Kirk Keller, CPA, was about to express an unmodified opinion on the audit of Lupton Television Broadcasting Company when he received a letter from Lupton’s independent counsel. The letter stated that the Federal Communications Commission has notified Lupton that its broadcasting license will not be renewed because of some alleged fraud in its broadcasting practices. Lupton cannot continue to operate without this license. Keller has also learned that Lupton and its independent counsel plan to take all necessary legal action to retain the license. The letter from the independent counsel, however, states that a favorable outcome of any legal action is highly uncertain. Based on this information, Keller should
Express an unmodified opinion with disclosure of the event in a separate emphasis-of-matter paragraph of his report.
According to AU-C 570, an evaluation should be made as to whether substantial doubt exists about the entity’s ability to continue as a going concern for a reasonable period of time, not to exceed 1 year beyond the date of the financial statements. If the auditor reaches this conclusion after identifying conditions and events that create such doubt and after evaluating management’s plans to mitigate their effects, (s)he should consider the adequacy of disclosure and include an emphasis-of-matter paragraph (after the opinion paragraph) in the report. This paragraph should use the phrases “substantial doubt” and “going concern,” but it should not contain conditional language. If the entity’s disclosure is inadequate, the material misstatement requires modification of the opinion. By itself, however, the substantial doubt does not require a modified opinion or a disclaimer of opinion. But AU-C 570 does not preclude issuing a disclaimer of opinion in cases involving uncertainties.