A. Significant related party transactions are pervasive.
B. Usual trade credit from suppliers is denied.
C. Arrearages in preferred stock dividends are paid.
D. 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 wel 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.
QUESTION: 18
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:

A. Be unable to express an opinion on the current year's results of operations and cash flows.
B. Express a qualified opinion on the financial statements because of a client-imposed scope
limitation.
C. Withdraw from the engagement and refuse to be associated with the financial statements.
D. 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.
QUESTION: 19

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