Francine, a CPA, is planning the audit of Richmond Contractors, a construction company that reports under ASPE. Francine notes the following with respect to Richmond:

• Richmond records revenue using the percent of completion method, using costs to date to total estimated costs to record the revenue earned.

• Francine notes that Richmond has significant accounts receivable and in the past, the allowance for doubtful accounts has been a good estimate of the actual uncollectible amounts.

• The company has inventory on hand, primarily goods needed for the projects in process. There is also inventory left over from past jobs. Management claims this leftover inventory can be reused. Francine notes some of this inventory is over two years old. The amount is material.

• The largest assets on the balance sheet include an office building and heavy equipment.

• Several years ago, Richmond purchased a competitor, which resulted in a large balance of goodwill on the balance sheet.

• Richmond has not been profitable the past two years. Competition in the construction industry has meant the company needs to bid low to be awarded any contracts. In addition, there have been some substantial cost overruns on the largest contracts in the past year.
• During the year, Richmond decided to withdraw from a contract it determined it could not complete, and the property owner is suing the company for damages. If the property owner is awarded a large payment for damages, Richmond is not sure how it will settle it.
• The company’s line of credit and lending capacity is at its maximum.
• In order to encourage cost management, the company implemented a stock option plan for employees during the year.
Required

a. Discuss the factors that question whether Richmond is a going concern and what Francine should do in this situation when planning the audit.

b. What estimates should Francine expect to see in the financial statements of Richmond? Discuss each with respect to estimation uncertainty.

c. What is Francine required to do with respect to the accounting estimates?