A. The auditor did not observe the entity's physical inventory and is unable to become satisfied
as to its balance by other auditing procedures.
B. The financial statements fail to disclose information that is required by generally accepted
accounting principles.
C. The auditor is asked to report only on the entity's balance sheet and not on the other basic
financial statements.
D. Events disclosed in the financial statements cause the auditor to have substantial doubt
about the entity's ability to continue as a going concern.

Answer(s): B
Explanation:
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.
QUESTION: 55
When an auditor expresses an adverse opinion, the opinion paragraph should include:

A. The principal effects of the departure from generally accepted accounting principles.
B. A direct reference to a separate paragraph disclosing the basis for the opinion.
C. The substantive reasons for the financial statements being misleading.
D. A description of the uncertainty or scope limitation that prevents an unqualified opinion.

Answer(s): B
Explanation:
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.)
QUESTION: 56
Under which of the following circumstances would a disclaimer of opinion not be appropriate?

A. The financial statements fail to contain adequate disclosure of related party transactions.
B. The client refuses to permit its attorney to furnish information requested in a letter of audit
inquiry.
C. The auditor is engaged after fiscal year-end and is unable to observe physical inventories or

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