QUESTION: 75
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:

A. The effects of the adverse financial conditions likely will cause a bankruptcy filing.
B. Information about the entity's ability to continue as a going concern is not disclosed.
C. Management has no plans to reduce or delay future expenditures.
D. 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.
QUESTION: 76
An auditor believes that there is substantial doubt about an entity's ability to continue as a going
concern for a reasonable period of time. In evaluating the entity's plans for dealing with the
adverse effects of future conditions and events, the auditor most likely would consider, as a
mitigating factor, the entity's plans to:

A. Repurchase the entity's stock at a price below its book value.
B. Issue stock options to key executives.
C. Lease rather than purchase operating facilities.
D. Accelerate the due date of an existing mortgage.

Answer(s): C
Explanation:
Choice "c" is correct. Leasing rather than purchasing operating facilities results in reduced (or at
least delayed) expenditures, which is a mitigating factor in a going concern situation. Choice "a"
is incorrect. Mitigating factors in a going concern situation include plans to dispose of assets,
plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to
increase ownership equity. Repurchasing stock is an outflow of cash that would reduce
ownership equity; as such, it is not a mitigating factor. Choice "b" is incorrect. Mitigating factors
in a going concern situation include plans to dispose of assets, plans to borrow money or
restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity.

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