Case 12.

4- Surfers Dude
By Group 2
Wenqi Hu, Sha Li, Katelyn Nugent, Tatiana
Wetzler
MAcc Advanced Auditing
December 2nd, 2014
Question 1
The first option available to Mark, and the one we would strongly
consider taking, is to excuse himself from the engagement, as it is
obvious he would not be an unbiased auditor should he choose to
remain in the engagement. This option would allow him to make sure
his firm could issue an impartial report, while at the same time
maintaining his personal relationship with George.
A second option, should he decide to remain in the engagement,
is to issue an opinion with a going concern paragraph. With this option
he would show that his friendship with George has no bearing on his
decision making as an auditor in this engagement. But on the other
hand, he would likely lose a friend (George), and would also almost
guarantee the company remains in the red. As an audit opinion with a
going concern paragraph tends to send a company deeper into
financial peril, and not the other way around
Question 2
The going concern paragraph sends a signal to stakeholders that
the company might not be in position to honor its commitments.
Suppliers would have a hard time extending payment terms to the
company, banks would possibly stop issuing lines of credit, customers
would maybe stop shopping there all together because of assumptions
that, if the company will no longer be there in a year, they might not
have the latest and greatest, or they might not be there if the
customers wanted to return merchandise. All in all, the going concern
signal sent to the market could possibly ensure that the company does
not have leverage anywhere to try to turn around financially. With no
one to buy from, no money to buy merchandise with, and no customers
to sell the merchandise to, the company would cease to exist.
Question 3
Auditors have the responsibility to provide reasonable assurance
that the issued financial statement are fairly stated and free from the
material misstatement. When the auditors issue an unqualified opinion
knowing that the company has a going-concern problem, they should
add an explanatory paragraph in the audit report to explain the
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problem the company is facing. Without adding the explanatory

paragraph, auditors wouldnt be performing their work exercising
professional skepticism and due professional care as the generally
accepted auditing standards require.
Question 4
Under both AICPA and PCAOB standards the auditor has a
responsibility to evaluate a companys going concern. The auditors
concern is whether or not the company would not be able to continue
its operations not exceeding one year from the date of the financial
statements audit (54).
The entire purpose of auditing is to reduce information risk
for the users of the financial statements. Audits provide reliable
information to users. If the audit isnt accurate, youre giving the users
wrong information which could sway their opinions.
By excluding the going concern explanatory paragraph and
just issuing an unqualified opinion is going to mislead the users. An
unqualified opinion is the best audit report you can give a company,
thus users would have no idea about the going concern issue. The
going concern report is in the best interest of all parties. The company
could still come back from any potential issues. The going concern
assumption is not finite; the company can still fix its problems and be
just fine. By including the explanatory paragraph, all parties would
avoid any potential litigation from angry users who were misled.
Question 5
It is not appropriate to have a strong personal relationship
between a client and auditors that can compromise the independence
of auditors. However, it is possible that the auditors can keep a healthy
relationship with the clients. If the auditors were in a management
position in the engagement team and have known the client well, the
auditing firm should then replace the manager since the relationship
can probably affect the quality of auditing work.
Question 6
There are three factors that might motive Mark to be objective in
his decision, despite his personal concern for his friend. First, his
characteristics of independence and competence as an audit partner.
These qualities require Mark to gather sufficient and appropriate
evidences to make professional judgments. Second, GAAS, GAAP and
other established regulations and laws prohibit Mark from violation of
objectivity. Third, the auditors responsibility is to provide reliability of
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financial statements for public users, so by keeping his objectivity Mark

would be more likely to gain public trust, which is beneficial for his
reputation and job.

Question 7
Mark should issue the report based on the real condition of the
company, which means an audit report with a going-concern
explanatory paragraph. When approaching George on Monday, Mark
should clearly explain the recession in retail clothing market and
struggles of Surfer Dude. Mark could give some suggestions such as
developing new styles to attract more customers and making
adjustments in management to save costs. Mark may also claim that
the whole retail clothing industry is suffering, if he gives a clean audit
opinion for Surfer Dude, whose value chain was hurting and ability to
meet all the financial obligations was doubtful, users would be more
likely to suspect the reliability of the audited financial statements,
leading to a bad effect on companys reputation or even worse - law
suits.

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