or the evolution of a new form of business transaction, the FS would otherwise be misleading.
Under these circumstances, the auditor's report should describe the departure, its approximate
effects, if practicable, and the reasons why compliance with the generally accepted principle
would result in a misleading statement. Choices "a", "b", and "d" are incorrect, per the above
Explanation.
QUESTION: 128
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?

A. Cash flows from operating activities are negative.
B. Research and development projects are postponed.
C. Significant related party transactions are pervasive.
D. Stock dividends replace annual cash dividends.

Answer(s): A
Explanation:
Choice "a" is correct. Negative cash flows from operating activities most likely would cause an
auditor to have substantial doubt about an entity's ability to continue as a going concern.
Choices "b" and "d" are incorrect. Plans to reduce or delay cash expenditures are mitigating
factors conserving cash (e.g., postponing R&D projects and replacing cash dividends with stock
dividends). This would not ordinarily cause an auditor to have substantial doubt about an entity's
ability to continue as a going concern. Choice "c" is incorrect. The existence of significant
related party transactions should be disclosed but would not ordinarily cause an auditor to have
substantial doubt about an entity's ability to continue as a going concern.
QUESTION: 129
For an entity that does not receive governmental financial assistance, an auditor's standard
report on financial statements generally would not refer to:

A. Significant estimates made by management.
B. An assessment of the entity's accounting principles.
C. Management's responsibility for the financial statements.
D. The entity's internal control.

Answer(s): D
Explanation:
Choice "d" is correct. The auditor's standard report generally does not make reference to the
entity's internal control. Note that for an entity that does receive governmental financial
assistance, a written report on internal control is required. Also, note that an auditor may (but is
not required to) expand his or her audit report to clarify that a GAAS audit does not require the
level of testing and reporting on internal control that is required for issuers. Choices "a" and "b"
are incorrect. The scope paragraph states that, "an audit also includes assessing the
accounting principles used and significant estimates made by management." Choice "c" is
incorrect. The introductory paragraph states that the "financial statements are the responsibility
of the company's management."
QUESTION: 130

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