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Auditors and their predictions about bankruptcy of a client

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For discussion purposes counter the statement that it is worse for auditors to incorrectly predict bankruptcy than when auditors fail to predict bankruptcy.

Do you think the current bank crisis and its negative credit crunch on the entire economy resulting in many small, medium and some big businesses closing their doors is an argument for more strict auditing on this side of incorrectly predicting bankruptcy?

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You have posed a very interesting question which will undoubtedly be discussed in auditing firms for the next few years.

You are correct that it is a difficult subject to disclose in an audit report footnotes because of the negative connotation about the future of the company. On the other hand, auditors have a responsibility to readers of financial statements to present as much valid and independent information as they can to the readers.

When you consider the wide range of stakeholders who may read and study financial statements, and consider the decisions those readers may make based on the financial statements, the responsibility is clear. Those stakeholders include bankers who may loan, investors who may buy or sell, creditors who may extend credit, analysts who may ...

Solution Summary

In 515 words, the solution explains the process that auditors must complete when it is questionable about whether a company will survive over the ensuing year. Although the conclusion is one involving judgment, the process is defined in accounting literature and will accomplish the objective.