Question

Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

1) Analyzing the entity's financial statements for unusual transactions or events
2) Reviewing the entity's compliance with laws and regulations
3) Obtaining written representations from management about its plans to mitigate the going concern uncertainty
4) Inquiring of the entity's legal counsel about pending litigation or claims

Answer 1

Auditors use specific procedures to determine an entity's ability to continue as a going concern, including analyzing financial statements, obtaining management's plans to address uncertainties, and inquiring about pending litigation.

Step-by-step explanation:

To assess if there is substantial doubt about an entity's ability to continue as a going concern, an auditor would likely perform several procedures, but among the options provided, the most effective would be:

1. Analyzing the entity's financial statements for unusual transactions or events.
2. Obtaining written representations from management about its plans to mitigate the going concern uncertainty.
3. Inquiring of the entity's legal counsel about pending litigation or claims.

Each of these procedures provides information that could indicate financial distress or uncertainties that profitability and the entity's business operations could continue in the foreseeable future, typically considered to be one year from the date of the financial statements.