Assessing going concern and audit opinions Learning objective In this assignment, you will assess the ability of Cloud 9 to continue as a going concern. Then, you will determine the audit opinion that should be given to Cloud 9 in a variety of circumstances. You are advised to read CAS 570 Going Concern, CAS 700 Forming an Opinion and Reporting on Financial Statements, CAS 705 Modifications to the Opinion in the Independent Auditor’s Report, and CAS 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report prior to attempting this assignment. Required Answer the following questions in relation to going concern.

1. What does the term “self-fulfilling prophecy” mean? (Hint: You may not find it in any textbook—try searching on-line.)

2. How could the inclusion of a going concern emphasis of matter paragraph to an audit opinion create a self-fulfilling prophecy for an audit client?

3. Assuming all material misstatements have been adjusted, do you think that Cloud 9 will meet the criteria for going concern in 2020? List arguments or evidence to support your decision.

4. What audit opinion do you think should be given to Cloud 9 for the year ending December 31, 2020?

Assume each of the following scenarios is material and independent, and that, apart from the information provided, the remainder of the financial statement accounts are fairly presented and comply with International Financial Reporting Standards. What audit opinion should be given for Cloud 9 in each scenario? Complete your answers in the table, providing an explanation and auditing standard reference to support your choice.

(a) Cloud 9 has recently changed its inventory accounting method from weighted average to FIFO. Carla Johnson, Financial Controller, did not provide any justification for the change. The change has resulted in an increase in profit for the financial year.

(b) There are rumours that Cloud 9 may purchase Groovy Shooz (a shoe competitor).

(c) Cloud 9 has recently been advised that it will need to begin sourcing running shoes from another supplier for 12 months while the Chinese manufacturing facility is being rebuilt after a devastating fire.

(d) When auditing the operating expenses of Cloud 9, the auditors were unable to obtain evidence to support the accuracy assertion. The office containing the receipts and other paperwork was destroyed in a flood caused by a burst water main outside the Cloud 9 offices.

(e) Carla refuses to make a material adjustment to revenue for Internet sales; she believes that revenue should be recorded when the customer places their non-refundable order—not when the shoes are received by customers.