CPA Exam — AUDPerforming Further Procedures and Obtaining EvidenceMedium
An auditor is evaluating the client's ability to continue as a going concern. Management has developed a plan to mitigate the going concern risk, which includes selling a significant non-core asset. Which of the following audit procedures would provide the MOST persuasive evidence regarding the feasibility of this plan?
- AReviewing management's internal projections of cash flows from the sale.
- BDiscussing the sale plan with the client's legal counsel.
- CObtaining a written representation from management confirming their intent to sell the asset.
- DExamining a signed purchase agreement for the asset with a financially capable buyer.
Show answer & explanationAnswer & explanation
Correct answer: D. Examining a signed purchase agreement for the asset with a financially capable buyer.
Examining a signed purchase agreement with a financially capable buyer provides the most objective and verifiable evidence that the sale of the asset is feasible and likely to occur, directly supporting the going concern mitigation plan.
Why the other options are wrong
- A. Internal projections are management-prepared and generally less persuasive as audit evidence without external corroboration.
- B. Discussions with legal counsel may confirm the legality of the plan but do not directly confirm the feasibility or likelihood of the sale itself from a financial perspective.
- C. Written representations are management's assertions and, while required, are the least persuasive type of evidence on their own for such a critical matter.
Going Concern Mitigation Evidence
Audit evidence supporting management's plans to alleviate substantial doubt about an entity's ability to continue as a going concern.
- Evidence must be persuasive and verifiable.
- Focus on specific, actionable plans with external support.
- Management's assertions alone are insufficient.
Memory trick: When the company's future looks grim, strong evidence is key to make it swim.