Question

An audit report included the following additional paragraph: "The financial statements of the Holmlund Company have been prepared assuming that the Company will continue as a going concern. As discussed in footnote 10, the Company has experienced losses and negative cash flows from operations for the past three years..." Which of the following statements is incorrect? a. The auditors issued an adverse opinion Holmlund's financial statements. b. The auditors obtained information regarding management's plans to improve financial performance. c. The auditors evaluated the viability of management's plans to improve financial performance. d. The auditors determined that management's plans to improve financial performance were likely to be unsuccessful.

Answer 1

The incorrect statement is that the auditors issued an adverse opinion on Holmlund's financial statements. The audit report's additional paragraph regarding the going concern reflects concerns about the company's viability, not an adverse opinion on the financial statements themselves.

The statement that the auditors issued an adverse opinion on Holmlund's financial statements is incorrect. An adverse opinion is given when the financial statements of a company are materially misstated. The additional paragraph in the audit report indicates the inclusion of a going concern note, which raises doubts about the company's ability to continue operating. However, the auditors would not necessarily conclude that the financial statements are incorrect, but that there is uncertainty about the company's future.

When auditors include this type of additional paragraph, it means they have taken into account the management's plans to improve financial performance (as stated in the potential answers b and c); however, such a paragraph does not make a judgment on the future success or failure of these plans, which makes option d incorrect as it assumes a conclusion that is not typically part of an auditor's report.