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 reviewing 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 aggressively 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?
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