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?

a. Inspecting title documents to verify whether any assets are pledged as collateral.
b. Confirming with third parties the details of arrangements to maintain financial support.
c. Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation.
d. Comparing the entity's depreciation and asset capitalization policies to other entities in the industry.

Answer 1

To identify going concern issues, (b) confirming with third parties regarding financial support is a key auditing procedure, providing insight into the entity's financial sustainability.

Step-by-step explanation:

Among the auditing procedures that might help an auditor identify conditions suggesting substantial doubt about an entity's ability to continue as a going concern, confirming arrangements for maintaining financial support with third parties is the most directly pertinent. This approach involves confirming with third parties the details of arrangements to maintain financial support. These arrangements may include lines of credit or new funding agreements which provide evidence about an entity's ability to manage its finances in the near future. This would be more insightful in identifying going concern issues than inspecting title documents, reconciling cash balances, or comparing depreciation policies.

In the context of the financial capital market, before providing a loan, banks mitigate the risk of imperfect information concerning repayment by requiring documentation of income sources, conducting credit checks, and possibly requiring a cosigner or collateral.