The auditor has determined that there is a material going concern uncertainty at the company due to their inability to comply with the requirements to refinance the company's debt. In addition, the company is suffering from losses and negative cash flows due to poor economic circumstances. The bank has refused to renew the company's borrowings and the directors now have no other option but to cease to trade. Inquiries of management have not revealed any practical plans or tangible solution to deal with the problem. Suppose that the financial statements have been prepared using the going concern basis of accounting but, in the auditor's judgment, management's use of the going concern basis of accounting in the preparation of the financial statements is inappropriate, what should be the opinion of the auditor in their report? a. Disclaimer Opinion O b. Adverse Opinion O c. Unqualified Opinion O d. Qualified Opinion

The auditor has determined that there is a material going concern uncertainty at the company due to their inability to comply with the requirements to refinance the company's debt. In addition, the company is suffering from losses and negative cash flows due to poor economic circumstances. The bank has refused to renew the company's borrowings and the directors now have no other option but to cease to trade. Inquiries of management have not revealed any practical plans or tangible solution to deal with the problem. Suppose that the financial statements have been prepared using the going concern basis of accounting but, in the auditor's judgment, management's use of the going concern basis of accounting in the preparation of the financial statements is inappropriate, what should be the opinion of the auditor in their report? a. Disclaimer Opinion O b. Adverse Opinion O c. Unqualified Opinion O d. Qualified Opinion

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter2: The Auditor’s Responsibilities Regarding Fraud And Mechanisms To Address Fraud: Regulation And Corporate Governance

Section: Chapter Questions

Problem 8CYBK

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A company’s management has uncovered events that indicate that substantial doubt exists that the company can pay its debts as they come due over the following year. Management studies the plans created to address this risk. How can the company avoid disclosing that this substantial doubt exists? a. The plans must be reviewed by the chief financial officer. b. It must be probable that the plans will be implemented and it must be probable that the plans will mitigate the conditions that raised substantial doubt. c. Disclosure of the substantial doubt is required regardless of the availability of the plans. d. The plans must have been tested before the end of the financial year.
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? Cash flows from operating activities are negative. Stock dividends replace annual cash dividends. Significant related party transactions are pervasive. Research and development projects are postponed.
You are an assurance services senior at Bailey & Associates and have noted the following independent issues in relation to the audit of Sleek Ltd: The accounting system at Sleek Ltd did not operate effectively during the first year of operations. Consequently, some general ledger accounts had to be based on estimates, as the actual data relating to these balances had been lost. (i) (ii) As a result of cost constraints, the directors of Sleek Ltd did not implement effective internal controls for debt collection. The debtors' tunover is 3.2 times. (iii) Due to increased competitive pressures, Sleek Ltd has recently moved the manufacture of some of its clothing lines out of Melbourne into regional areas. While Sleek Ltd saves around 20% in costs, the manufacturing process takes longer and on several occasions late delivery has resulted in lost sales. Required: Explain the impact of each of these separate issues on your assessment of audit risk, the materiality level and the audit strategy…
The operations of Dugas Bank are being evaluated by the Bangko Sentral ng Pilipinas. During the investigation, the BSP has determined that numerous loans made by top management were unwise and have seriously endangered the future of the bank. Which of the following statements is true? * The accounting entity assumption is sacrificed. The consent of the separate entity which is the bank was violated by top management. Basing on this information, if these decisions highly affect the ability of the bank to operate, financial accountants would need to determine whether the going concern assumption would still be used in the preparation of the financial statements. The Bangko Sentral ng Pilipinas undertook an external audit of the bank. The principle of periodicity assumption was violated. Past and current actions by the top management affect the future of the bank.
The CPA firm of Webster, Warren, & Webb LLP issued an adverse opinion on the internal control of Alexandria Financial, a public company, due to a material weakness. The weakness involved the lack of sufficient accounting expertise to evaluate and adopt appropriate accounting principles. Subsequent to issuance of the report, management of Alexandria hired a new controller to eliminate the weakness. a. Describe what steps Alexandria must perform to engage Webster, Warren, & Webb to issue a report indicating that the weakness no longer exists. b. Describe how Webster, Warren, & Webb should approach the engagement. c. Describe what Webster, Warren, & Webb must do if, during the course of the engagement, a member of the audit team discovers another material weakness in internal control over financial reporting. Will the new weakness affect the auditors’ report?
Lehman Brothers, as well as many other investment banks, failed as a result of an extremely risky business model. Auditors are required under PCAOB standards to evaluate internal controls surrounding financial reporting. In the wake of the banking failure, many commentators asked, “Where were the auditors?” and questioned why the auditors did not also evaluate risk management controls. Do you believe auditors should have responsibility for evaluating a client’s internal controls in areas not directly related to financial reporting?
Which of the following controls will most likely justify a reduced assessed level ofcontrol risk for the completeness assertion for notes payable?(1) The accounting staff reviews board of director minutes for any indication ofany transactions involving outstanding debt to make sure all borrowings areincluded in the general ledger.(2) All borrowings that exceed $500,000 require approval from the board ofdirectors before loan contracts can be finalized.(3) Before approving disbursement of principal payments on notes payable, thetreasurer reviews terms in the note.(4) Accounting maintains a detailed schedule of outstanding note payable that isreconciled monthly to the general ledger.
You are an assurance services senior at Bailey & Associates and have noted the following independent issues in relation to the audit of Sleek Ltd: (i) The accounting system at Sleek Ltd did not operate effectively during the first year of operations. Consequently, some general ledger accounts had to be based on estimates, as the actual data relating to these balances had been lost. (ii) As a result of cost constraints, the directors of Sleek Ltd did not implement effective internal controls for debt collection. The debtors’ turnover is 3.2 times. Required: Explain the impact of each of these separate issues on your assessment of audit risk, and the audit strategy that would be adopted.
In an article published in The Australian on 4 May 2021, it was noted that the company named as the ‘ABCGroup’ reported a big loss equal to $595 million and negative net assets of $75 million. The company seemsinsolvent and unable to pay all of its liabilities if they fall due. The auditors did not qualify the financialstatements, nor challenge the directors on their assertion that the company was a going concern.Requirement:1) Discuss the implications for the company’s financial statements preparation and presentation if thecompany is not considered to be a going concern? Use the conceptual framework concept andgeneral-purpose financial statements requirement given the evidence provided above?
Jaycom Enterprises has invested its excess cash in the bonds of several different companies and desires to maximize income over the short run. Jaycom is unsure about the appropriate investment policy and thus what reporting practice to follow. What classification procedure and subsequent classification could Jaycom follow in order to meet its objective? How will Jaycom justify its choice to the Jaycom auditors?
ABC Corporation (the "Company") incurred heavy losses over the past 10 years resulting in deficit and liquidity problems. The Company considers borrowing from different banks as a way to produce more funds for the company to continue operation and possibly, recover from losses. However, banks are afraid to grant loans to the Company due to recent issues with fraudulent issuance of financial statements by the companies just to obtain loans.In line with the above scenario, what good corporate governance practices may be implemented by the company to increase the confidence of banks (lenders) and avoid the high probability of issuing misstated financial statements by the company? - Have an independent external audit - Require internal audit to conduct examination/audit of Company’s FS - Have the financial statements certified by BIR, Management, and SEC before submission to Banks - Increase integrity and loyalty of BOD
Read the following scenario about Strang Corporation and identify the substantive procedures that the CPA (Elaine Stanley) should perform to determine whether lapping exists. Do not discuss deficiencies in the system of internal control. During the year, Strang Corporation began to encounter cash flow difficulties, and a cursory review by management revealed receivable collection problems. Strang’s management engaged Elaine Stan ley, CPA, to perform a special investigation. Stanley studied the billing and collection cycle and noted the following: The accounting department employs one bookkeeper who receives and opens all incoming mail. This bookkeeper is also responsible for depositing receipts, filing daily remittance advices, recording receipts in the cash receipts journal, and posting receipts in the individual customer accounts and the general ledger accounts. There are no cash sales. The bookkeeper prepares and controls the mailing of monthly statements to customers. The concentration of functions and the receivable collection problems caused Stanley to suspect that a systematic theft of customers’ payments through a delayed posting of remittances (lapping of accounts receivable) is present.