Case Study: Audit Procedures for Going$-$Concern Considerations

Introduction:

In the world of auditing, assessing a company's ability to continue its operations as a going concern is a critical aspect. The going$-$concern concept assumes that a company will remain in business for the foreseeable future. However, uncertainties and risks can challenge this assumption. In this case study, we'll explore the audit procedures involved in evaluating going$-$concern considerations.

Case Scenario:

ABC Manufacturing Company is a medium$-$sized manufacturing firm that produces automotive components. As part of the annual audit, the external auditor, Jane, is tasked with assessing the company's going concern. Over the past year, ABC Manufacturing has experienced declining profitability due to increased competition and operational challenges.

Audit Procedures:

Review Financial Statements: Jane begins by thoroughly reviewing ABC Manufacturing's financial statements, including the balance sheet, income statement, and cash flow statement. She compares current and previous years' financial performance to identify any significant changes or trends.

Evaluate Management's Plans: Jane meets with ABC Manufacturing's management team to discuss their strategic plans for addressing the company's challenges. She evaluates the feasibility and effectiveness of these plans in improving the company's financial health and sustainability.

Assess Cash Flow Projections: Jane carefully examines ABC Manufacturing's cash flow projections to determine if the company has sufficient liquidity to meet its obligations in the near future. She considers factors such as accounts receivable, inventory turnover, and accounts payable to assess cash flow reliability.

Review Financing Arrangements: Jane reviews ABC Manufacturing's existing financing arrangements, such as bank loans and lines of credit. She evaluates the company's ability to maintain these arrangements and secure additional funding if needed to support its operations.

Analyze Market Conditions: Jane conducts market research to understand the competitive landscape and industry trends affecting ABC Manufacturing. She assesses the company's positioning and prospects for growth or decline based on market conditions.

Consider Legal and Regulatory Issues: Jane examines any legal or regulatory issues that could impact ABC Manufacturing's ability to continue its operations. This includes pending litigation, regulatory compliance, and potential changes in industry regulations.

Evaluate Subsequent Events: Jane considers any significant subsequent events that may have occurred after the balance sheet date but before the audit report issuance. These events could provide additional insights into ABC Manufacturing's going concern status.

Objective Type Question:

Based on the case study, what is one of the key audit procedures for evaluating going$-$concern considerations for ABC Manufacturing Company?

A$)$ Reviewing financial statements

B$)$ Assessing market conditions

C$)$ Analyzing legal and regulatory issues

D$)$ Evaluating management's plans