Question

In: Accounting

Assume that you are the audit partner on an engagement for a client that has had...

Assume that you are the audit partner on an engagement for a client that has had a string of operating losses. You know the CFO, who is a former audit manager of your firm. The company still has a positive net worth, but you are worried that the company might have to close down within the next year or so. When you tell the CFO that the company should make full disclosure in the notes concerning substantial doubt about the company’s ability to continue as a going concern, your colleague says, “Hogwash! There’s no substantial doubt. The probability of our having to close down is remote. We’ll make no such disclosure. To do so would only make our customers and creditors nervous, possibly making such a disclosure a self-fulfilling prophecy. Our competitors are as bad off as we are, and their auditors aren’t making them send out a distress signal.” You agree that the determination of “substantial doubt” is a judgment call.

Apply the five-step Conceptual Framework for Members in Public Practice to this dilemma.

1) Identify problem

2) Evaluate it significance

3) Consider solutions

4) Select best solution

5) Document decisions,

implement and evaluate

Solutions

Expert Solution

Identify Problem : In the given problem there is substantial doubt about going concern. As per accounting standards disclosure of uncertainties about an entity’s ability to continue as a going concern, provides guidance in preparing financial statements

Evaluate Significance: if substantial doubt exit, then the company needs to decide if management’s plans alleviate the going concern issues. This decision determines the disclosures to be made. The required disclosures are based upon:

· Management’s plans alleviate the going concern issue

· Management’s plans do not alleviate the going concern issue

Consider Solution :Company has positive net worth but there is substantial doubt about going concern to the company.Managment believes substantial doubt about the company’s ability to continue as a going concern within the next twelve months from the date these financial statements are available to be issued. The ability to continue as a going concern is depend upon the future operations, cash flow and additional financing so in the given case management is working to secure new financing ,No need to disclosure.

Select Best Solution : Management intends to finance operating costs over next few years with existing cash on hand and loans from its directors .If management plans are disclosed ,the probability of success is not provided so best solution is as per my opinion no need to disclose.

Document Decision : As per audit evidence obtained whether substantial doubt about an entity’s ability to continue as going concern for reasonable period of time exists and evaluate the possible financial statement effects including disclosures regarding entity’s ability to continue as going concern. Report in accordance with SAS


Related Solutions

For the following independent situations, assume that you are the audit partner on the engagement: 1....
For the following independent situations, assume that you are the audit partner on the engagement: 1. You found that the depreciation is calculated on the total of land and buildings. In previous years it was only charged on buildings. Total depreciation is $5m and the element charged to land only is $1.4m. Profit before tax is $20m. 2. Fortune Co has 20% inventory held by Just Department Store on a consignment basis. Confirmation request has been already sent to them...
For the following independent situations, assume that you are the audit partner on the engagement: 1....
For the following independent situations, assume that you are the audit partner on the engagement: 1. A number of frozen yogurt stores have opened in the last few years and your client, YogurtLand, has experienced a noticeable decline in customer traffic over the past several months that has caused you to have substantial doubt about YogurtLand’s ability to continue as a going concern. 2. Intelligis Electronics is a manufacturer of advanced electrical components. During the year, changes in the market...
For the following independent situations, assume that you are the audit partner on the engagement: 1....
For the following independent situations, assume that you are the audit partner on the engagement: 1. A number of frozen yogurt stores have opened in the last few years and your client, YogurtLand, has experienced a noticeable decline in customer traffic over the past several months that has caused you to have substantial doubt about YogurtLand’s ability to continue as a going concern. 2. Intelligis Electronics is a manufacturer of advanced electrical components. During the year, changes in the market...
For the following independent situations, assume you are the audit partner on the engagement. For each...
For the following independent situations, assume you are the audit partner on the engagement. For each situation, using the framework for reporting decisions, decide what type of auditor’s report should be issued and provide your rationale. If your decision depends on additional information, state the alternative reports you are considering and the additional information you need to make the decision. During your examination of Debold Batteries Ltd., you conclude there is a possibility that inventory is materially overstated. The client...
Assume that you are the audit partner on the engagement. Company is manufacturer of racing cars....
Assume that you are the audit partner on the engagement. Company is manufacturer of racing cars. During the year, the changes in the market resulted in a significant decrease in the demand for the product, which are now being sold significant below cost. Management refuses to write off the products and not disclose this information in the footnotes 1. Identify which of the condition requiring a deviation from a standard unmodified opinion audit report is applicable, if any 2. State...
You are the senior manager or audit engagement partner on Care For Kids Inc., a not-for-...
You are the senior manager or audit engagement partner on Care For Kids Inc., a not-for- profit organization that has a December 31 year-end. While performing year-end substantive procedures, the engagement team identified an error in the entity’s year-end adjusting entries. Care For Kids Inc. had inadvertently not recorded an unrealized gain of $5 million in one of its many investment portfolios. The investments total approximately $200 million. Through inquiry of client management, the engagement team learned that the accounting...
EXPLAIN THE IMPORTANCE OF AUDIT ENGAGEMENT TO AUDITOR AND THE CLIENT
EXPLAIN THE IMPORTANCE OF AUDIT ENGAGEMENT TO AUDITOR AND THE CLIENT
Connie is the recently appointed engagement partner of the audit of Camel Inc. Connie has just...
Connie is the recently appointed engagement partner of the audit of Camel Inc. Connie has just taken over the audit from Mathew Pate, a partner who will be retiring soon. Mathew had a small portfolio of clients and completed most substantive testing for Camel at year-end. Connie is unable to do this because she is facing difficulties with two of her other large clients. These clients have just been advised that their financing arrangements with banks may not be renewed,...
Background Information: In this project you are to assume that you are the audit partner on...
Background Information: In this project you are to assume that you are the audit partner on the audit engagement of Earthwear Clothiers, Inc. (Earthwear). Earthwear is a U.S. publicly traded company and is subject to the rules and regulations of the Public Company Accounting Oversight Board (United States). It is classified as an “accelerated filer” under the rules of the Securities and Exchange Commission (SEC). Your firm has been engaged to perform an audit of the financial statements of Earthwear's...
You have been asked by the audit partner to draft a letter to the client on...
You have been asked by the audit partner to draft a letter to the client on internal control related matters. You were informed that the written communication regarding significant deficiencies and material weaknesses indentified during an audit of financial statements should include certain statements. For each of the significant deficiencies and material weaknesses reflected in the table below, double-click on each of the associated shaded cells and select from the list provided the appropriate disposition of each statement in regard...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT