Mark’s option is to include an explanatory paragraph about Surfer Dude Duds, Inc. ’s going concerns. SAS 59 requires an auditor to evaluate conditions or events discovered during the engagement that raise questions about the validity of the going-concern assumption. An auditor who concludes that substantial doubt exists about the entity’s ability to continue as a going concern and who is not satisfied that management’s plans are enough to mitigate these concerns is required to issue a modified (but unqualified) report. It is also the duty for Mark to convince George about the financial position of his company’s going concern.
Although George has past success involved in his retail business; however, he is not willing to accept the fact that the business is so much at a loss that it needs no going concern explanatory paragraph. Therefore it is the duty of Mark to explain to George the consequences of not including the explanatory paragraph in the report. He should also probably predict the future position of Surfer Dude given the present economic conditions and try to explain George the reasons why the company may not be able to recover in the consequent year for which the going concern explanatory report becomes necessary.
2. How might a going-concern explanatory paragraph become a “self-fulfilling prophecy” for Surfer Dude? Because the issuance of a going-concern opinion is feared to be a self-fulfilling prophecy to Surfer Dude, Mark may be reluctant to issue one. Moreover, since Mark and George and became good friends, it had made it difficult for Mark to include the explanatory paragraph for the going concern. A going concern opinion may lower stockholders’ and creditors’ confidence in the company; ratings agencies may then downgrade the debt, leading to an inability to obtain new capital and an increase in the cost of existing capital.
Creditors often regard a subject to qualification as a separate reason for not granting a loan, a reason in addition to the circumstances creating the uncertainty that caused the qualification. This frequently puts the auditor in the position, in effect, of deciding whether a company is able to obtain the funds it needs to continue operating. Thus, the auditor’s qualification tends to be a self-fulfilling prophecy. The auditor’s expression of uncertainty about the company’s ability to continue may contribute to making it a certainty.
The fear is that a going-concern opinion can hasten the demise of an already troubled company, reduce a loan officer’s willingness to grant a line of credit to that troubled company, or increase the point spread that would be charged if a company was granted a loan. Auditors are placed at the center of a moral and ethical dilemma: whether to issue a going-concern opinion and risk escalating the financial distress of their client, or not issue a going-concern opinion and risk not informing interested parties of the possible failure of the company.
The hope is that issuing a going-concern opinion might promote timelier rescue activity. 3. What potential implications arise for the accounting firm if they issue an unqualified report without the going-concern explanatory paragraph? It would be unethical to issue an unqualified report without the going concern report. This is because every audit report must consist of the reasons for the unqualified report. An unqualified report is a clean bill of health of the organization and an auditor must not exclude any information or insert any irrelevant information in this report.
Every unqualified report has a structure which consists of three parts that is introductory paragraph, scope paragraph and opinion paragraph therefore it is necessary that the auditor fills in all the necessary information. It also would put Mark’s independent toward Surfer Dude into questions. 4. Discuss the importance of full and accurate auditor reporting to the public, and describe possible consequences for both parties if the going-concern explanatory paragraph and footnote are excluded. How might Mark convince George that a going-concern report is in the best interests of all parties involved?
It is necessary that the auditor and the company reports full disclosure of information in the audit report. This is because the audit report acts as an ideal way of getting to know the financial status of the company. It is the responsibility of the organization to provide full and correct information to the auditor which in turn helps the auditor to prepare correct report. If the company does not provide the correct accounts, it will be held liable. If the auditor despite knowing the fact that the financial information is not correct and he prepared a report in favor of the company he will be held liable by the court of law.
Therefore it is essential that the parties involved in auditing provide a true report. Mark might convince George by telling him the consequences of not including the going concern report. Mark should also convince George to come up with solutions to deal with the true economic situation that Surfer Dude faces now and in the future. Furthermore, George should take Mark’s advise instead of thinking it is a criticism if George considers Mark as a friend. 5. Is it appropriate for an audit partner to have a friendly personal relationship with a client?
At what point could a personal relationship become an independence issue? It is appropriate for the auditor to have a friendly personal relationship with the client so long as it does not interrupt the level of professionalism of the business relationship. In this case; however, Mark was reserve about telling George about the going concern explanatory paragraph that Mark want to put in the audit report. This situation was awkward because Mark and George were friends. In the end, Mark had decided to tell George about the going concern explanatory paragraph, but not after Mark had some doubt.
If Mark would issue a clean unqualified opinion, Mark’s friendship with George would have cause Mark to be not independent. 6. What factors should motivate Mark to be objective in his decision, despite his personal concern for his friend? The factors that should motivate Mark to be objective are the independent standard and ethic standard of an auditor. Mark’s personal belief and personal value also come into factor. Last and not least is the legal consequences factor. All these important factors should motivate Mark to be objective in his decision, despite his personal concern for his friend. . In your opinion, what should Mark do? Briefly justify your position. In my opinion, there is no doubt that Mark should include the going concern explanatory paragraph in his audit report. By doing so, Mark will show the public of his ethic and justify his independence and his own professionalism. Mark can help George realize that George can take this as a challenge to turn his company around. This can show any outsider that George is not a person that hide under a rock whenever there are any controversy. The most important is that Mark had shown George that he is a true friend.