducted in ac-
cordance with PSAs.

According to PSAE 3400, the report on an examination of


prospective financial information should include the follow-
ing:

a) Title;
b) Addressee;
c) Identification of the prospective financial infor-
mation;
d) A reference to the Philippine Standard on Assurance
Engagements applicable to the examination of pro-
spective financial information;

r ~ .....______________................. --~
\ \ ---~-
808 CPA EXAMINATION REVIEWER: AUDITING THEORY

e) A statement that management is responsible for the


prospective financial information including the as-
sumptions on which it is based;
f) When applicable, a reference to the purpose and/or
restricted distribu~ion of the prospective financial
information;
g) A statement of negative _assurance as to whether the
assumptions provide a reasonable basis for the pro-
sp~ctive financial information;

h) An opinion as to whether the prospective financial


information is properly prepared on the basis of the
assumptions and is presented in accordance with the
relevant financial reporting framework;
i) Appropriate caveats concerning the achievability of
the results indicated by the prospective financial in-
formation;
j) Date of the report which should be the date the pro-
cedures have been completed;
k) Auditor's address; and
I) Signature.

59. Before accepting an engagement to examine prospective


financial information, the auditor would consider
I. The intended use of the information.
II. The nature of the assumptions.
III. The period covered by the information.
A. I only
B. II only
C. I and III only
D. I, II, and III
R 11 Other Reporting Responsibilities 809
cl'IAprE

pSAE 3400 states that before accepting an engagement to


examine prospective financial information, the auditor
would consider, among other things:

• The intended use of the information .


• Whether the information will be for general or lim-
ited distribution.
• The nature of the assumptfons, that is, whether they
are best-estimate or hypothetical assumptions.
• The elements to be included in the information .
• The period covered by the information .

60. Which of the following statements concerning an examina-


tion of prospective financial information is incorrect?
A. The auditor should consider the period of time covered
by the financial information.
s. The auditor should obtain a sufficient level of knowledge
of the business to be able to evaluate whether all signifi-
cant assumptions required for the preparation of the
prospective financial information have been identified.
C. The auditor need not obtain written representations from
management.
D. The auditor should consider the extent to which reliance
on the entity's historical financial information is justified.

According to PSAE 3400, "The auditor should obtain written


representations from management regarding the intended
use of the prospective financial information, the complete-
ness of significant management assumptions and manage-
ment's acceptance of its responsibility for the prospective
financial information." ·
810 CPA EXAMINATION REVIEWER: AUDITING THEORY

TRUE OR FALSE ·

1. A CPA firm can issue a compilation report only if the en-


gagement partner has no direct or material indirect financial
interest in the client.

2. A compilation of financial statements provides negative as-


surance regarding the financial statements.

3. A review engagement is not currently an acceptable form of


association with prospective financial statements.

4. The statement that "Nothing came to our attention which


would indicate that these statements are not fairly present-
ed" expresses a disclaimer of opinion.

5. When a pre:Ktitioner examines projected financial state~


ments, the practitioner's report should include a separate
paragraph that describes the limitations on the usefulness of
the presentation.

6. The concept of limited assurance is provided for in agreed~


upon procedures engagements.

7. Use of the agreed-upon procedures report is rest1icted to


the specified users.

8. An audit requires less evidence related to internal . control


than a review.

9. A practitioner who reviews the financial statements o~da~


entity should issue a report stating that a review provi. e
only limited assurance that the financial statements are fairlY
presented. ·
TER 11 Other Reporting Responsibilities 8.11
cHAP
An accountant's repoi:: issued after compiling the fir.iancial
· statements of an. en~ty should· state that a compilation is
10
limited to presenting m the form of financial statements in-
formation that is the representation of management.

sefore performing a review of an entity's financial state-


ll. ments, an practitioner should obtain a sufficient level of
knowledge of the accounting principles and practices of the
industry in which the entity operates.

12. An accountant's report issued after compiling the financial


statements of an entity should state that a compilation is
substantially less in scope than an audit in accordance with
PSA, the objective of which is the expression of an opinion.

13. Negative assurance is not permissible in reports based upon


a review engagement.

14. Compilation reports are normally dated as of the client's bal-


ance sheet date.

15. An accountant's report issued after compiling the fiAancial


statements of an entity should state that a compilation con-
sists principally of inquiries of company personnel and ana-
lytical procedures.

16. Accepting an engagement to examine an entity's financial


projection most likely would be appropriate if the projection
were to be distributed to a bank with which the entity is ne-
gotiating for a loan.

17. A nonaudit engagement in which the accountant undertakes


to present, in the form of financial, statements, information
that is the tepresentation of management, without undertak-
-- - - _:_ ___ ~- ~- • ,_ -
• •1 - -. ~. - .-

812 CPA EXAMINATION REVIEWER: AUDITING THEORY

ing to express any assurance on the statements is called an


agreed-upon procedures engagement.

18. A CPA must be independent to issue a review report.

19. A practitioner's report on agreed-upon procedures that is in


the form of procedures and findings should contain an ac-
knowledgment of the practitioner's responsibility for the suf-
ficiency of the procedures.

20. When performing compilation services, the accountant is re-


quired to obtain an understanding of the client's internal
control.

21. An agreed-upon procedures engagement is one in which the


auditor and management or a third party agree that the au-
ditor will apply his/her judgment to determine procedures to
be performed.

22. The CPA may issue a report on whether the summary finan-
cial statements derived from the audited financial state-
ments are consistent, in all material respects, with those fi-
nancial statements, in accordance with PFRS.

23. When an accountant compiles a financial forecast, the ac-


countant's report should include a caveat that the prospec-
tive results of the financial forecast may not be achieved.

24. General use statements are prepared for use by known con-
tractual parties.

25. Financial projections can be provided for general use.


TER 11 Other Reporting Responsibilities 813
cHAP

KEY ANSWERS

1. A 16. c 31. c 46. A

2. c 17. D 32. A 47. B

3. c 18. A 33. D 48. A

4. A 19. c 34. c 49. D

5. B 20. A 35. D 50. c


6. D 21. B 36. A 51. B

7. c 22. c 37. D 52. A

8. c 23. A 38. D 53. B

9. 8 24. D 39. B 54. D

10. A 25. c 40. c 55. c


11. A 26. D 41. D 56. A

12. B 27. B 42. A 57. c


13. A 28. A 43. D 58. c
14. A 29. B 44. A 59. D

15. B 30. c 45. D 60. c


. -- .-~!V--. · ....

- .- '" f t!tT .

814 CPA EXAMINATION REVIEWER: AUDITING THEORY

TRUE OR FALSE

1. False 6. False 11. True 16. True 21. False

2. False· 7. True 12. False 17. False 22. True

3. True 8. False 13. False 18. True 23. True

4. False 9. False 14. False 19. False 24. False

5. True 10. True 15. False 20. False 25. False