Callie Peters is completing the audit of MakingNewFriends.com for the year ended December 31, 2019. Callie has been the audit manager on this engagement
for the past three years. MakingNewFriends.com issued stock two years ago but has had
difficulty establishing a loyal client base and generating advertising revenues. In review-
ing results for the current year, Callie noted the client has had operating losses for the past
three years, and its working capital ratio has declined from 1.2 in 2018 to 0.9 in 2019. Callie
discussed plans for the future with the management of MakingNewFriends.com, and they
indicated they are planning on obtaining debt financing in fiscal 2020; however, they have
not yet secured the financing with a bank. Management also indicated they are aggres-
sively pursuing new advertising contracts and plan to increase advertising revenues by 20
percent in 2020.
a. According to auditing standards, what is the auditor’s obligation to consider whether
the client can continue as a going concern?
b. Assuming management is using U.S. GAAP to prepare the financial statements, over
what time period is the auditor required to consider the client’s ability to continue as
a going concern?
c. What factors discussed above are relevant for a going-concern assessment for
MakingNewFriends.com? What additional information might the auditor consider in
the going-concern assessment?
d. What responsibility does the auditor have to evaluate whether management’s plans
will be effective?
