Going Concern Issues Flashcards
Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity’s ability to continue as a going concern?
Performing cutoff tests of sales transactions with customers with long-standing receivable balances.
Evaluating the entity’s procedures for identifying and recording related-party transactions.
Inspecting title documents to verify whether any real property is pledged as collateral.
Inquiring of the entity’s legal counsel about litigation, claims, and assessments.
Inquiring of the entity’s legal counsel about litigation, claims, and assessments.
This answer is correct because the inquiry of legal counsel may reveal major litigation, claims, and assessments against the entity that raise substantial doubt about its ability to continue as a going concern.
A CPA firm is completing the fieldwork for an audit of Swenson Co. for the current year ended December 31. The manager in charge of the audit is performing the final steps in the evidence accumulation phase of the audit and notes that there have been several changes in Swenson during the year under audit. Which of the following items would indicate there could be substantial doubt about Swenson’s ability to continue as a going concern for a reasonable period of time?
Cash infusion by a venture capital firm.
Recurring working capital shortages.
A lack of significant contracts with new customers.
Term debt refinanced with a new bank.
Recurring working capital shortages.
This answer is correct because recurring working capital shortages are considered a negative trend that may indicate such substantial doubt.
An auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. The entity’s financial statements adequately disclose its financial difficulties. Under these circumstances, the auditor’s report is required to include a paragraph that specifically uses the phrase(s)
“Except for the effects
of such adjustments”
“Possible discontinuance
of the entity's operations" Yes Yes Yes No No Yes No No
No
No
This Answer is Correct
This answer is correct because an emphasis-of-matter paragraph ordinarily doesn’t use either term; the appropriate paragraph indicates that the statements were prepared assuming the company is a going concern, that substantial doubt exists, and refers to the note disclosure in the financial statements on the situation.
An auditor believes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. In evaluating the entity’s plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity’s plans to
Repurchase the entity’s stock at a price below its book value.
Issue stock options to key executives.
Lease rather than purchase operating facilities.
Accelerate the due date of an existing mortgage.
Lease rather than purchase operating facilities.
This answer is correct because an entity’s ability to lease rather than purchase operating facilities may reduce required expenditures and thereby mitigate the immediate effects of a current liquidity problem.
An auditor believes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. In evaluating the entity’s plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity’s plans to
Extend the due dates of existing loans.
Operate at increased levels of production.
Accelerate expenditures for research and development projects.
Issue stock options to key executives.
Extend the due dates of existing loans.
This answer is correct because extending due dates of existing loans may help reduce a cash shortage situation.
An auditor should consider which of the following when evaluating the ability of a company to continue as a going concern?
Audit fees.
Future assurance services.
Management’s plans for disposal of assets.
A lawsuit for which judgment is not anticipated for 18 months.
Management’s plans for disposal of assets.
This is correct because auditors consider management’s plans to (1) dispose of assets (2) borrow money or restructure debt, (3) reduce or delay expenditures, and (4) increase ownership equity.
Which of the following audit procedures most likely would assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity’s ability to continue as a going concern?
Confirmation of accounts receivable from principal customers.
Reconciliation of interest expense with debt outstanding.
Confirmation of bank balances.
Review of compliance with terms of debt agreements.
Review of compliance with terms of debt agreements.
You Answered Correctly!
This is correct because a review of compliance with debt agreements may reveal that the company is not in compliance due to financial difficulties.
An auditor believes there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. In evaluating the entity’s plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity’s plans to
Purchase production facilities currently being leased from a third party.
Postpone expenditures to upgrade its information technology system.
Pay cash dividends that are in arrears to the preferred stockholders.
Increase the useful lives of plant assets for depreciation purposes.
Postpone expenditures to upgrade its information technology system.
This answer is correct because the ability to postpone an expenditure may ease a situation in which cash is severely limited.
Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity’s ability to continue as a going concern?
Review compliance with the terms of debt agreements.
Confirmation of accounts receivable from principal customers.
Reconciliation of interest expense with debt outstanding.
Confirmation of bank balances.
Review compliance with the terms of debt agreements.
This answer is correct because a review of compliance with terms of debt and loan agreements is a procedure that may reveal conditions of noncompliance due to poor financial condition.
Green, CPA, concludes that there is substantial doubt about JKL Co.’s ability to continue as a going concern. If JKL’s financial statements adequately disclose its financial difficulties, Green’s auditor’s report should
Include an
emphasis-of-
matter paragraph
following the
opinion
paragraph
Specifically
use the words
“going
concern”
Specifically
use the
words
“substantial
doubt" Yes Yes Yes Yes Yes No Yes No Yes No Yes Yes
Yes
Yes
Yes
The audit report must include an emphasis-of-matter paragraph following the opinion paragraph, and must use the terms “going concern” and “substantial doubt.”
Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern?
Significant related-party transactions are pervasive.
Usual trade credit from suppliers is denied.
Arrearages in preferred stock dividends are paid.
Restrictions on the disposal of principal assets are present.
Usual trade credit from suppliers is denied.
This answer is correct because conditions and events likely to indicate substantial doubt include negative trends (e.g., recurring operating losses), other indications of possible financial difficulties (e.g., denial of credit, as in this answer), internal matters (e.g., work stoppages), and external matters (e.g., legal proceedings).
After considering management’s plans, an auditor concludes that there is substantial doubt about a client’s ability to continue as a going concern for a reasonable period of time. The auditor’s responsibility includes
Disclaiming an opinion on the financial statements due to the indications of possible financial difficulties.
Indicating to the client’s audit committee whether management’s plans for dealing with the adverse effects of the financial difficulties can be effectively implemented.
Considering the adequacy of disclosure about the client’s possible inability to continue as a going concern.
Issuing a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements.
Considering the adequacy of disclosure about the client’s possible inability to continue as a going concern.
This answer is correct because unless the matter is properly disclosed in the financial statements, a departure from generally accepted accounting principles exists, in which case either a qualified or adverse opinion becomes appropriate.
Which of the following audit procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity’s ability to continue as a going concern?
Reading the minutes of meetings of the stockholders and the board of directors.
Comparing the market value of property to amounts owed on the property.
Reviewing lease agreements to determine whether leased assets should be capitalized.
Inspecting the documents to verify whether any assets are pledged as collateral.
Reading the minutes of meetings of the stockholders and the board of directors.
This answer is correct because the matters considered in the meetings of the stockholders and board of directors may bear on the going concern status of the client.
An auditor has substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time because of negative cash flows and working capital deficiencies. Under these circumstances, the auditor would be most concerned about the
Control environment factors that affect the organizational structure.
Correlation of detection risk and inherent risk.
Effectiveness of the entity’s internal control activities.
Possible effects on the entity’s financial statements.
Possible effects on the entity’s financial statements.
When the auditor has substantial doubt about an entity’s ability to continue as a going concern, the auditor’s primary focus will be on the financial statement effects, especially the adequacy of disclosure of the matters raising the going concern issue.
When an auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time, the auditor’s responsibility is to
Prepare prospective financial information to verify whether management’s plans can be effectively implemented.
Project future conditions and events for a period of time not to exceed one year following the date of the financial statements.
Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements.
Consider the adequacy of disclosure about the entity’s possible inability to continue as a going concern
Consider the adequacy of disclosure about the entity’s possible inability to continue as a going concern.
If substantial doubt about an entity’s ability to continue as a going concern exists, the auditor must consider the adequacy of disclosure in the entity’s financial statements and in the auditor’s report. A going concern problem is addressed through the addition of an emphasis-of-matter paragraph to the auditor’s report without modification of the opinion.
