CHAPTER # 19: REPORTS

1. ISA 700 states that the auditor shall express a

modified opinion when the auditor concludes that
the financial statements are prepared, in all
material respects, in accordance with the
applicable financial reporting framework:
(a) True
(b) False (correct)
Answer (b)
Explanation:
ISA 700 states that 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.
2. The following table summarizes the different types
of modified opinion that can arise:
Option Nature of Material but not Material and
Circumstances Pervasive Pervasive
I. Financial statements Qualified Opinion Disclaimer of
are materially Opinion
misstated
II. Auditor unable to Adverse Opinion Disclaimer of
obtain sufficient Opinion
appropriate audit
evidence
III. Financial statements Adverse Opinion Disclaimer of
are materially Opinion
misstated
IV. Auditor unable to Qualified Opinion Disclaimer of
obtain sufficient Opinion
appropriate audit
evidence

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 Which of the above is correct?
(a) I
(b) II
(c) III
(d) IV (correct)
Answer (d)
Explanation:
Optio Nature of Material but not Material and
n Circumstances Pervasive Pervasive
 Financial statements Qualified Opinion Adverse Opinion
are materially
misstated
 Auditor unable to Qualified Opinion Disclaimer of Opinion
obtain sufficient
appropriate audit
evidence

3. The statement of management’s responsibilities is

always included in the auditors’ report:
(a) True
(b) False (correct)
Answer (b)
4. A “Basis for opinion” paragraph would be included
in the audit report in which situation?
(a) All modified audit reports
(b) Audit reports with a modified audit opinion
(correct)
(c) All audit reports
(d) Unmodified audit reports
Answer (b)
Explanation:
A basis for opinion paragraph is included in all
audit reports when the auditor modifies the
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 opinion, immediately before the opinion
paragraph, to provide a description of the matter
giving rise to the modification.
5. What is the impact of the following conclusion on
the audit report?
“The auditor of Shariq Co. has concluded that the
use of the going concern assumption is
appropriate and that the material uncertainty has
been adequately disclosed.”
(a) Unmodified opinion without an emphasis of
matter paragraph
(b) Adverse opinion
(c) Unmodified opinion with an emphasis of
matter paragraph (correct)
(d) Modified opinion
Answer (c)
Explanation:
The emphasis of matter paragraph is an
explanatory paragraph detailing the uncertainty.
6. Receivables accounts of Jaweria Co. include a
material amount that management believes will be
paid and does not require any allowance. The
auditors do not believe that any part of the balance
will be paid. What form should the audit opinion
take?
(a) Adverse
(b) Except for (correct)
(c) Disclaimer
Answer (b)
Explanation:
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 The opinion will be a modified "except for" opinion
as the misstatement is not pervasive and does not
justify an adverse opinion. A disclaimer is not
appropriate as there is no indication that the
auditor was unable to obtain sufficient, appropriate
evidence.
7. Why an auditor would need to modify the audit
opinion, identify the reasons?
I. They wish to draw attention to a matter that
is fundamental to the users' understanding
of the financial statements.
II. They conclude that the financial statements
as a whole are not free from material
misstatement.
III. They conclude that there is a material
inconsistency between the audited financial
statements and the other information
contained in the annual report.
IV. They have been unable to obtain sufficient
appropriate evidence to conclude that the
financial statements as a whole are free
from material misstatement.

(a) I and II
(b) II and III
(c) II and IV (correct)
(d) III and IV
Answer (c)
Explanation:
I: would need an “emphasis of matter
paragraph”.
III: would need an “other matter paragraph”.

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8. The inclusion of an emphasis of matter paragraph
in the auditor’s report does not affect the auditor’s
opinion on the financial statements:
(a) True (correct)
(b) False
Answer (a)
9. Find out the statement which is correct regarding
the auditor's accumulation of identified
misstatements?
(a) The auditor must accumulate all
misstatements identified during the audit.
(b) The auditor must accumulate misstatements
identified during the audit, other than those
that are clearly trivial. (correct)
(c) The auditor must only accumulate
individually material misstatements identified
during the audit.
Answer (b)
Explanation:
This is in accordance with ISA 450 Evaluation of
misstatements identified during the audit.
10. Point out the state of affair which leads the auditor
to give a qualified opinion?
(a) The matter is material to the financial
statements (correct)
(b) The matter represents a substantial
proportion of the financial statements
(c) The matter is not confined to specific
elements of the financial statements

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 (d) The matter relates to a disclosure that is
fundamental to the users' understanding of
the financial statements
Answer (a)
Explanation:
(b), (c) and (d) describe a matter that is material
and pervasive — in these circumstances the
auditor must give an adverse or disclaimer of
opinion. If the matter is material but not pervasive,
a qualified opinion must be given.
11. During the audit of Wong Co., a small company
with shares totally owned by the directors, it has
become apparent that the system of internal
controls is not sufficiently reliable for audit
purposes. What form should the audit report take?
(a) Be modified unless adequate assurance is
obtained from extensive substantive testing
and a review of costs and margins (correct)
(b) Always be modified on the grounds of
uncertainty, usually with an "except for" form
of modification
(c) Be modified unless adequate assurances
are received in the form of written
management representations
(d) Be modified unless there is adequate
evidence that control has been exercised
through the close involvement of the
directors
Answer (a)
Explanation:

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 Lack of internal controls mean that the auditor
should apply greater substantive procedures
(including analytical procedures) in order to obtain
sufficient appropriate audit evidence and minimize
audit risk.
12. Identify which one is not included in an unmodified
auditor's report?
(a) Audit opinion
(b) Auditors' responsibilities
(c) Deficiencies of internal controls (correct)
(d) Management's responsibility for the financial
statements
Answer (c)
Explanation:
The basic elements of the auditor's report are title,
addressee, introductory paragraph, management's
responsibility for financial statements, auditor's
responsibility, opinion paragraph, other reporting
responsibilities, auditor's signature, date of the
report and auditor's address.
13. With respect to an Other Matter Paragraph in the
Auditor's Report which statement is correct?
(a) The matter is deemed to be fundamental to
the users' understanding of the financial
statements
(b) The audit report is referred to as an
unmodified report
(c) It is used as an alternative to a qualified
opinion
(d) It is used to communicate a matter relevant
to users' understanding of the audit, the

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 auditor's responsibilities or the audit report
(correct)
Answer (d)
Explanation:
(a) is incorrect as an other matter paragraph is
used to draw attention to a matter that does not
affect the financial statements or the users'
understanding of them. (b) is incorrect as an other
matter paragraph results in the report being
modified but the opinion is unmodified. (c) is
incorrect as the auditor cannot use other matter
(or emphasis of matter) paragraphs as a substitute
for a qualified opinion.
14. Point out in which circumstance would a
disclaimer of opinion is issued?
(a) The auditor concludes that the financial
statements include misstatements which are
material but not pervasive to the financial
statements.
(b) The auditor has not been able to obtain
sufficient appropriate audit evidence on
which to base an opinion and has concluded
that the possible effects of any undetected
misstatements could be both material and
not pervasive. (correct)
(c) The auditor concludes that the financial
statements include misstatements which are
both material and pervasive to the financial
statements.
(d) The auditor has not been able to obtain
sufficient appropriate audit evidence on
which to base an opinion but has concluded
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 that the possible effects of any undetected
misstatements could be material but not
pervasive.
Answer (b)
Explanation:
In (a) and (d) a qualified opinion would be issued.
In (c) an adverse opinion would be issued.
15. Give three examples of misunderstandings which
contribute to the expectations gap:
I._______________________________________
_________________________
II.______________________________________
__________________________
III.______________________________________
__________________________

Answer:
I. The nature of the financial statements
II. The type and extent of work undertaken by
auditors
III. The level of assurance given by auditors
16. Identify which two elements must an unmodified
auditor's report include, at a minimum?
I. An emphasis of matter paragraph.
II. The auditor's telephone number.
III. A description of the responsibilities of
management for the preparation of the
financial statements.
IV. A reference to International Standards on
Auditing and the law or regulation.

(a) I and III

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 (b) II and III
(c) II and IV
(d) III and IV (correct)
Answer (d)
Explanation:
An emphasis of matter paragraph is only required
if there is a fundamental matter affecting the
financial statements to draw the users' attention to,
and would not appear in an unmodified audit
report, therefore option I incorrect. The audit report
would name the auditor's location but not provide
any other contact details, therefore option II is
incorrect.
17. Which of the following are examples of other
information in documents containing audited
financial statements?
I. Employment data
II. Information contained on the entity’s website
III. Representation letter
IV. Financial ratios
V. Names of officers and directors

(a) I, IV and V (correct)

(b) II, III and IV
(c) I, II and V
(d) I, III and V
Answer (a)
Explanation:
Examples of other information in documents
containing audited financial statements are:
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 • Employment data
• Financial ratios
• Names of officers and directors
18. Find out the phrase that would be included in an
unmodified audit opinion?
(a) Nothing has come to our attention to
suggest that the financial statements do not
present fairly, in all material respects…
(b) The financial statements present fairly, in all
material respects… (correct)
(c) The financial statements are free from
material misstatement...
Answer (b)
Explanation:
Statement (a) is the wording used for an
unmodified opinion in a limited assurance
engagement. Statement (c) is a phrase included in
the objective of an audit, but not the audit opinion.
19. Qasim Co. has not complied with certain aspects
of an applicable financial reporting standard. The
auditor concurs with the departure in that if Qasim
Co. had applied all aspects of the standard, the
company's financial statements would not have
shown a true and fair view. It has not been
disclosed as a departure from an applicable
financial reporting standard in the accounting
policy note. What form should the audit report
take?
(a) Modified opinion for material misstatement
over truth and fairness and non-compliance
with disclosure requirements

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 (b) Modified opinion for material misstatement
over truth and fairness
(c) Modified opinion for material misstatement
over non-disclosure of the departure
(correct)
(d) Unmodified opinion with an Emphasis of
Matter paragraph referring to the non-
disclosure of the departure from the financial
reporting standard
Answer (c)
Explanation:
The financial statements give a true and fair view,
except for the lack of full disclosure concerning the
divergence from the requirements of the financial
reporting standard. If the auditor did not agree with
the departure, then the opinion would have been
qualified "except for" on the basis of material
misstatement of the financial statements. If the
auditor considered it to also be pervasive, then an
adverse opinion would be given. In (d), as no
disclosure had been made, the Emphasis of
Matter paragraph would be irrelevant.
20. The statement of financial position of Rosh
Corporation includes a material amount of PKR
200,000 in respect of costs capitalized in the year
as development expenditure. The auditor has
concluded that these costs are research
expenditure. If the auditor is to issue an
unmodified opinion which financial statements will
require adjustment?
(a) Statement of financial position only

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 (b) Statement of financial position and
statement of profit or loss (correct)
(c) Statement of profit or loss only
(d) Neither the statement of financial position
nor the statement of profit or loss
Answer (b)
Explanation:
Both statements are materially misstated as the
asset must be written off reducing the profit for the
year. An unmodified opinion can only be issued if
both statements are adjusted.
21. Following phrase should be included in which
section of the audit report?
"We conducted our audit in accordance with
International Standards on Auditing"
(a) Auditor's opinion
(b) Auditor's responsibility (correct)
(c) Introductory paragraph
Answer (b)
Explanation:
The introductory paragraph states that an audit
has been carried out and specifies the subject
matter of the audit. The auditor's opinion does not
include any additional information other than the
audit opinion itself.
22. Pak Corporation is being sued by a customer for
the supply of faulty products. At the year end the
outcome of the legal case is still uncertain. The
directors have fully disclosed the matter as a

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 contingent liability and the auditors are satisfied
with the treatment and the level of disclosure.
What form of audit opinion would the auditor give?
(a) Disclaimer
(b) Qualified opinion
(c) Unmodified opinion without an emphasis of
matter paragraph
(d) Unmodified opinion with an emphasis of
matter paragraph (correct)
Answer (d)
Explanation:
An emphasis of matter paragraph is used to draw
the reader’s attention to matters which are referred
to in the financial statements but which are
fundamental to the users' understanding of the
financial statements.
23. Following phrase should be included in which
section of the audit report?
'We have audited the accompanying financial
statements of ABC Company, which comprise..."
(a) Introductory paragraph (correct)
(b) Auditor's responsibility
(c) Auditor's opinion
Answer (a)
Explanation:
The introductory paragraph states that an audit
has been carried out and specifies the subject
matter of the audit.

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24. In the following scenario what form of modified
opinion should the auditor issue?
“The auditor of Butt Co. has concluded that
inventory is overstated. The overstatement is
material but not pervasive to the financial
statements. Management has refused to make an
adjustment to the financial statements.”
(a) Qualified opinion due to a material
misstatement (correct)
(b) Disclaimer of opinion
(c) Qualified opinion due to insufficient
appropriate evidence on which to base an
opinion
(d) Adverse opinion
Answer (a)
Explanation:
The auditor issues a qualified opinion as the issue
is material but not pervasive. The grounds for the
modification are that the financial statements are
misstated rather than due to insufficient evidence.
25. Identify the type of audit opinion which is
illustrated by the following phrase?
"We do not express an opinion on the financial
statements"
(a) Unmodified opinion
(b) Disclaimer of opinion (correct)
(c) Adverse opinion
Answer (b)
Explanation:

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 When the auditor has not been able to obtain
sufficient appropriate evidence to provide a basis
for the audit opinion, they provide a disclaimer of
opinion, i.e. they do not express an opinion on the
financial statements.
26. The auditor may wish to draw the users' attention
to a matter which is not presented or disclosed in
the financial statements but which is relevant to
the users' understanding of the auditor's report.
How would this affect the auditor's report?
(a) The audit opinion would be qualified.
(correct)
(b) An emphasis of matter paragraph would be
included.
(c) An other matters paragraph would be
included.
(d) The auditor's report would not be affected as
the auditor's report only refers to matters
presented or disclosed in the financial
statements.
Answer (a)
Explanation:
This is in accordance with ISA 706 Emphasis of
matter paragraphs and other matter paragraphs in
the independent auditor's report.
27. An auditor considers that his work has been
deliberately frustrated by management to such an
extent that he has been unable to carry out a
proper audit because management has prevented
him from gathering sufficient appropriate evidence

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 for accounts receivable, inventory and liabilities.
What action should the auditor take?
(a) Issue an adverse opinion
(b) Obtain a court order requiring management
to provide the necessary information and
explanations
(c) Inform the relevant regulatory authorities
(d) Issue a disclaimer of opinion or resign and
ensure that the reasons are made known to
shareholders in a written statement (correct)
Answer (d)
Explanation:
An apparent lack of management integrity is
justification for issuing a disclaimer of opinion or
resigning from the engagement. An adverse
opinion is issued when misstatements are material
and pervasive. This is not indicated by the facts.
(b) and (c) are not appropriate actions.
28. The financial statements of Zahid Co. include a
receivables balance of PKR 20,000 which the
auditors do not believe will be recovered.
Materiality has been set at PKR 100,000. There
are no other unadjusted misstatements. What form
of audit opinion would be issued by the auditor?
(a) Adverse opinion
(b) Disclaimer of opinion
(c) Unmodified opinion (correct)
(d) Qualified opinion due to overstatement of
receivables
Answer (c)
Explanation:
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 Although the receivables balance is overstated,
the amount involved is not material.
29. Baba Corporation manufactures air conditioning
units. At 31st March, inventory included a system
that cost PKR 400,000 to manufacture. In April the
system was sold for PKR 410,000 but this was
after modification costing PKR 50,000. Baba
Corporation’s profit before tax for the year ended
31st March was PKR 800,000. Which type of audit
report/opinion would be most appropriate for Baba
Corporation, assuming the directors refused to
make any adjustments in respect of the above?
(a) Modified Opinion – Adverse
(b) Modified Opinion - Except For (Qualified)
(correct)
(c) Unmodified report, as the sale happened
after the year end
(d) Unmodified report with an emphasis of
matter paragraph
Answer (b)
Explanation:
(c) is not correct as the event is an adjusting event
so the financial statements must be adjusted if the
effect is material. Emphasis of matter paragraph is
not appropriate here as the financial statements
are materially misstated so the opinion must be
modified. As the adjustment required of PKR
40,000 represents 5% of PBT the matter is
material but not pervasive, therefore an adverse
opinion is not correct.

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30. In the following scenario which form of audit
opinion will the auditor issue?
“The auditor of Grand Co. has completed the audit
and has concluded that sufficient appropriate
evidence has been obtained, which confirms that
the financial statements are not materially
misstated.”
(a) A disclaimer of opinion
(b) Unmodified opinion (correct)
(c) Adverse opinion
(d) Qualified opinion
Answer (b)
Explanation:
An unmodified opinion is expressed when the
auditor concludes that the financial statements are
prepared, in all material respects, in accordance
with the applicable financial reporting framework.
31. Banana Ltd. is being sued by a competitor for
stealing trade secrets. If they lose the court case
they would declare bankrupt. The company
lawyers are uncertain as to the likely outcome but
the directors have decided to include a note to the
accounts describing the potential liability. The
auditors are satisfied the wording of the note is
adequate. Which type of audit report/opinion
would be most appropriate for Banana Ltd.?
(a) Unmodified report with another matter
paragraph
(b) Modified audit report with an unmodified
opinion (correct)
(c) Modified Opinion — Adverse

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 (d) Unmodified audit report
Answer (b)
Explanation:
The report would be modified with an emphasis of
matter paragraph. The opinion would not be
modified as the auditor is satisfied that the client
has dealt with the material uncertainty
appropriately in the financial statements.
32. In the following scenario which form of opinion will
the auditor issue?
“The majority of the books and records of Quad
Co. have been destroyed by a flood and the
auditor has no other realistic means of obtaining
sufficient, appropriate audit evidence.”
(a) Qualified opinion on the basis that sufficient
appropriate evidence is not available
(b) An adverse opinion
(c) A disclaimer of opinion (correct)
(d) Unmodified opinion with an emphasis of
matter paragraph explaining the
circumstances of the flood
Answer (c)
Explanation:
The impact of the lack of evidence is both material
and pervasive due to the extent of the loss of
books and records.
33. A company's financial statements include an
investment of PKR 45,000 in a company which is
in liquidation. It is not yet clear what, if anything

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 will be recovered. Pending the final report of the
liquidators, no allowance has been made in the
financial statements. The situation is fully
explained in a note to the financial statements.
Profit before tax is PKR 200,[Link] form should
the audit opinion take?
(a) Disclaimer
(b) Adverse
(c) Except for - material misstatement
(d) Unmodified (correct)
Answer (d)
Explanation:
Inherent uncertainties such as these do not give
rise to modified opinions. As the situation is fully
explained in a note to the financial statements, an
Emphasis of Matter paragraph would be used.
This does not affect the opinion, but does mean
that the report is modified.
34. The financial statements of Gem Co. have been
prepared on a going concern basis but the auditor
has concluded that Gem Co. is not a going
concern and management has refused to change
them. What form of audit opinion will be issued by
the auditor?
(a) An adverse opinion (correct)
(b) A modified opinion due to material
misstatement
(c) An unmodified opinion
(d) A modified opinion due to insufficient
appropriate audit evidence
Answer (a)

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Explanation:
In accordance with ISA 570 Going concern where
the going concern basis of preparation of the
financial statements is adopted inappropriately the
auditor issues an adverse opinion.

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