Callie Peters is completing the audit of MakingNewFriends.com for the year ended December 31, 2013. Callie has been the audit manager on thisengagement for the past three years. MakingNewFriends.com issued stock two years ago,but has had difficulty establishing a loyal client base and generating advertising revenues.In reviewing results for the current year, Callie noted the client has had operatinglosses for the past three years, and their working capital ratio has declined from 1.2in 2012 to 0.9 in 2013. Callie discussed plans for the future with the management ofMakingNewFriends.com, and they indicated they are planning on obtaining debtfinancing in fiscal 2014; however, they have not yet secured the financing with a bank.Management also indicated they are aggressively pursuing new advertising contracts andplan to increase advertising revenues by 20% in 2014.a. According to auditing standards, what is the auditor’s obligation to consider whetherthe client can continue as a going concern?b. Over what time period is the auditor required to consider the client’s ability tocontinue as a going concern?c. What factors discussed above are relevant for a going-concern assessment forMakingNewFriends.com? What additional information might the auditor considerin their going-concern assessment?d. What responsibility does the auditor have to evaluate whether management’s planswill be effective?
Callie Peters is completing the audit of MakingNewFriends.
com for the year ended December 31, 2013. Callie has been the audit manager on this
engagement for the past three years. MakingNewFriends.com issued stock two years ago,
but has had difficulty establishing a loyal client base and generating advertising revenues.
In reviewing results for the current year, Callie noted the client has had operating
losses for the past three years, and their
in 2012 to 0.9 in 2013. Callie discussed plans for the future with the management of
MakingNewFriends.com, and they indicated they are planning on obtaining debt
financing in fiscal 2014; however, they have not yet secured the financing with a bank.
Management also indicated they are aggressively pursuing new advertising contracts and
plan to increase advertising revenues by 20% in 2014.
a. According to auditing standards, what is the auditor’s obligation to consider whether
the client can continue as a going concern?
b. Over what time period is the auditor required to consider the client’s ability to
continue as a going concern?
c. What factors discussed above are relevant for a going-concern assessment for
MakingNewFriends.com? What additional information might the auditor consider
in their going-concern assessment?
d. What responsibility does the auditor have to evaluate whether management’s plans
will be effective?
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