A staff auditor has just returned from a continuing professional education workshop on current auditing standards. One of her managers has asked her to prepare a training session for the rest of the staff. In particular, he wants her to discuss the standard related to the client's ability to continue as a going concern.
a. Describe the auditor's responsibility for assessing each client's ability to continue as a going concern.
b. Describe the effect on the financial statements and on the auditor's report for each of the following independent situations.
1. The auditor has substantial doubt as to whether the client is a going concern.
2. The auditor believes the footnote describing the going concern problem is inadequate. In the prior year statements, a going concern problem had been disclosed and was referred to in the auditor's prior year report, but the uncertainty has been eliminated this year. Comparative statements will be issued.
3. The auditor concludes that the client is likely to continue in existence for at least one more year. The same conclusion had been reached in prior years.
4. The client was forced into bankruptcy by creditors after year-end but before the audit was completed.
a. A going concern qualification within an audit report says that the company is in serious jeopardy about continuing to be in business within the next year. The auditor has a responsibility to the stakeholders reading the financial statements to present a fair picture of the status of the company historically but also going forward with information known prior to the issue date of the report. With a going concern qualification, a banker might decline to renew a line of credit, investors might sell the shares, and key employees might leave the company. In light of the situation, it also may be the last audit report issued for the company.
1. In the event of doubt, the auditor ...
The solution presents a comprehensive discussion for each of the five items in the problem including examples and real-world situations which could influence the approach to each situation.