Allmark, the client, is a small manufacturing company currently in need of cash in order to stay in business. Loan payments exceeding its cash on hand are due in 60 days and if Allmark defaults, its bank says it will foreclose on the assets used as collateral. Allmark's only recourse then would be to file bankruptcy. One solution is to seek outside financing from vendors eager to keep Allmark in business, although the availability of financing will not be known until the next fiscal year. The auditor should:
A) audit the financial statements and disclose the possibility that Allmark may not be able to continue as a going concern.
B) withhold the audit report until financing has been secured.
C) disclaim an opinion on the financial statements.
D) ignore the issue as it does not affect the current year under audit.

Question

Quizplus · Accepted Answer

The best choice is for the auditor to audit the financial statements and disclose the possibility that Allmark may not be able to continue as a going concern. This is because the going concern assumption is a fundamental principle in accounting and auditing. If the auditor has doubt about Allmark's ability to continue as a going concern, they are required to disclose this in the financial statements. This will inform the users of the financial statements about the risks and uncertainties associated with investing in Allmark. Withholding the audit report or disclaiming an opinion are not appropriate options as they do not address the issue of going concern. Ignoring the issue is also not an option as it would be a violation of auditing standards.

Allmark, the Client, Is a Small Manufacturing Company Currently in Need