Final answer:
Substantial doubt exists when there are concerns about a company's ability to continue operating as a going concern in bankruptcy. It suggests serious concerns about the company's financial viability.
Step-by-step explanation:
In the context of bankruptcy, substantial doubt is said to exist when there are concerns about a company's ability to continue operating as a going concern. It typically arises when there is significant uncertainty about the company's ability to generate enough cash flow or obtain sufficient financing to meet its financial obligations.
For example, in the case of the Ace Company, if the independent auditor questions whether there is substantial doubt about the company's ability to continue as a going concern, it suggests that there are serious concerns about the company's financial viability. This could be due to factors such as mounting debts, declining sales, or an inability to generate positive cash flow.
When substantial doubt exists, it may impact the company's ability to access credit, attract investors, or retain customers and suppliers. It is an indication that the company is at risk of bankruptcy and may need to consider filing for protection under the bankruptcy laws.