Reference no: EM132619131

Callie Peters is completing the audit of MakingNewFriends.com for the year ended December 31, 2016. Callie has been the audit manager on this engagement for the past three years. MakingNewFriends.com issued stock two years ago, but has had difficulty establishing a loyal client base and generating advertising revenues. In reviewing results for the current year, Callie noted the client has had operating losses for the past three years, and its working capital ratio has declined from 1.2 in 2015 to 0.9 in 2016. Callie discussed plans for the future with the management of MakingNewFriends.com, and they indicated they are planning on obtaining debt financing in fiscal 2017; however, they have not yet secured the financing with a bank. Management also indicated they are aggressively pursuing new advertising contracts and plan to increase advertising revenues by 20% in 2017.

Problem 1: According to auditing standards, what is the auditor's obligation to consider whether the client can continue as a going concern?

Problem 2: Over what time period is the auditor required to consider the client's ability to continue as a going concern?

Problem 3: What factors discussed above are relevant for a going-concern assessment for MakingNewFriends.com? What additional information might the auditor consider in the going-concern assessment?

Problem 4: What responsibility does the auditor have to evaluate whether management's plans will be effective?