When a Question Arises About an Entity's Continued Existence, the Auditor

question 14

Multiple Choice

When a question arises about an entity's continued existence, the auditor should consider factors tending to mitigate the significance of negative information concerning the entity's means for maintaining adequate cash flow. An example of such a factor is the

• A) Possibility of purchasing certain assets rather than leasing them.
• B) Capability of extending the due dates of existing debt.
• C) Appropriateness of changing depreciation methods from double declining balance to straight line.
• D) Marketability of property and equipment that management plans to keep.

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Definitions:

Investment Opportunity

An option to invest capital with the expectation of generating a return, including stocks, bonds, real estate, or business ventures.

Required Rate of Return

The minimum annual percentage earned by an investment that will induce individuals or companies to put money into a particular security or project.

Operations

The day-to-day activities required for the business to function, including production, sales, and administration.

Residual Income

The amount of income that an entity has after all personal debts and expenses, including the mortgage, have been paid.