You are the auditor of GOGO Ltd. For year ended December 31,  20×6.
The summarized financial statements for year ended Dec. 31, 20×6 are:


The audit report is required by April 20, 20×7.

You are concerned with the continuous losses and deteriorating liquidity position.

The management has stated that the situation is expected to be reversed by end of net year and therefor going concern qualification would not be required. In support of their assertions following forecast financial statements have been submitted for your review.


The forecast assumes an increase in selling price by 5%

You are required to set out audit procedures to be performed to evaluate appropriateness of going concern assumption.

Relevant procedures to evaluate appropriateness of going concern assumption will be:

You are concerned with the continuous losses and deteriorating liquidity position.

1. Analysis of income statement, balance sheet and cash flow forecast

a) Increase in selling price may result in losing some customers. Has the company considered decrease in volume?

b) Increase in selling should be accompanied by increase in selling expenses like salesmen commission, advertisement, delivery expenses and bad debts the impact of such increase has not been considered in the forecast.

c) Cost of sales ratio has been decreased from 88% to 80%. Is it practicable to reduce material waste, labor rates or overheads? If labor cost is reduced due to curtailment of work force, has provision been made for redundancy costs?

d) Receivable collection period is reduced from 122 days to 91 days. Is it practicable to reduce credit limit? If cash discounts are allowed to reduce collection period, the profit and loss should have include the discount expense.

e) Average settlement period to suppliers is increased from 93 to 118 days.
Will the suppliers agree for increase in payment period?

Provision for discounts lost have not been made.

f) Share capital has been increase.d. What are the possibilities that the shareholder will subscribe to rights issue?

g) Sale of certain idle fixed assets has been contemplated. Are there sufficient idle fixed assets available for disposal without interrupting the operations?

2. Review events from January 1 to April 20, 20×7 affecting entity’s ability to continue as going conc.

3. Analyzed and discus interim financial statements to March 31, 20×7

4. Read minutes of the meetings of the board of directors and important committees for reference to resolve finical difficulties.

5. Inquire entity’s lawyers regarding litigation and claims.

ISA 570, Going concern, requires that when events or conditions have been identified which may cast significant doubt on the entity’s ability to continue as a going concern, the auditor should reviews management’s plan for future actions based on its going concern assumptions. Such plans may include liquidating some assets, borrow money or restructure dept reduce or delay expenditure or increase capital.

Audit procedures that are relevant in this regard include analyzing and discussing cash flow, profit and other relevant forecasts with the management. 

While you were performing risk assessment procedures and further audit procedure you have noted that current liabilities of your client Gloomy Enterprises at December 31, 20×8 exceeds its total assets significantly. The companies financing arrangements expire and amount outstanding are payable by March 20, 20×9 Negotiations for replacement financing are under process.

The discussed the matter with the management and indicated that the audit report may be qualified The management has given you its plans for further action including forecast cash flow statement. Along with timecast balance sheet and profit and loss statement for the next accounting period. The forecast cash flow reflects increase in cash and equivalent by Rs. 770,000. Other relevant data includes:


State the matters you would future investigate and discuss with the management arising from review of the forecast.

The matters to be investigated and discussed with the management will include:

1. Sales reflect an increase by 40%. Are there certain confirmed orders? What is the value of sales at the time the forecast is being reviewed? How does it compare with annual forecast sales?

2. No of days in receivables are reduced from 91 to 69 days. This sounds to be unrealistic and such a large reduction may not be

3. Inventory levels as compared to cost of sales reflect a significant decline. The entity may not be able to achieve the target.

4. The forecast selling expenses are 12% of sales. Actual were 18%. The estimated is unreasonable particularly as most of the selling expenses vary with sales. Also, a reduction in credit period will involve more cash discounts.

5. Increase in credit period from suppliers may be doubtful Due to financial problems, many suppliers would insist on cash on delivery terms.

6. Further matters to be considered are:

  1. The methods used to develop and apply assumptions
  2. The accuracy of forecasts prepared in prior periods and reasons for significant variances
  3. Management’s compactness and integrity
  4. The extent to which judgments have been used
  5. Documents supporting management assumptions.

During the audit of a manufacturing company, you have noted certain conditions that cast significant doubt on the company’s ability to continue as a going concern. You had a meeting with the CEO of the Company to discuss the issue and communicated your decision that at least an emphasis of matter paragraph in the Audit Report  is.inevitable The CEO disagreed with your opinion and shared with you the management’s plan to deal with the potential going-concern uncertainty. The plan mainly constitutes the following measures:

(i) The Company is guaranteed a continuous financial support by the parent company.

(ii) It has recently rescheduled its borrowing facilities.

(iii) The management has plans to reduce overheads and administrative expenses.

(iv) the management had decided to discontinue a segment with nonprofitable operations.

(v) The management has plans to increase equity and

(vi) The management is expecting profitable operations in the next year.

Describe the audit procedures that should be performed to gather sufficient appropriate audit evidence to support the validity of the CEO’s claims and assess the viability of the above measures being taken by the management.

Following procedures are to be performed to assess practicability of management plans.

(i) Financial support from parent company-
– Obtain copy of legally binding agreement between parent and subsidiary.
– Assess capability of parent to support subsidiary.

(ii) Rescheduling borrowings
– Rescheduling borrowings
– Obtain confirmation from bank.

(iii) Reduction of overheads
– Study the minters of the Board of directors
– Assess practicability to reduce overheads.

(iv) Discontinuation of segment
– Study the minutes of the Board of directors
– Consider impact of disposal
– Obtain sale agreement.

(v) Issuance of new shares
– Study the minutes of the Board of directors
– Study permission from capital issuance authority to issue new shares.

(vi) Profitable operations
– Obtain assumptions used to prepare forecast
– Assess reasonableness of assumption
– Carry out arithmetical check
– Check whether the forecasts are consistent with assumptions.
– Study latest interim accounts to compare year to date results with forecast.

You are the manager in charge on the audit financial statements of Haroon Private Limited. During the course of audit you noticed certain conditions which created significant doubts about the validity of the going concern assumptions.

You have discussed the issue with the client which further revealed that the management has developed certain plans to cope with the situation but on the basis of your assessment of their plans, you concluded that the going concern assumption is no more appropriate.

(a) Advise the client as to what should be done in the circumstances. 

(b) What procedures would you perform if the management to your proposals?

(c) If the management does not agree, draft appropriate modifications for inclusion in the audit report. (You may assume necessary details)

(a) If the auditor believes that the entity is not a going concern, the auditor should ask the management to prepare financial statements at break up value basis.

Assets should be valued at recoverable amount, current and non current classification is not to be made and additional liabilities arising from liquidation should be recognized.

(b) Proper application of alternative approach is to be considered by
the auditors. If the accounting treatment and disclosures are appropriate, an unqualified opinion may be given.

(c) In our opinion, because of the matters discussed in the preceding, the financial statements do not give as true and fair view of the financial position of Haroon Private Limited as of December 31, 2008, and of its financial performance and its cash flows for the year then ended, in accordance with International Financial Reporting Standards.

Posted on November 4, 2015 in Going Concern

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