Related parties
Related-party transactions aren't inherently improper, but they carry higher risk because they may not be at arm's length and may be used to manipulate results. The auditor must inquire of management about the identity of related parties, remain alert for undisclosed relationships throughout the audit, and evaluate whether disclosure is adequate.
IMPORTANT: The auditor is not required to determine whether a related-party transaction occurred at arm's-length prices, and should not state in the report that a transaction was on terms equivalent to an arm's-length transaction unless that assertion can be substantiated.
Going concern: the evaluation
The auditor evaluates whether substantial doubt exists about the entity's ability to continue as a going concern for a reasonable period of time — generally one year after the date the financial statements are issued (or available to be issued).
Common conditions and events: recurring operating losses, negative cash flows, working capital deficiencies, loan defaults, denial of trade credit, loss of a major customer or franchise, uninsured catastrophe, legal proceedings.
Management's plans and the auditor's conclusion
| Situation | Reporting outcome |
|---|---|
| Substantial doubt alleviated by management's plans, adequate disclosure | Unmodified opinion; emphasis-of-matter is not required but may be added |
| Substantial doubt remains, adequate disclosure | Unmodified opinion + separate section headed "Substantial Doubt About the Entity's Ability to Continue as a Going Concern" |
| Substantial doubt remains, inadequate disclosure | Qualified or adverse opinion (GAAP departure) |
EXAM TIP: A going-concern paragraph does not make the opinion qualified. The opinion stays unmodified — the doubt is communicated in an additional section. Auditors also may not use conditional language like "if the company is unable to continue…"