Question

A CPA firm is completing the fieldwork for an audit of Swenson Co. for the current year ended December 31. The manager in charge of the audit is performing the final steps in the evidence accumulation phase of the audit and notes that there have been several changes in Swenson during the year under audit. Which of the following items would indicate there could be substantial doubt about Swenson's ability to continue as a going concern for a reasonable period of time?

a. New product launches
b. Positive cash flows
c. Significant changes in management
d. Expansion of production facilities

Answer 1

Significant changes in management could indicate potential substantial doubt about a company's ability to continue as a going concern, as opposed to other options which are generally positive signs.

Step-by-step explanation:

When evaluating whether there is substantial doubt about a company's ability to continue as a going concern for a reasonable period of time, an auditor will look for negative financial indicators and other qualitative factors. Of the options provided, significant changes in management could be a sign that there may be internal turmoil or instability, which might contribute to doubt about the company's ability to continue operations. Although management changes can be part of normal business operations, they can sometimes indicate deeper issues if they are unexpected or involve multiple high-level personnel. The other options such as new product launches, positive cash flows, and expansion of production facilities are typically positive signs that suggest the company is growing and not indicative of going concern issues.