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Assume that you are the audit partner on an engagement for a client that has had a string of operating losses
Assume that you are the audit partner on an engagement for a client that has had a string of operating losses. You know the CFO, who is a former audit manager of your firm. The company still has a positive net worth, but you are worried that the company might have to close down within the next year or so. When you tell the CFO that the company should make full disclosure in the notes concerning substantial doubt about the company’s ability to continue as a going concern, your colleague says, “Hogwash! There’s no substantial doubt. The probability of our having to close down is remote. We’ll make no such disclosure. To do so would only make our customers and creditors nervous, possibly making such a disclosure a self-fulfilling prophecy. Our competitors are as bad off as we are, and their auditors aren’t making them send out a distress signal.” You agree that the determination of “substantial doubt” is a judgment call.
Apply the five-step Conceptual Framework for Members in Public Practice to this dilemma.
1) Identify problem
2) Evaluate it significance
3) Consider solutions
4) Select best solution
5) Document decisions,
implement and evaluate
Expert Solution
Identify Problem : In the given problem there is substantial doubt about going concern. As per accounting standards disclosure of uncertainties about an entity’s ability to continue as a going concern, provides guidance in preparing financial statements
Evaluate Significance: if substantial doubt exit, then the company needs to decide if management’s plans alleviate the going concern issues. This decision determines the disclosures to be made. The required disclosures are based upon:
· Management’s plans alleviate the going concern issue
· Management’s plans do not alleviate the going concern issue
Consider Solution :Company has positive net worth but there is substantial doubt about going concern to the company.Managment believes substantial doubt about the company’s ability to continue as a going concern within the next twelve months from the date these financial statements are available to be issued. The ability to continue as a going concern is depend upon the future operations, cash flow and additional financing so in the given case management is working to secure new financing ,No need to disclosure.
Select Best Solution : Management intends to finance operating costs over next few years with existing cash on hand and loans from its directors .If management plans are disclosed ,the probability of success is not provided so best solution is as per my opinion no need to disclose.
Document Decision : As per audit evidence obtained whether substantial doubt about an entity’s ability to continue as going concern for reasonable period of time exists and evaluate the possible financial statement effects including disclosures regarding entity’s ability to continue as going concern. Report in accordance with SAS
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