Stock Market and Services Textbook Page
1. Reviewing GM's financial information in GM Exhibit 1 and its stock price in GM Exhibit 2, when do you first see signs of GM's impending financial distress?
The sign of GM’s impending financial distress is first seen in 2005. GM reported a net loss of more than $10 billion and has continued to post annual losses since that time with losses reaching almost $31 billion in 2008. GM's cash flow from operations in 2005 was a negative $16.8 billion.
Reviewing GM’s stock price, we can see that the stock price also decreased dramatically started in 2004 to 2008. In 2005, GM’s stock traded around $19 per share and reached the lowest of $1.45 per share on March 2009.
Source: Auditing and Assurance Services Textbook page C11-C13.
2. In referencing professional standards, what factors auditors should consider in evaluating potential going-concern uncertainties?
Auditors are required to consider evidence obtained and accumulated throughout the audit and make an overall evaluation as to whether substantial doubt exists with respect to the ability of the client to continue as a going concern for a reasonable period of time not to exceed one year beyond the date of financial statements. Factors that auditors should consider in evaluating potential going-concern uncertainties are:
-Negative trends, including recurring operating losses, working capital deficiencies, and negative cash flow from operations.
-Indications of financial difficulties, including default on loans, denial of trade credit from suppliers, restructuring of debts, or arrearages in dividends.
-Internal matters, including work stoppages or substantial dependence on the success of a particular project or activity.
-External matters, including legal proceeding; loss of a key franchise, license, or patent; or loss of a major customer or supplier.
According to Auditing & Assurance Service Textbook, auditors are not expected to design and perform procedures solely for the purpose of identifying conditions
The sign of GM’s impending financial distress is first seen in 2005. GM reported a net loss of more than $10 billion and has continued to post annual losses since that time with losses reaching almost $31 billion in 2008. GM's cash flow from operations in 2005 was a negative $16.8 billion.
Reviewing GM’s stock price, we can see that the stock price also decreased dramatically started in 2004 to 2008. In 2005, GM’s stock traded around $19 per share and reached the lowest of $1.45 per share on March 2009.
Source: Auditing and Assurance Services Textbook page C11-C13.
2. In referencing professional standards, what factors auditors should consider in evaluating potential going-concern uncertainties?
Auditors are required to consider evidence obtained and accumulated throughout the audit and make an overall evaluation as to whether substantial doubt exists with respect to the ability of the client to continue as a going concern for a reasonable period of time not to exceed one year beyond the date of financial statements. Factors that auditors should consider in evaluating potential going-concern uncertainties are:
-Negative trends, including recurring operating losses, working capital deficiencies, and negative cash flow from operations.
-Indications of financial difficulties, including default on loans, denial of trade credit from suppliers, restructuring of debts, or arrearages in dividends.
-Internal matters, including work stoppages or substantial dependence on the success of a particular project or activity.
-External matters, including legal proceeding; loss of a key franchise, license, or patent; or loss of a major customer or supplier.
According to Auditing & Assurance Service Textbook, auditors are not expected to design and perform procedures solely for the purpose of identifying conditions