Audit Case 12 PDF

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Case 12.4 Surfer Dude Duds, Inc.: Considering the Going-Concern Assumption Due: November 29th, 2018

2. How might going-concern explanatory paragraph become a “selffulfilling prophecy” for Surfer Dude? The idea of the going-concern explanatory paragraph becoming the means to a “self-fulfilling prophecy” for Surfer Dude means that Mark’s decision to include this statement in the report will translate to viewers as a red flag, and ultimately deter business to Surfer Dude until they are out of business. Mark foresees an economic decline in the clothing market and predicts that Surfer Dude will not be able to meet their financial obligations but implying this revelation in a going-concern paragraph will only make cause negative reactions in the company’s stakeholders such as their employees, customers, management, suppliers, creditors, and shareholders. Surfer Dude’s suppliers and vendors may fear payment defaults and require cash on delivery instead of granting them the option to pay on credit. Creditors will hesitate to grant loans to Surfer Dude, or they will limit credit lines to the company. Customers may also shy away from buying from the business

because

of

the

unsteadiness

of

their

sales

return

policy. These are just a few examples of how a going-concern explanatory paragraph can become a self-fulfilling prophecy that causes Surfer Dude’s business to go asunder through stakeholder’s actions to protect themselves pending the company’s demise.

4. What potential implications arise for the accounting firm if they

issue

an

unqualified

report

without

the

going-concern

explanatory paragraph? A major concern for Scott in this case is the implications that could be present for the audit firm if a clean audit opinion is issued. Scott would have to hope that George’s firm does in fact reverse the negative trends that are predicted. If this does happen, then the relationship between the two can continue in a positive manner. However, if the company defaults in the next year failing to continue as a going concern, Scott’s firm would face

serious

backlash

for

not

providing

the

appropriate

information in the audit report in advance. One major fear would be that the stakeholders would face significant losses without this essential information. This not only would be detrimental to the firm’s reputation, but also there would be legal implications for

the

company’s

firm.

In

addition,

managements

this

credibility,

omission and

would

ultimately

affect be

a

the very

expensive mistake for the auditing firm.

5. What factors might motivate Scott to be objective in his decision, despite his personal concern for his friend? There are several factors that would motivate Scott to be objective in his decision, a few of them include: protecting

himself

and

omitting

his

an

audit

important

firm

from

aspect

any

from

litigations

the

financial

caused

by

statement,

keeping his personal integrity and commitment to his firm, and abiding by his duty towards the public. As an auditor, Scott’s decision should not be influenced by his personal relationships with his clients. In addition, he needs to uphold the standards and

integrity

expected

of

an

auditor

–

one

of

them

being

transparent and impartial about his opinions. He should be more concerned

and

worried

about

possible

repercussions

caused

by

omitting the “going-concern” on his client’s financial statement – instead of his friendship between George – because these could potentially lead to losses for him and his audit firm.

7. In your opinion, what should Scott do? Briefly justify your position and explain how you would approach George on Monday. Scott should remain objective with his audit opinion and document his doubts about the company’s ability to continue. As an auditor, Scott has the responsibility to display an accurate representation of the company’s financial situation, which in this case means including a going-concern explanatory paragraph in the audit report. George has already expressed his concerns and has identified the potential negatives of a going-concern report.

Thus,

Scott

should

patiently

approach

George

with

confidence to help him comprehend the benefits of including the going-concern explanatory paragraph by identifying the negative results of omitting it if Surfer Dude Duds, Inc. doesn’t ride it out....