Question

In: Accounting

Read the following case and answer the questions that follow: GeoPetro is independent oil and natural...

Read the following case and answer the questions that follow:
GeoPetro is independent oil and natural gas company with headquarters in San Francisco,
California. It recently received an audit opinion that expressed a going concern paragraph.
The following is an excerpt from GeoPetro’s 2012 report:
The accompanying consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the consolidated
financial statements, the Company has incurred recurring net losses that have resulted in an
accumulated deficit of $49.7 million as of December 31, 2012. Also, the Company has
limited cash and working capital to fund its future operations. These factors raise substantial
doubt about the ability of the Company to continue as a going concern. Management’s plans
regarding those matters are also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of these uncertainties.
Required:
a. What is the general purpose of an auditors’ report?
b. What is a going concern? Define it in your words, don’t quote the book.
c. Are losses, restructuring, and the disposal of segments necessarily precursors to the
demise of the company?
d. What, in your words, are the auditors saying about these particular companies?

Solutions

Expert Solution

a) The general purpose of an auditor’s report is to bring out following to the shareholders of the company:

1. The authentication of revenues and expenses and legal compliances undertaken by the company in business operations during the period.

2. The level of the production and profitability of the concern during the financial period.

3. The confirm the assets and liabilities of the concern at the end of accounting year.

b) Going concern is the legal continuation character of the company business operations for ever future. Each and every concern is supposed to last forever unless certain business closure propositions are in sight. The going concern character of the company does not get affected with the coming and going of owners, employers and segments or products.

c) The precursors of demise of any company are always the losses, negative capital structure and non-existence of the product segments because these are always the reasons of negative cash flow in the business and not making profits. None company can exist without making profits or atleast cashing enough to cater its expenses. Non generation of cash will lead to closure of company’s business.

d) The auditors of such loss making company’s always raise alarm to the owners and the creditors of the company to take care of their investments in the company. The auditors use to provide option to revive the diminishing business of the company which could include re-structuring of capital.


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