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Essay about Surfer Dude Duds, Inc

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Surfer Dude Duds, Inc.

Case 12.4

Auditing II
ACG 4642-Spring 2011
By
Rick Woo

1. What are Mark’s option?

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
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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
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