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Considering the Going-Concern Assumption

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What options does a business owner have when approached by an auditor, who has a friendly client-auditor relationship between the two, wanting to discuss the issue of a going-concern report and footnote disclosure on the financial reports when the business at hand has gone south for the past year in sales?

How might a going-concern explanatory paragraph be able to become a self-fulfilling prophecy for a company?

What potential implications arise for the accounting firm if they issue and unqualified report without the going-concern explanatory paragraph?

What is the importance of full and accurate auditor reporting to the public and possible consequences for both owner and auditor if the going-concern explanatory paragraph and footnote are excluded?

How might a going-concern report would be in the best interests of all parties involved?

How appropriate is it for an auditor to have a friendly auditor-client relationship with a client?

What factors should motivate an auditor to be objective in his or her decision about a going-concern report, despite personal concerns for his or her friend (the owner of the business)?

What should an owner do when the auditor feels that a going-concern report is necessary, but the owner (the friend) feels that this report will cause the company to go belly-up for sure even with the sales for the past year has gone south and no sight of recovery?

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Solution Preview

As you undoubtedly know, a going-concern qualification in an audit report says that there is substantial doubt that the company will be in business in 12 months. It is a professional opinion to put readers of the financial statement on notice that there is risk with a pending serious problem.

Of course, no business owner wants such a report issued but this is business, not personal relationships. There are several choices for the auditor:

1. Provide a better explanation about the reasons for and the effects of the qualification to the client
2. Explain why there is a professional responsibility to report that which an auditor concludes is necessary
3. Withdraw from the ...

Solution Summary

The 450-word solution explains the ramifications of a going-concern opinion as it affects the company, the stakeholders and the CPA firm. It is a realistic response which discusses consequences that could occur as a result of non-disclosure by the CPA firm. It also discusses ways in which a CPA firm might assist a client to solve the issues which brought the problem up in the first place.