Courtney is completing the audit of Profile Framing Ltd. The framing business is seasonal and very competitive. She discovers that a major long-term debt in the draft nancial statements is actually due for repayment two months after the close of the financial year. The company president is negotiating with Profile's bank to renew the debt for a further twoyear term and has been in to see two other banks about arranging new loans. The president has been keeping a close eye on cash flow and negotiating with suppliers about payment terms and extensions of credit. The cash flow for the current year has declined considerably since the year before, and the operating cash flow is negative due to pressure to reduce prices to compete with a discount framing chain that has been opening shops close to Profile's. With the busy holiday gift season approaching, Profile needs to purchase inventory, but it has no cash and its suppliers have all refused to provide any more goods except on a cashonly delivery basis. Required: a. Discuss the liquidity and solvency issues faced by Profile. How do these issues affect Profile's financial statements? Consider the disclosures that should be made regarding its financial condition. // b. Assuming that Courtney is satisfied that Profile's financial statements adequately disclosed the financial uncertainties that it is facing, describe the form of opinion and the EOM paragraph that she will include in her audit report. Going Concern Opinions Read the case and answer the questions that follow. Oftentimes, especially in challenging economic times, companies may not have positive financial results. The professional standards require that auditors evaluate whether there is substantial doubt about the company's ability to continue as a going concern for a reasonable period of time--a year from the balance sheet date. Tremendousjudgment is involved in this phase ofthe audit. It should be noted that while auditors are not required to perform procedures to test the going concern assumption, they must evaluate the assumption in relation to the results of the audit procedures performed relative to the other components of the audit. Read the case and answer the questions that follow. Due to a variety of reasons, such as current economic conditions and individual operating results, companies may not have the ability to continue as a going concern. This assumption is of great interest to users of financial statements, as GAAP financial statements make the assumption the company will continue. Assets, for example, may be carried at a cost that is higher than liquidation value. Audit standards require that auditors consider whether the company under audit will be able to continue as a going concern. Auditors do not need to perform specific procedures, but they do need to use judgment in making an assessment. Items like the ability to pay debt, negative cash flow issues, legal situations, etc, all come into play. Dillon CPA is the auditor for Sunshine Industries, a manufacturer of widgets. Sunshine's cash flow has cash used in operations of an amount twice that from last year, a net loss and current liabilities exceed current assets by about 25 percent. Company management insists they are spending lots of money investing in new product development and expect to see profits from these new products in the next year. Additionally, according to the CEO of Sunshine Industries, a lawsuit from a former supplier is expected to be settled in the next year. What procedures should the Dillon CPA audit team consider based on these facts