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AICPA CPA-Auditing Exam
CPA Auditing and Attestation (AUD) (Page 16 )

Updated On: 9-Feb-2026
Page 16 of 207
PDF with 1026 Questions

Restrictions imposed by a retail entity that is a new client prevent an auditor from observing any physical inventories. These inventories account for 40% of the entity's assets. Alternative auditing procedures cannot be applied due to the nature of the entity's records. Under these circumstances, the auditor should express a(an):

  1. Disclaimer of opinion.
  2. Qualified opinion.
  3. Adverse opinion.
  4. Unqualified opinion with an explanatory paragraph.

Answer(s): A

Explanation:

Choice "a" is correct. Since the auditor is unable to observe inventory or apply alternative audit procedures, a scope limitation exists. Due to the significance of the inventory balance (40% of total assets is quite material), a disclaimer of opinion (rather than simply a qualification) is appropriate. Choice "b" is incorrect. Since the inventory balance is so material, a qualified opinion is not sufficient in this case.
Choice "c" is incorrect. An adverse opinion is not an appropriate response to a scope limitation. Choice "d" is incorrect. Since the scope limitation relates to a material balance, an unqualified opinion is not appropriate.



Which of the following audit procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

  1. Reading the minutes of meetings of the stockholders and the board of directors.
  2. Comparing the market value of property to amounts owed on the property.
  3. Reviewing lease agreements to determine whether leased assets should be capitalized.
  4. Inspecting title documents to verify whether any assets are pledged as collateral.

Answer(s): A

Explanation:

Choice "a" is correct. The auditor should examine any evidence that appears contrary to the basic principle of going concern. Reviewing the minutes from stockholder and board of director meetings is one procedure that is used in this regard.
Choice "b" is incorrect. Comparison of the market value of property to amounts owed on the property determines its net value, but would not necessarily indicate a going concern issue. Choice "c" is incorrect. Reviewing lease agreements to determine whether leased assets should be capitalized is important in evaluating the financial statements, but it would not provide evidence of going concern issues.
Choice "d" is incorrect. Inspecting title documents to verify whether any assets are pledged as collateral provides information regarding presentation and disclosure, but would not provide evidence of going concern issues.



Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

  1. Performing cutoff tests of sales transactions with customers with long-standing receivable balances.
  2. Evaluating the entity's procedures for identifying and recording related party transactions.
  3. Inspecting title documents to verify whether any real property is pledged as collateral.
  4. Inquiring of the entity's legal counsel about litigation, claims, and assessments.

Answer(s): D

Explanation:

Choice "d" is correct. If a liability is significant enough, it may give rise to a situation in which there is substantial doubt about an entity's ability to continue as a going concern. Inquiring of an entity's legal counsel about litigation, claims, and assessments is one way to determine whether such a liability exists.
Choice "a" is incorrect. Cutoff tests are used to determine whether sales are recorded in the proper period. Applying such tests to customer accounts with long-standing receivable balances would not provide information about the entity's ability to continue a as a going concern. Choice "b" is incorrect. Evaluating the entity's procedures for identifying and recording related party transactions is a means for the auditor to evaluate financial statement presentation and disclosure, but it does not provide information about going concern issues. Choice "c" is incorrect. Identifying situations in which real property is pledged as collateral is a means for the auditor to evaluate financial statement presentation and disclosure, but it does not provide information about going concern issues.



A CPA's standard report on audited financial statements would be inappropriate if it referred to:

  1. Management's responsibility for the financial statements.
  2. An assessment of the entity's accounting principles.
  3. Significant estimates made by management.
  4. The CPA's assessment of sampling risk factors.

Answer(s): D

Explanation:

Choice "d" is correct. The CPA's standard report on audited financial statements does not include matters related to the auditor's assessment of specific risk factors. Choice "a" is incorrect. The CPA's standard report on audited financial statements states that, "These financial statements are the responsibility of the Company's management." Choices "b" and "c" are incorrect. The CPA's standard report on audited financial statements states that, "An audit also includes assessing the accounting principles used and significant estimates made by management."



When an auditor has substantial doubt about an entity's ability to continue as a going concern because of the probable discontinuance of operations, the auditor most likely would express a qualified opinion if:

  1. The effects of the adverse financial conditions likely will cause a bankruptcy filing.
  2. Information about the entity's ability to continue as a going concern is not disclosed.
  3. Management has no plans to reduce or delay future expenditures.
  4. Negative trends and recurring operating losses appear to be irreversible.

Answer(s): B

Explanation:

Choice "b" is correct. In a situation where it is likely that an entity's operations will be discontinued, disclosure of information about the entity's ability to continue as a going concern is required by GAAP.
Failure to make such disclosure would be a departure from GAAP, resulting in either a qualified or adverse opinion.
Choice "a" is incorrect. As long as the going concern situation is adequately disclosed, the fact that there will be a bankruptcy filing would not cause the auditor to express a qualified opinion. Generally, an explanatory paragraph would be added following the opinion paragraph of the unqualified report.
Choice "c" is incorrect. As long as the going concern situation is adequately disclosed, the fact that management does not intend to reduce or delay future expenditures would not cause the auditor to express a qualified opinion. Generally, an explanatory paragraph would be added following the opinion paragraph of the unqualified report.
Choice "d" is incorrect. As long as the going concern situation is adequately disclosed, the fact that negative trends and recurring operating loses appear to be irreversible would not cause the auditor to express a qualified opinion. Generally, an explanatory paragraph would be added following the opinion paragraph of the unqualified report.






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