Courtney Heart is completing the audit of Profile Framing Ltd. The framing business is seasonal and very competitive. She discovers that a major long-term debt in the draft financial statements is actually due for repayment two months after the close of the financial year. The company president is negotiating with Profile’s bank to renew the debt for a further two-year term and has been in to see two other banks about arranging new loans. The president has been keeping a close eye on cash flow and negotiating with suppliers about payment terms and extensions of credit. The cash flow for the current year has declined considerably since the year before, and the operating cash flow is negative due to pressure to reduce prices to compete with a discount framing chain that has been opening shops close to Profile’s. With the busy holiday gift season approaching, Profile needs to purchase inventory, but it has no cash and its suppliers have all refused to provide any more goods except on a cash-only delivery basis.

Required:
a. Discuss the liquidity and solvency issues faced by Profile. How do these issues affect Profiles financial statements? Consider the disclosures that should be made regarding its financial condition.
b. Assuming Courtney is satisfied that Profile’s financial statements adequately disclosed the financial uncertainties it is facing, describe the form of opinion and the emphasis of matter paragraph she will include in her audit report.