This is the third year audit of Green Lawns. The company has carved out a new market niche on the Web for the delivery of lawn and garden supplies, including links with local companies that provide lawn services. The company issued stock two years ago and raised sufficient capital to continue operations through this year.
The company is currently trading at five times revenue. The company showed no profits in its first three years. Revenue growth has been 100%, 65%, and 30%, respectively, over each of the last three years. The current year revenue is at $220 million. The auditor has audited current cash flow and has serious reservations about the ability of the company to remain a going concern without either some profitability or an infusion of cash. The company has responded with the following management plan:
● Another public offering of stock to raise $200 million in capital, which will be equal to 30% of the existing stock outstanding
● Sign an agreement with at least fifty more local distributors during the year
● Improve warehousing and distribution to cut at least 20% off the distribution costs
● Increase sales by 50% through more advertising, coupons, and better marketing to existing customers
● Improve profit margins by using its purchase power to sign more attractive purchase agreements with vendors, but stay away from major-brand vendors such as Scott's, Ortho products, and so forth
a. What is the auditor's responsibility to evaluate the effectiveness of management's plan? What action should the auditor take if he or she does not believe that management's plan will be effective?
b. Assume that the auditor modifies the opinion on the financial statements. What does this action say to the users of the financial statements about confidence in management's ability to remain a going concern?
c. What is the required disclosure regarding management's plans?
d. For each element in management's plan, indicate the auditor's responsibility to assess the element. Indicate audit procedures that should be performed to assess each part of management's plans.