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Auditing Question: Going concern issue in an auto industry

1. Assume you are an auditor of a small, publicly held "parts" supplier in Detroit. Its major clients are the auto companies, although they do support some appliance manufacturers and the airline industry. What type of questions would you ask about management's plan to replace reduced sales from auto manufacturers?

2. The U.S. government recently pledged a very sizable sum of taxpayer dollars to bail out the auto industry, with the assertion that certain companies will only survive with the government's assistance. In order to restore faith in the economy, it was essential that the auto bailout succeed.

Now, play the part of auto industry auditor. Your opinion that states the auto company is not a going concern will essentially say the bailout has failed, and the next domino to fall is lost faith in capitalism and the government. That's a lot of pressure to issue a statement saying the auto company is a going concern.

Faced with this additional perspective, what would you do? (Please attempt to keep political discussions/judgments to a minimum in the main forum, unless relevant to the audit discussion. Political discussions are fair game in the chat room, however please be respectful of differing opinions.)

Solution Preview

1. Assume you are an auditor of a small, publicly held "parts" supplier in Detroit. Its major clients are the auto companies, although they do support some appliance manufacturers and the airline industry.
What type of questions would you ask about management's plan to replace reduced sales from auto manufacturers?

Very interesting questions that could be applied to any industry in any market. The job of an auditor is to attempt to quantify, as much as qualify, the documentation to support an opinion about a going concern. The evaluation process involved in making the determination about the disclosure is certainly subjective, but it can be documented by a variety of procedures.

Any company could have reduced sales for events beyond its control. For example, trade laws could change for global businesses, market confidence would be impacted after the death or resignation of key management members, negative lawsuits about products could suspend production, and many other circumstances.

When faced with disaster, a company has immediate options to recover including, but not limited to, reducing costs, divesting itself of certain assets, changing the product mix, developing new products, investigating new markets, expanding globally, merging or acquiring other business units, or liquidating.

A very important procedure for a going concern qualification is ...

Solution Summary

The 892 word solution explains the different types of opinions expressing a going concern and also answers each question directly including steps to proceed in each case.

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