CPA Exam — AUDPerforming Further Procedures and Obtaining EvidenceHard
An auditor is evaluating the client's ability to continue as a going concern. Management has developed a plan to mitigate substantial doubt, including selling off non-essential assets and renegotiating debt terms. Which of the following audit procedures would provide the most persuasive evidence regarding the feasibility of management's plan to sell non-essential assets?
- AObtaining management's written representation confirming their intent to sell the assets.
- BComparing the expected proceeds from asset sales to the client's historical asset disposal rates.
- CReviewing market analyses and discussions with investment bankers about the salability of similar assets.
- DInquiring of management about the specific assets they plan to sell and their expected proceeds.
Show answer & explanationAnswer & explanation
Correct answer: C. Reviewing market analyses and discussions with investment bankers about the salability of similar assets.
To assess the feasibility of selling non-essential assets, the auditor needs objective, external evidence about the market for those assets and the likelihood of realizing the expected proceeds. Reviewing market analyses and discussing with independent investment bankers provides such external, expert corroboration, making it highly persuasive evidence.
Why the other options are wrong
- A. Written representations are management's assertions and are generally the least persuasive evidence, especially for forward-looking plans.
- B. Historical disposal rates may not be relevant in the current distressed situation, and this procedure does not provide direct evidence of current market demand or realizable value.
- D. Inquiry of management provides understanding but is not sufficient on its own to corroborate the feasibility of the plan.
Auditing Going Concern Mitigation Plans
Procedures performed by an auditor to evaluate the feasibility and effectiveness of management's plans to mitigate substantial doubt about the entity's ability to continue as a going concern.
- Focus on specific, actionable plans.
- Requires corroborating evidence for each plan component.
- External, objective evidence is highly persuasive.
Memory trick: For asset sales, external market data is the best advocate.