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AICPA CPA-Auditing Exam
CPA Auditing and Attestation (AUD) (Page 5 )

Updated On: 9-Feb-2026
Page 5 of 207
PDF with 1026 Questions

In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion or an adverse opinion?

  1. The auditor did not observe the entity's physical inventory and is unable to become satisfied about its balance by other auditing procedures.
  2. Conditions that cause the auditor to have substantial doubt about the entity's ability to continue as a going concern are inadequately disclosed.
  3. There has been a change in accounting principles that has a material effect on the comparability of the entity's financial statements.
  4. The auditor is unable to apply necessary procedures concerning an investor's share of an investee's earnings recognized on the equity method.

Answer(s): B

Explanation:

Choice "b" is correct. Inadequate disclosure of the substantial doubt about an entity's ability to continue as a going concern is a departure from GAAP, resulting in either a qualified or adverse opinion.
Choices "a" and "d" are incorrect. Scope limitations result in either a qualified opinion or in a disclaimer of opinion, but not in an adverse opinion.
Choice "c" is incorrect. A change in accounting principle results in a modified unqualified report, as long as the change was accounted for properly.



Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?

  1. Significant related party transactions are pervasive.
  2. Usual trade credit from suppliers is denied.
  3. Arrearages in preferred stock dividends are paid.
  4. Restrictions on the disposal of principal assets are present.

Answer(s): B

Explanation:

Choice "b" is correct. Indications of possible financial difficulties, such as denial of usual trade credit from suppliers, may cause an auditor to have substantial doubt about an entity's ability to continue as a going concern.
Choice "a" is incorrect. The existence of related parties and the occurrence of related party transactions do not indicate doubt about the entity's ability to continue as a going concern. Choice "c" is incorrect. Payment of preferred stock dividends in arrears might very well indicate an improvement in the entity's financial situation. It is the lack of payment of preferred, cumulative dividends (a possible indication of financial difficulty) that might cause an auditor to have substantial doubt about an entity's ability to continue as a going concern. Choice "d" is incorrect. Restrictions on the disposal of assets might limit the options available to management as far as mitigating adverse conditions, but it would not in and of itself cause the auditor to have substantial doubt about an entity's ability to continue as a going concern.



In the first audit of a client, an auditor was not able to gather sufficient evidence about the consistent application of accounting principles between the current and prior year, as well as the amounts of assets or liabilities at the beginning of the current year. This was due to the client's record retention policies. If the amounts in question could materially affect current operating results, the auditor would:

  1. Be unable to express an opinion on the current year's results of operations and cash flows.
  2. Express a qualified opinion on the financial statements because of a client-imposed scope limitation.
  3. Withdraw from the engagement and refuse to be associated with the financial statements.
  4. Specifically state that the financial statements are not comparable to the prior year due to an uncertainty.

Answer(s): A

Explanation:

Choice "a" is correct. Since the auditor was unable to gather sufficient evidence on the beginning balances of the balance sheet accounts, the auditor would be unable to express an opinion on the current year's results of operations and cash flows. The auditor could express an opinion on the statement of financial position.
Choice "b" is incorrect. Since the scope limitation could have a pervasive effect on the financial statements (affecting all assets and liabilities), a disclaimer of opinion (and not merely a qualified opinion) is required on the income statement and statement of cash flows. An opinion may be expressed on the year-end statement of financial position.

Choice "c" is incorrect. The auditor does not need to withdraw from the engagement and refuse to be associated with the financial statements.
Choice "d" is incorrect. An uncertainty does not exist. The auditor can express an opinion on one of the financial statements.



Pell, CPA, decides to serve as principal auditor in the audit of the financial statements of Tech Consolidated, Inc. Smith, CPA, audits one of Tech's subsidiaries. In which situation(s) should Pell make reference to Smith's audit?

I). Pell reviews Smith's audit documentation and assumes responsibility for Smith's work, but expresses a qualified opinion on Tech's financial statements.
II). Pell is unable to review Smith's audit documentation; however, Pell's inquiries indicate that Smith has an excellent reputation for professional competence and integrity.

  1. I only.
  2. II only.
  3. Both I and II.
  4. Neither I nor II.

Answer(s): B

Explanation:

Choice "b" is correct. The principal auditor makes reference in the audit report to the work of the other auditor when the principal auditor is unable to review the other auditor's audit documentation. This is because the principal auditor will be unable to be satisfied concerning the work performed by the other auditor. Even though the other auditor has an excellent reputation, the principal auditor must see the work to be able to assume responsibility for it. Choice "a" is incorrect.
When the principal auditor decides to assume responsibility for the work of the other independent auditor, no reference is made to the work of the other auditor, regardless of the type of audit report expressed.
Choice "c" is incorrect.
When the principal auditor decides to assume responsibility for the work of the other independent auditor, no reference is made to the work of the other auditor, regardless of the type of audit report expressed.
Choice "d" is incorrect. The principal auditor will make reference in the audit report to the work of the other auditor when the principal auditor is unable to review the other auditor's audit documentation. This is because the principal auditor will be unable to be satisfied concerning the work performed by the other auditor. Even though the other auditor has an excellent reputation, the principal auditor must see the work to be able to assume responsibility for it.



Cooper, CPA, believes there is substantial doubt about the ability of Zero Corp. to continue as a going concern for a reasonable period of time. In evaluating Zero's plans for dealing with the adverse effects of future conditions and events, Cooper most likely would consider, as a mitigating factor, Zero's plans to:

  1. Discuss with lenders the terms of all debt and loan agreements.
  2. Strengthen internal controls over cash disbursements.
  3. Purchase production facilities currently being leased from a related party.
  4. Postpone expenditures for research and development projects.

Answer(s): B

Explanation:

Choice "d" is correct.
When assessing management's plans for dealing with the adverse effects of future conditions and events, mitigating factors would include:
1. The postponement of expenditures (including R&D),
2. Plans to dispose of assets,
3. Plans to borrow money or restructure debt,
4. Plans to increase ownership equity (sell stock).
Choice "a" is incorrect. Discussions with lenders regarding terms would not be a mitigating factor. Actual agreements regarding restructuring of debt or amendments to covenants would be required. Choice "b" is incorrect. Strengthening internal controls over cash would not qualify as a management tactic to address going concern issues.
Choice "c" is incorrect. Purchasing facilities which are currently being leased would only further decrease cash flow.






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