Davis, CPA, believes there is substantial doubt about the ability of Hill Co. to continue as a going concern for a reasonable period of time. In evaluating Hill's plans for dealing with the adverse effects of future conditions and events, Davis most likely would consider, as a mitigating factor, Hill's plans to:
Answer(s): D
Choice "d" is correct. Negotiating reductions in required dividends would conserve cash, which would be a mitigating factor in Davis' concerns about Hill's ability to continue as a going concern. Choice "a" is incorrect. Accelerating R&D projects would use cash and impair the company's ability to continue as a going concern.Choice "b" is incorrect. Accumulating treasury stock would consume cash and aggravate the situation.Choice "c" is incorrect. Purchasing equipment that is currently leased would use cash and impair the company further.
In the auditor's report, the principal auditor decides not to make reference to another CPA who audited a client's subsidiary. The principal auditor could justify this decision if, among other requirements, the principal auditor:
Choice "d" is correct. If, among other requirements, the principal auditor is satisfied as to the independence and the professional reputation of the other auditor, the principal auditor may express an opinion on the financial statements taken as a whole without making reference to the audit of the other auditor.Choice "a" is incorrect. Whether or not an unqualified opinion is issued is not the determining factor as to whether the principal auditor must make reference to another CPA. Choice "b" is incorrect. Whether or not an unqualified opinion is issued on the subsidiary's financial statements is not the determining factor as to whether the principal auditor must make reference to another CPA.Choice "c" is incorrect. If the principal auditor is unable to review the audit programs and audit documentation of the other CPA, he or she is likely to divide responsibility by making reference to the other CPA in the auditor's report.
A limitation on the scope of an audit sufficient to preclude an unqualified opinion will usually result when management:
Answer(s): A
Choice "a" is correct. Restrictions on the scope of the audit, such as the timing of the work, the inability to obtain sufficient appropriate audit evidence, or an inadequacy in the accounting records, may require the auditor to qualify or disclaim an opinion. Inability to obtain audited financial statements supporting the entity's investment in a foreign subsidiary is such a restriction on the scope of the audit.Choice "b" is incorrect. Client refusal to disclose related party transactions in the notes to the financial statements is a GAAP problem, not a scope problem. For a GAAP problem, the auditor must either issue a qualified or adverse opinion.Choice "c" is incorrect. The auditor sends an engagement letter to the client, not vice versa. Choice "d" is incorrect. Management may choose not to correct a significant deficiency in internal control if the cost of correcting the condition outweighs the benefit.
In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion or an adverse opinion?
Answer(s): B
Choice "b" is correct. Failure to disclose information that is required by GAAP is a departure from GAAP.Departures from GAAP result in a qualified or an adverse opinion. Choice "a" is incorrect. If the auditor is unable to observe physical inventory and is unable to become satisfied through alternative means, that is a scope limitation. Scope limitations result in either a qualified opinion or a disclaimer of opinion.Choice "c" is incorrect. The auditor can report on one financial statement and not the others. This does not preclude issuance of an unqualified opinion.Choice "d" is incorrect. If, after considering identified conditions and events and management's plans, the auditor concludes that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time remains, the audit report should include an explanatory paragraph (after the opinion paragraph in the unqualified report) to reflect that conclusion.
When an auditor expresses an adverse opinion, the opinion paragraph should include:
Choice "b" is correct. The opinion paragraph in an adverse opinion reads, "in our opinion, because of the effects of the matters discussed in the preceding paragraphs, the financial statements...." Choice "a" is incorrect. The principal effects of the departure from GAAP are included in the explanatory paragraph, not the opinion paragraph.Choice "c" is incorrect. The "substantive reasons for the financial statements being misleading" are discussed in the explanatory paragraph, not the opinion paragraph. Choice "d" is incorrect. Scope limitations pertain to disclaimers of opinion, not adverse opinions. (It is very important to memorize the qualifying phrases in the qualified, adverse, and disclaimer of opinions.)
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