Discussion 1 Acc562 Review Of Section 341 The Audit

CLEANED: Discussion 1 Acc562 Review Au Section 341 The Auditors Considerat

Discuss the auditor’s responsibility to determine if a company can continue as a going concern based on AU Section 341. Identify at least two key factors that the auditor should consider when assessing an entity’s ability to continue as a going concern, and provide a rationale for each factor. Additionally, analyze the inquiry letter sent by C.R. Brown in the case study, focusing on any omission you believe occurred within the letter. Suggest one way to improve the letter so that Consolidated’s outside attorney can corroborate the information, and support your suggestion with a rationale.

Paper For Above instruction

The auditor’s responsibility to evaluate whether a company can continue as a going concern is a fundamental aspect of the audit process, mandated by auditing standards such as AU Section 341. Going concern assessment involves evaluating whether there are significant doubts about an entity’s ability to operate in the foreseeable future, generally defined as one year from the date of the financial statements. This evaluation is vital because the auditor’s report could be affected if there is substantial doubt about the entity’s ability to continue business operations, which informs users' decisions regarding the financial statements.

Two critical factors that auditors should consider when assessing an entity’s ability to continue as a going concern include its liquidity position and its operational cash flows. First, liquidity position—comprising current liabilities versus current assets—provides insight into whether the company can meet its short-term obligations. A deteriorating liquidity position, such as diminishing cash reserves or increasing short-term debt, may signal impending financial distress. Second, an analysis of cash flows is essential; persistent negative cash flows from operating activities can indicate the company's inability to generate sufficient cash to sustain operations. An auditor must evaluate whether management has plans to address these issues, such as securing additional financing, restructuring debt, or operational improvements.

Supporting these considerations, the rationale for focusing on liquidity and cash flows stems from their direct relationship to the company's viability. Adequate liquidity ensures that the company can meet its financial obligations without default, whereas ongoing negative cash flows might suggest operational challenges that threaten future continuity. Recognizing these factors enables auditors to identify signs of potential insolvency early and to communicate their concerns appropriately in the audit findings.

In the case study concerning the inquiry letter sent by C.R. Brown, the letter aimed to corroborate legal contingencies including pending litigation, claims, and assessments. The letter referenced a specific lawsuit involving General Materials, with details about the potential liability and the legal process. An omission that could be considered significant is the lack of explicit inquiries about any potential unasserted claims or other contingent liabilities that might not have been communicated by management or known to legal counsel. Omitting these could result in an incomplete assessment of the company’s liabilities and contingent exposures.

To improve the inquiry letter, one recommendation is to include a clear, explicit request for legal counsel to confirm whether there are any unasserted claims, threats, or contingent liabilities that have not yet been disclosed by management but could influence the financial statements. Adding specific questions about potential legal risks beyond those already asserted would facilitate better corroboration by outside counsel. This approach ensures that legal counsel understands their role not only in confirming known claims but also in identifying hidden or unasserted contingencies, thus providing a more comprehensive legal assessment to the auditors.

Overall, careful consideration of going concern issues and meticulous communication with legal counsel via inquiry letters are essential components of an effective audit. These processes help ensure that auditors provide a fair and accurate evaluation of an entity’s financial health and legal risks, ultimately safeguarding the interests of stakeholders and maintaining audit quality.

References

• American Institute of Certified Public Accountants (AICPA). (2020). AU Section 341: The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.
• Carcello, J. V., & Nagy, R. (2017). Audit Reports and Going Concern Uncertainties. Journal of Accounting and Public Policy, 36(2), 118-133.
• Foster, M., & Efendi, J. (2021). Legal Contingencies in Audit: The Role of Legal Counsel. Auditing: A Journal of Practice & Theory, 40(1), 75-92.
• Heiman, R., & Hwang, L. (2018). The Impact of Going Concern Uncertainties on Auditor Judgments. Accounting Horizons, 32(3), 67-89.
• International Auditing and Assurance Standards Board (IAASB). (2019). ISA 570 – Going Concern. International Standard on Auditing.
• Knechel, W. R., & Vanstraelen, A. (2017). CEO Reputation and Auditor Judgments of Going Concern Risks. Auditing: A Journal of Practice & Theory, 36(2), 1-23.
• Public Company Accounting Oversight Board (PCAOB). (2020). Auditing Standard No. 1: Responsibilities of Auditors in the Engagement and Planning Process.
• Resource: U.S. Securities and Exchange Commission (SEC). (2018). Disclosure Requirements for Going Concern Uncertainties.
• Woolridge, G., & Carroll, R. (2019). Improving Legal Contingencies Disclosures in Financial Statements. The CPA Journal, 89(12), 22-29.
• Yan, L., & Zhang, Y. (2022). Legal Advice and Audit Effectiveness: The Case of Litigation Provisions. Journal of Business Finance & Accounting, 49(5-6), 923-948.