Case 12.4- Surfers DudeBy Group 2 Wenqi Hu, Sha Li, Katelyn
Nugent, Tatiana WetzlerMAcc Advanced AuditingDecember 2nd, 2014
Question 1
The first option available to Mark, and the one we would
strongly consider taking, is to excuse himself from the engagement,
as it is obvious he would not be an unbiased auditor should he
choose to remain in the engagement. This option would allow him to
make sure his firm could issue an impartial report, while at the
same time maintaining his personal relationship with George.A
second option, should he decide to remain in the engagement, is to
issue an opinion with a going concern paragraph. With this option
he would show that his friendship with George has no bearing on his
decision making as an auditor in this engagement. But on the other
hand, he would likely lose a friend (George), and would also almost
guarantee the company remains in the red. As an audit opinion with
a going concern paragraph tends to send a company deeper into
financial peril, and not the other way around
Question 2
The going concern paragraph sends a signal to stakeholders that
the company might not be in position to honor its commitments.
Suppliers would have a hard time extending payment terms to the
company, banks would possibly stop issuing lines of credit,
customers would maybe stop shopping there all together because of
assumptions that, if the company will no longer be there in a year,
they might not have the latest and greatest, or they might not be
there if the customers wanted to return merchandise. All in all,
the going concern signal sent to the market could possibly ensure
that the company does not have leverage anywhere to try to turn
around financially. With no one to buy from, no money to buy
merchandise with, and no customers to sell the merchandise to, the
company would cease to exist.
Question 3
Auditors have the responsibility to provide reasonable assurance
that the issued financial statement are fairly stated and free from
the material misstatement. When the auditors issue an unqualified
opinion knowing that the company has a going-concern problem, they
should add an explanatory paragraph in the audit report to explain
the problem the company is facing. Without adding the explanatory
paragraph, auditors wouldnt be performing their work exercising
professional skepticism and due professional care as the generally
accepted auditing standards require.Question 4
Under both AICPA and PCAOB standards the auditor has a
responsibility to evaluate a companys going concern. The auditors
concern is whether or not the company would not be able to continue
its operations not exceeding one year from the date of the
financial statements audit (54). The entire purpose of auditing is
to reduce information risk for the users of the financial
statements. Audits provide reliable information to users. If the
audit isnt accurate, youre giving the users wrong information which
could sway their opinions. By excluding the going concern
explanatory paragraph and just issuing an unqualified opinion is
going to mislead the users. An unqualified opinion is the best
audit report you can give a company, thus users would have no idea
about the going concern issue. The going concern report is in the
best interest of all parties. The company could still come back
from any potential issues. The going concern assumption is not
finite; the company can still fix its problems and be just fine. By
including the explanatory paragraph, all parties would avoid any
potential litigation from angry users who were misled.
Question 5
It is not appropriate to have a strong personal relationship
between a client and auditors that can compromise the independence
of auditors. However, it is possible that the auditors can keep a
healthy relationship with the clients. If the auditors were in a
management position in the engagement team and have known the
client well, the auditing firm should then replace the manager
since the relationship can probably affect the quality of auditing
work.
Question 6
There are three factors that might motive Mark to be objective
in his decision, despite his personal concern for his friend.
First, his characteristics of independence and competence as an
audit partner. These qualities require Mark to gather sufficient
and appropriate evidences to make professional judgments. Second,
GAAS, GAAP and other established regulations and laws prohibit Mark
from violation of objectivity. Third, the auditors responsibility
is to provide reliability of financial statements for public users,
so by keeping his objectivity Mark would be more likely to gain
public trust, which is beneficial for his reputation and job.
Question 7
Mark should issue the report based on the real condition of the
company, which means an audit report with a going-concern
explanatory paragraph. When approaching George on Monday, Mark
should clearly explain the recession in retail clothing market and
struggles of Surfer Dude. Mark could give some suggestions such as
developing new styles to attract more customers and making
adjustments in management to save costs. Mark may also claim that
the whole retail clothing industry is suffering, if he gives a
clean audit opinion for Surfer Dude, whose value chain was hurting
and ability to meet all the financial obligations was doubtful,
users would be more likely to suspect the reliability of the
audited financial statements, leading to a bad effect on companys
reputation or even worse - law suits.
[Type text][Type text][Type text]1Group Two
