Case Scenario:

XYZ Corporation is a manufacturing company operating in a highly competitive industry. The company has experienced declining sales and profitability in recent years due to increased competition and economic downturns. As the external auditor for XYZ Corporation, Sarah is tasked with assessing the company's ability to continue as a going concern for the foreseeable future.

Audit Procedures:

Analyzing Financial Statements: Sarah begins by analyzing XYZ Corporation's financial statements, including the balance sheet, income statement, and cash flow statement. She evaluates key financial metrics such as liquidity ratios, profitability ratios, and cash flow trends to assess the company's financial health and ability to meet its obligations as they become due.

Reviewing Management's Plans: Sarah meets with XYZ Corporation's management to discuss their plans and strategies for addressing the company's financial challenges. She evaluates the feasibility and effectiveness of management's plans in improving the company's financial performance and cash flow generation.

Assessing Industry and Economic Conditions: Sarah conducts research and analysis on the industry in which XYZ Corporation operates and the broader economic environment. She considers factors such as market trends, competitive dynamics, regulatory changes, and economic indicators to assess the potential impact on the company's future prospects.

Evaluating Financing Arrangements: Sarah reviews XYZ Corporation's existing financing arrangements, including debt agreements, credit facilities, and capital structure. She assesses the company's ability to meet its debt obligations and refinance existing debt if necessary, taking into account any covenants or restrictions imposed by lenders.

Considering Cash Flow Forecasts: Sarah evaluates XYZ Corporation's cash flow forecasts and projections prepared by management. She assesses the reliability of these forecasts and considers the likelihood of achieving projected cash flows based on historical performance, market conditions, and management's assumptions.

Assessing Working Capital Management: Sarah reviews XYZ Corporation's management of working capital, including inventory levels, accounts receivable, and accounts payable. She evaluates the company's ability to efficiently manage its working capital to support ongoing operations and meet short$-$term financial obligations.

Considering External Support: Sarah considers any external support or assistance available to XYZ Corporation, such as access to additional financing, potential asset sales, or strategic partnerships. She evaluates the likelihood and feasibility of obtaining external support to mitigate financial challenges and support the company's continued operations.

Documenting Audit Evidence: Throughout the audit process, Sarah documents her findings, conclusions, and supporting audit evidence regarding XYZ Corporation's ability to continue as a going concern. This documentation provides a clear record of the audit procedures performed and the basis for her assessment of the company's going concern status.

Objective Type Question:

Based on the case study, what is one of the primary responsibilities of the auditor regarding the assessment of going concern?

A$)$ Analyzing industry and economic conditions

B$)$ Reviewing management's plans and strategies

C$)$ Assessing working capital management

D$)$ Documenting audit evidence