You are auditing the financial statements of your new client, Blake Inc., a manufacturer of office furniture for the year ended October 31, 2020. Blakes previous auditors had issued a going concern opinion for the financial statements of the year ended October 31, 2019 for the following reasons:

• Blake had defaulted on $13 million of unregistered debentures sold overseas, due in 2019.
• The default of the debentures constituted a possible violation on other debt agreements.
• Interest and principal payments due on the remainder of a ten-year credit agreement, which began in 2013, exceeded cash flows generated from operations in recent years.
• The company had disposed of certain operating units. The proceeds from the sale were subject to possible adjustments through arbitration proceedings, the outcome of which was uncertain at year end.
• Various lawsuits were pending against the company.
• The company was in the midst of tax proceedings as a result of an examination of the companys federal tax returns over the last twelve years.

You find the following on the status of the above matters at year-end October 31, 2020.

• The company is still in default on $4.6 million of the debentures due in 2019 but is trying to identify the remaining bondholders, many of whom are located overseas, in order to negotiate a settlement with them. It has already located a large number of bondholders and has settled their claims at significantly less than par.
• The company has renegotiated the 2013 credit agreement.
• The new credit agreement provides for a 2 year moratorium on principal payments and interest at 8%. It also requires a limitation on net losses ($2.25 million for 2020) and requires a certain level of defined cumulative quarterly operating income to be maintained.
• The arbitration proceedings were resolved in 2020.
• The legal actions were settled in 2020.
• Most of the tax issues have been resolved and, according to the companys legal counsel, those remaining will result in a net cash inflow to the company.

At year-end, Blake has a cash balance of $5.5 million and expects to generate a net cash flow of $3.2 million in the next fiscal year.

REQUIRED

• How much weight should the report on the October 31, 2018 financial statements have in making your decision?

Additional Information:

The following information about Blakes plans for fiscal 2021 may be helpful in your decision. (Amounts in millions.)

	2021 Budget	2020 Actual	2020 Budget
Net Revenues	66.2	60.9	79.8
Gross Margin	34.7	33.6	45.6
Operating Expenses	27.9	34.7	39.4
InterestNet Income (Expense)	(5.1)	(6.0)	(5.7)
Other Income (Expenses)--Net	(.2)	2.1	-
Earnings before Income Taxes	1.5	(5.0)	.5
Cash Receipts	69 .9	74.1
Cash Disbursements	66.7	96.9
Net Cash Inflow (Outflow)	3.2	(22.8)