You are completing your audit of Carleson Motorcycle Manufacturing Company and evaluating the going concern status of the company. Competition from foreign motorcycle makers has been severe. The company incurred losses this year and last year. Management is projecting a loss for next year but a sizable profit in the following year because of the introduction of a new model and anticipated cost reductions. At the audit date, current assets exceed current liabilities although there has been a decline in cash and an increase in inventory. The company is near its long-term borrowing limit.

The company has been slow in paying its suppliers because of the cash shortage, but all suppliers continue to extend normal trade credit. The company's union agreement expires next year, and union leaders have indicated that they expect to obtain large wage increases for their members. Management believes that a new union agreement containing a small wage increase can be reached without a strike.

The company's management is stable and experienced. It has overcome other serious business problems in the past and believes that its current problems can be resolved without substantial disposition of assets outside the ordinary course of business, restructuring of debt, externally forced revisions of its operations, or similar actions.

Required:

Consider the preceding information and decide whether you have substantial doubt as to the ability of the company to continue as a going concern for a reasonable period of time. Support your decision with reasons in a memorandum to the audit manager.