Question

On February 25, 2005, Ernst & Young LLP issued the following opinion about the financial statements of Northwest Airlines:
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Northwest Airlines Corporation as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2004. Our report dated February 25, 2005 expressed an unqualified opinion thereon.
On September 14, 2005, Northwest Airlines filed for bankruptcy. On March 13, 2006, Ernst & Young LLP issued the following opinion about the financial statements of Northwest Airlines:
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated balance sheets of Northwest Airlines Corporation (Debtor-in-Possession) as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2004. Our report dated March 13, 2006 expressed an unqualified opinion thereon and included explanatory paragraphs related to (i) the Company's reorganization under Chapter 11 of the United States Bankruptcy Code, (ii) the Company's ability to continue as a going concern, and (iii) the change in method of recognizing certain pension plan administrative expenses associated with the Company's defined benefit pension plans.
Surely, Ernst & Young realized that Northwest was in serious financial difficulty as of early 2005.
a. Do you think that Ernst & Young provided adequate warning to users of Northwest's financial statements as of February 25, 2005?
b. Whose responsibility is it to recognize and report problems regarding the going-concern status of a company? Review Exhibit 14.3 and briefly describe the main steps the auditor should follow when assessing the going concern status of a company.
c. Auditors cannot predict the future. Given this, what should the auditor's responsibility be to determine whether a company is likely to remain in operation as a going concern?
d. Why might Ernst & Young have been reluctant to issue an audit report highlighting problems regarding the going-concern status of Northwest Airlines in early 2005?



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  • CreatedSeptember 22, 2014
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