CPA Exam — AUDPerforming Further Procedures and Obtaining EvidenceMedium
A client is experiencing significant recurring operating losses and negative cash flows from operations. The auditor should primarily consider which of the following in assessing the entity's ability to continue as a going concern?
- AManagement's plans for mitigating the adverse conditions.
- BThe historical trend of the entity's stock price.
- CThe industry's overall economic outlook.
- DThe auditor's ability to perform additional substantive procedures.
Show answer & explanationAnswer & explanation
Correct answer: A. Management's plans for mitigating the adverse conditions.
When substantial doubt about an entity's ability to continue as a going concern exists, the auditor's primary focus shifts to evaluating management's plans to mitigate these conditions. These plans are crucial in determining if the going concern assumption remains appropriate. While other factors might be considered, management's plans directly address the identified conditions.
Why the other options are wrong
- B. Stock price is an indicator but less direct than management's specific plans for financial viability.
- C. Industry outlook is a general factor; specific entity plans are more relevant once issues arise.
- D. The auditor's ability to perform procedures doesn't resolve the client's going concern issue, it only affects the audit evidence.
Going Concern Assessment
The auditor assesses whether there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time (typically one year from the financial statement date).
- Indicators include recurring losses, negative cash flows, and debt defaults.
- Management's plans to mitigate these conditions are a critical part of the assessment.
- If substantial doubt remains, disclosure and potentially a modified opinion are required.
Memory trick: Going Concern: Doubt? Look at Management's Route!