Case Facts
Peterson Medical Products (PMP) is a medical supplies manufacturer owned by three individuals.
PMP is a C-corporation that began operations in 2004 when a group of doctors in San Diego,
California, discovered a medical device that greatly improved the survival rates of patients following
organ transplant surgeries. The device is made up of two components, which the company
assembles in its warehouse. Due to patented technology, PMP is required to purchase one of the
components exclusively from Bronson Industries, Inc. The other component is not protected by
patents and can be purchased from several suppliers.
Given the companyàinnovation and the success of its products, PMP has been profitable for most
of its existence. However, during the year ended December 31, 20X7, the company generated a loss
from operations and experienced the third-lowest net income in its history. In the three years since
that period, PMPàsales have been steadily decreasing due to increased competition and new
developments in the medical device industry. In an effort to obtain funding for the research and
development of new products, the owners of PMP invited seven additional wealthy investors to
purchase an equity interest in PMP.
In order to provide additional working capital, PMP established a line of credit (LOC) with Charter
Bank during May 20X8. The LOC allows the Company to borrow up to $475,000. No other lines of
credit or unused notes payable existed at year-end. At December 31, 20X8, PMP had not drawn on
its LOC, and the company had a cash balance of $873,650. Given its declining sales trend and its
efforts to research and develop new products, PMP is currently spending $138,500 more cash than
it brings in each month.
Assume that you are an audit manager for KPR & Associates, the public accounting firm that has
been engaged to complete the PMP audit for the period ending on December 31, 20X8. As your
engagement team is completing its audit of PMP on March 17, 20X9, the expectation is that an
unqualified opinion will be issued with respect to the financial statements.
Q1. In accordance with AS 2415, what are KPR & Associates2esponsibilities with respect to
assessing an audit clientàability to continue as a going concern?
Q2. What is the date through which auditors should assess the Companyàability to continue as a
going concern?
Q3. Based on the facts in the case, do you think that KPR & Associates!udit report for the period
ending December 31, 20X8 should include an explanatory paragraph expressing substantial doubt
about PMPàability to continue as a going concern? Why or why not? Provide an explanation using
facts within the case.
Q4. What influence could a going concern modification to the auditoràstandard report have on the
companyàfuture performance? How might these influences impact the auditor-client relationship
and the auditoràwillingness to issue a going concern modification to the audit report?
Q5. Assume that one of PMPàwealthy shareholders extended a line of credit to PMP on March 16,
20X9. Should that type of subsequent event be considered when an auditor is assessing whether
going concern verbiage should be included in the audit report? Explain.
Q6. Assume that the line of credit mentioned above was extended and that KPR included it in its
going concern assessment. What would the minimum amount of the line of credit need to be in
order to provide a sufficient comfort level such that the auditor would not need to include going
concern verbiage in its audit report?

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