Reference no: EM132808764

Assume your firm is providing an audit in the following two independent scenarios:

Scenario 1

Super Green Farm's revenues have been decreasing in the last two years. At the end of its 2020 year end, the retained earnings will be in a deficit balance. The company has a long term loan from a local bank that is due on January 31, 2021. Management is currently in the process of renegotiating the loan with the bank or at the very least trying to get an extension on the loan.

According to the auditor's discussions with management the renegotiation is going well but since the renegotiations are still ongoing a small risk remains that the bank will put Green into receivership and liquidate its assets. Green's CFO has provided draft 2020 financial statements to the auditor. The statements classify the debt as a current liability and there is a note describing the going concern issue.

Scenario 2

Flexible Manufacturing Inc. is a medium-sized business that is trying to cut back on costs. They decided that, as their record-keeping is good, that they would not count inventory at year end. Inventory is a material item on the financial statements.

For each scenario:

Problem a) Indicate the type of auditor's report to be issued

Problem b) Justify your conclusion in a) above by describing the conditions and nature of the issue that is affecting the type of audit report to be issued

Problem c) Provide an additional audit procedure for each scenario that you could conduct prior to the issue of the auditor's report that would address any issues that you have identified. Explain the purpose of the procedure.