Going Concern – Knowsia

AAA – L3 – SA – Q4.10 – Reporting

What should an auditor do if a material uncertainty about going concern is disclosed?

Question

A company prepares its financial statements on a going concern basis, but a material uncertainty exists about the ability of the company to continue as a going concern which is fully disclosed by management in the financial statements. In this situation, what shall the auditor do?

A The auditor’s report shall contain a ‘Material Uncertainty Related to Going Concern’ paragraph

B The auditor’s report shall state an adverse opinion

C The auditor’s report shall state a disclaimer of opinion

D The auditor’s report shall contain an ’emphasis of matter’ paragraph

Answer

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Tags: Auditor’s Report, Disclosure, Financial Statements, Going Concern, Material Uncertainty
Level: Level 3

Topic: Reporting

AAA – L3 – SA – Q1.10 – Audit Opinion

Audit opinion for disclosed zero-interest loan.

Question

If a client has a loan from another group company at zero rate of interest and discloses it in a note to the financial statements, what is the correct audit opinion?

A It depends whether the item is material

B Qualified opinion, ‘except for’

C Qualified opinion, ‘adverse’

D Unqualified

Answer

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Tags: Audit opinion, Financial Statement Disclosure, Going Concern, ICAG
Level: Level 3

Topic: Reporting

AAA – L3 – SA – Q1.8 – Going Concern Audit

Incorrect statement about going concern audit.

Question

Which of the following is NOT true about audit of the appropriateness of management’s use of the going concern basis of accounting?

A The auditor must assess the appropriateness of the going concern basis of accounting.

B Auditing the cash flow forecast is a good source of audit evidence.

C Written representations are usually sufficient on their own.

D If there a material uncertainty exists with regards to going concern, an unmodified audit opinion is possible if a Material Uncertainty Related to Going Concern paragraph is included.

Answer

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Tags: Audit Evidence, Audit opinion, Going Concern, ICAG
Level: Level 3

Topic: Evaluation and review

Question Title: AA – L2 – Q71 – Subsequent Events

Describe auditor's responsibilities for subsequent events between year-end and report signing, and post-signing to issuance.

Question

You are an audit senior for an audit firm and are currently working on the audit of TechWorks Co, a company which produces sophisticated electronic laboratory equipment. The company imports a high proportion of the components it uses from China. The equipment is used by some laboratories dealing with hazardous chemicals.

As the audit draws to a close, the partner in charge has asked you to ensure that all procedures relating to subsequent events and going concern are properly performed. You are to consider the audit work to be performed in relation to ISA 560 Subsequent Events and ISA 570 Going Concern.

Required:
(a) Describe the auditor’s responsibilities for subsequent events occurring between:
(i) The year-end date and the date the auditor’s report is signed.
(ii) The date the auditor’s report is signed and the date the financial statements are issued. (6 marks)

(b) Going concern relates to the judgement that an entity will continue to trade for the foreseeable future.

(i) Explain the responsibilities of directors and auditors in relation to going concern. (3 marks)

(ii) Explain the audit procedures that audit could carry out when conducting the going concern review of TechWorks Co.

(c) TechWorks Co has an internal audit function. The partner in charge of the audit is seeking clarification regarding how any deficiencies in internal control should be identified and communicated to management. The partner feels the report produced by the external auditors may duplicate the produced by the internal audit function.

Required:
Explain how the purpose and content of an internal auditor’s report on internal control deficiencies differs from one prepared by the external auditor.

Answer

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Tags: Audit Procedures, Going Concern, ISA 570, Responsibilities
Level: Level 2

Topic: Internal Audits

AA – L2 – Q68 – Going Concern

Identify further information needed for audit opinion on Luxe Scents due to supplier issues. Outline possible audit report forms for Luxe Scents given supplier financial issues.

Question

Luxe Scents has been in existence, importing perfume, for a number of years. The managing director had built up the business using contacts he already had in the industry. The company imports only one brand of perfume, which is manufactured exclusively by one company. The perfume is distributed via ‘shops within shops’ at 20 branches of a well-known store. Under this agreement, Luxe Scents pays a percentage of its takings to the store, with a minimum annual payment of $50,000 per store.

The audit is nearing completion, but you have just heard that the Italian manufacturer is facing serious financial difficulties and that supplies have ceased.

Required
(a) Set out the further information the auditor would require before reaching an audit opinion.

(b) Set out the possible forms of report that the auditor may issue.

Answer

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Tags: Audit opinion, Audit Reports, Going Concern, Material Uncertainty
Level: Level 2

Topic: AUDIT REPORT

AAA – L3 – Q64 – Subsequent events

Identify four financial statement areas relevant to subsequent events review, with relevant post-year-end information and reasons.

Question

Identify four areas of the financial statements to which a review of subsequent events might be relevant. For each area state what kind of information available after the reporting period might be relevant, and why.

Answer

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Tags: Audit Procedures, Financial Statements, Going Concern, Inventory, Payables, Receivables, Subsequent events
Level: Level 3

Topic: Subsequent events

AAA – L3 – Q63 – Audit-related services

Assess audit procedures and alternative audit opinions for Maris Vintages' going concern status due to loan repayment issues.

Question

You are the audit manager in charge of the audit of Maris Vintages, a company which imports and distributes palm wine. In recent years the company has become less profitable due to the large range of palm wines now carried by supermarkets. The draft financial statements for the year ended 30 November 20X8 show that current liabilities exceed current assets by $200,000.
The company’s major source of finance is a bank loan of $500,000 which is due for repayment in full on 31 October 20X5. The company is currently negotiating with its bankers for a replacement long-term loan of $1 million. They intend to use some of the loan to reposition themselves in the marketplace to establish the superiority of their wines over those sold in supermarkets.
The directors submitted a profit forecast with their loan application and are optimistic that their application will be successful. However, they do not expect negotiations to be completed before the annual general meeting in March. Your firm has been asked not to approach the bank directly.

Required
(a) Set out the audit procedures you would perform in order to establish the ability of Maris Vintages to continue as a going concern.
(b) Discuss the alternative audit opinions that might be relevant to the financial statements of Maris Vintages together with the circumstances in which each would be appropriate.

Answer

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Tags: Audit opinion, Audit Procedures, Financial Statements, Going Concern, Loan repayment, Material Uncertainty, Profit forecast
Level: Level 3

Topic: Audit-Related Services

AAA – L3 – Q62 – Audit-related services

Evaluate audit seniors' proposals for auditor’s reports for two clients with going concern and non-disclosure issues.

Question

You are the manager responsible for the audit of two, unrelated, audit clients. In each case you are currently reviewing the audit working papers and the audit seniors’ recommendations for the type of auditor’s report to be issued. Details are as follows:

(1) PrimeTech Laptops is a subsidiary of CoreTech Computers. Serious going concern problems have been noted during this year’s audit. PrimeTech Laptops will be unable to trade for the foreseeable future unless it continues to receive financial support from CoreTech Computers. A letter of support has been received and a copy is filed on the current audit file.
The audit senior has suggested that, due to the seriousness of the situation, the audit opinion should be modified.

(2) During the year, Rania Textiles has made a small loan to one of its directors but this has not been disclosed in the financial statements. Such disclosure is required by local legislation. Your auditor’s report gives an opinion on compliance with such legislation.
The audit senior has suggested that, as the amount involved is small, an unmodified opinion should be issued.

Required:
For each client, comment on the suitability or otherwise of the seniors’ proposals for the auditor’s reports. Where you disagree, indicate what kind of modification (if any) should be given instead

Answer

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Tags: Audit opinion, Auditor’s Report, Compliance, Financial support, Going Concern, Local legislation, Material Misstatement, Non-disclosure
Level: Level 3

Topic: Audit-Related Services

AAA – L3 – Q60 – Evaluation and review

Identify further information needed to assess Jemila Foods' going concern status due to supplier financial difficulties.

Question

Jemila Foods has been in existence, importing foodstuffs such as rice, for a number of years. The managing director had built up the business using contacts he already had in the industry. The company imports only one brand of food which is manufactured exclusively by one company which is based in Bharat. The food is distributed via ‘shops within shops’ at 20 branches of a well-known store. Under this minimum annual payment of $10,000 per store.

The audit is nearing completion but you have just heard that the Bharat manufacturer is facing serious financial difficulties and that supplies have ceased.

Required:

(a) Set out the further information the auditor would require before reaching his audit opinion. (b) Set out the possible forms of report that the auditor may issue.

Answer

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Tags: Audit Procedures, Financial Distress, Going Concern, Material Uncertainty, Supplier Issues
Level: Level 3

Topic: Evaluation and review

AAA – L3 – Q59 – Going Concern

Identify factors indicating that a company may not be a going concern.

Question

You are responsible for the audit of Asante Co, a limited liability company, for the year ended 31 December 20X8. The principal activity of Asante Co is the provision of high-quality packaging services for manufacturing companies. The company was established 3 years ago and has significantly exceeded its growth targets in each subsequent year.

Historically, the packaging process was labour-intensive, but in September 20X8, in an effort to reduce labour costs and increase efficiency, the company invested in an enhanced automated packing system. The investment was funded by a loan repayable in monthly instalments over four years. The loan covenant agreement includes a covenant specifying that the company’s debt:equity ratio should not exceed 1:1.

A comparison of the draft financial statements for the year ended 31 December 20X8 with the previous year indicates a significant increase in revenue with a small increase in profitability. The company is currently trading in excess of its overdraft limit and is negotiating an increase in its facility with the bank. Management has prepared, in support of its negotiations, profit and cash flow forecasts based on the assumptions that the anticipated increase in efficiency and reduction in labour costs will be achieved.

The company struggles to meet the weekly wage bill and has fallen behind with its payments to the taxation authorities. It has also failed to comply with the terms of the lease in respect of the factory premises and has not paid the last 3 months’ instalments.

Required:

(a) Identify, and explain, from the information provided above, factors which indicate that Asante Co may not be a going concern. (b) Outline the matters to which you would direct your attention in the period after the end of the reporting period in order to determine whether Asante Co can continue as a going concern for the foreseeable future.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit Procedures, Cash Flow, Debt Covenant, Financial Distress, Going Concern, Overdraft, Taxation Liabilities
Level: Level 3

Topic: Evaluation and review

Tag (SQ): Going Concern

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AAA – L3 – SA – Q4.10 – Reporting

What should an auditor do if a material uncertainty about going concern is disclosed?

AAA – L3 – SA – Q1.10 – Audit Opinion

Audit opinion for disclosed zero-interest loan.

AAA – L3 – SA – Q1.8 – Going Concern Audit

Incorrect statement about going concern audit.

Question Title: AA – L2 – Q71 – Subsequent Events

Describe auditor's responsibilities for subsequent events between year-end and report signing, and post-signing to issuance.

AA – L2 – Q68 – Going Concern

Identify further information needed for audit opinion on Luxe Scents due to supplier issues. Outline possible audit report forms for Luxe Scents given supplier financial issues.

AAA – L3 – Q64 – Subsequent events

Identify four financial statement areas relevant to subsequent events review, with relevant post-year-end information and reasons.

AAA – L3 – Q63 – Audit-related services

Assess audit procedures and alternative audit opinions for Maris Vintages' going concern status due to loan repayment issues.

AAA – L3 – Q62 – Audit-related services

Evaluate audit seniors' proposals for auditor’s reports for two clients with going concern and non-disclosure issues.

AAA – L3 – Q60 – Evaluation and review

Identify further information needed to assess Jemila Foods' going concern status due to supplier financial difficulties.

AAA – L3 – Q59 – Going Concern

Identify factors indicating that a company may not be a going concern.

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AAA – L3 – SA – Q4.10 – Reporting

What should an auditor do if a material uncertainty about going concern is disclosed?

You're reporting an error for "AAA – L3 – SA – Q4.10 – Reporting"

AAA – L3 – SA – Q1.10 – Audit Opinion

Audit opinion for disclosed zero-interest loan.

You're reporting an error for "AAA – L3 – SA – Q1.10 – Audit Opinion"

AAA – L3 – SA – Q1.8 – Going Concern Audit

Incorrect statement about going concern audit.

You're reporting an error for "AAA – L3 – SA – Q1.8 – Going Concern Audit"

Question Title: AA – L2 – Q71 – Subsequent Events

Describe auditor's responsibilities for subsequent events between year-end and report signing, and post-signing to issuance.

You're reporting an error for "Question Title: AA – L2 – Q71 – Subsequent Events"

AA – L2 – Q68 – Going Concern

Identify further information needed for audit opinion on Luxe Scents due to supplier issues. Outline possible audit report forms for Luxe Scents given supplier financial issues.

You're reporting an error for "AA – L2 – Q68 – Going Concern"

AAA – L3 – Q64 – Subsequent events

Identify four financial statement areas relevant to subsequent events review, with relevant post-year-end information and reasons.

You're reporting an error for "AAA – L3 – Q64 – Subsequent events"

AAA – L3 – Q63 – Audit-related services

Assess audit procedures and alternative audit opinions for Maris Vintages' going concern status due to loan repayment issues.

You're reporting an error for "AAA – L3 – Q63 – Audit-related services"

AAA – L3 – Q62 – Audit-related services

Evaluate audit seniors' proposals for auditor’s reports for two clients with going concern and non-disclosure issues.

You're reporting an error for "AAA – L3 – Q62 – Audit-related services"

AAA – L3 – Q60 – Evaluation and review

Identify further information needed to assess Jemila Foods' going concern status due to supplier financial difficulties.

You're reporting an error for "AAA – L3 – Q60 – Evaluation and review"

AAA – L3 – Q59 – Going Concern

Identify factors indicating that a company may not be a going concern.

You're reporting an error for "AAA – L3 – Q59 – Going Concern"

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