Case Study:

ABC Manufacturing Company is a medium$-$sized manufacturing firm specializing in the production of automotive parts. Over the past few years, the company has faced increasing competition, fluctuating market demand, and rising operational costs. Despite efforts to streamline operations and cut expenses, ABC Manufacturing Company has experienced consecutive years of net losses.

As the external auditor for ABC Manufacturing Company, your firm is tasked with performing the annual audit for the fiscal year ending December $31,2023.$ Given the challenging economic environment and the company's financial performance, particular attention needs to be paid to the going concern assumption.

During the audit process, you perform the following audit procedures related to the going concern assessment:

Review of Management's Financial Forecasts: You obtain and evaluate the financial forecasts prepared by the management of ABC Manufacturing Company for the next three years. These forecasts include projected revenues, expenses, cash flows, and capital expenditures.

Assessment of Liquidity and Solvency Ratios: You calculate and analyze various liquidity and solvency ratios, including the current ratio, quick ratio, debt$-$to$-$equity ratio, and interest coverage ratio. These ratios provide insight into the company's ability to meet its short$-$term and long$-$term financial obligations.

Inquiry and Discussions with Management: You interview key members of management, including the CEO, CFO, and controller, to discuss the company's financial performance, business strategies, and plans for addressing current challenges. You inquire about any plans to secure additional financing or restructure debt.

Evaluation of Financing Arrangements: You examine the terms and conditions of the company's existing debt agreements, lines of credit, and other financing arrangements. You assess the company's compliance with debt covenants and any risks associated with default or non$-$renewal of financing facilities.

Analysis of Cash Flow Projections: You analyze the company's projected cash flows, considering factors such as operating cash flows, investing activities, and financing activities. You assess the adequacy of projected cash flows to meet debt service obligations and fund ongoing operations.

Review of Contingent Liabilities: You review the company's disclosures regarding contingent liabilities, such as pending litigation, warranty claims, and environmental liabilities. You assess the potential impact of these liabilities on the company's financial position and ability to continue as a going concern.

Evaluation of External Factors: You consider external factors that may impact the company's ability to continue as a going concern, such as changes in industry regulations, shifts in market demand, and economic trends affecting the automotive industry.

Question:

Based on the case study provided, which audit procedure is specifically aimed at assessing the company's ability to meet its short$-$term financial obligations?

A$)$ Review of Management's Financial Forecasts

B$)$ Assessment of Liquidity and Solvency Ratios

C$)$ Inquiry and Discussions with Management

D$)$ Evaluation of Financing Arrangements