Surfer Dude Duds, Inc

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Surfer Dude Duds, Inc.

Case 12.4

Auditing II
ACG 4642-Spring 2011
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 concern. Although George has past success involved in his retail business; however, he is not willing to accept the fact that the business is so much at a loss that it needs no going concern explanatory paragraph. Therefore it is the duty of Mark to explain to George the consequences of not including the explanatory paragraph in the report. He should also probably predict the future position of Surfer Dude given the present economic conditions and try to explain George the reasons why the company may not be able to recover in the consequent year for which the going concern explanatory report becomes necessary.

2. How might a going-concern explanatory paragraph become a “self-fulfilling prophecy” for Surfer Dude? Because the issuance of a going-concern opinion is feared to be a self-fulfilling prophecy to Surfer Dude, Mark may be reluctant to issue one. Moreover, since Mark and George and became good friends, it had made it difficult for Mark to include the explanatory paragraph for the going concern. A going concern opinion may lower stockholders’ and creditors’ confidence in the company; ratings agencies may then downgrade the debt, leading to an inability to obtain new capital and an increase in the cost of existing...
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