Tag (SQ): Material Uncertainty

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  • 20 Marks

AAA – L3 – Q3 – Going Concern

Audit manager reviews a client with going concern issues where directors refuse to disclose a required note in financial statements.

As the Audit Manager of Zelton & Associates, you are responsible for conducting reviews on audit files where there is potential disagreement between your firm and clients.

You are looking at DuaKonta LTD’s audit file’s going concern section. DuaKonta LTD is a client with severe cash flow issues as well as other, less significant operational signs of going concern issues.

According to the working papers, DuaKonta LTD is now attempting to raise funds to support its operating cash flows, and if the funds are not obtained, there will be serious uncertainty over the company’s ability to continue as a going concern. After reviewing the working papers, it came to light that the going concern assumption is appropriate. However, it is advised that the financial statements include a note outlining the company’s cash flow issues, a description of the financing being sought and an assessment of the company’s going concern status. The Directors of DuaKonta LTD do not wish to include the note in the financial statements.

Required:
a) Compare and contrast the responsibilities of Management and of Auditors, in relation to the assessment of going concern. You should include a description of the procedures used in this assessment where relevant.

b) Consider and comment on FOUR possible reasons the Directors of DuaKonta LTD are reluctant to provide the note to the financial statements.

c) Identify and discuss the implications for the auditor’s report if:
i) The directors refuse to include the disclosure note.
ii) The directors agree to include the disclosure note

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  • 1 Marks

AAA – L3 – SA – Q4.10 – Reporting

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

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

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  • 12 Marks

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.

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.

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  • 15 Marks

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 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.

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  • 15 Marks

AAA – L3 – Q60 – Evaluation and review

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

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.

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