22) Going Concern

Question 1

what are the two types of insolvency?

Answer 1

• factual
• commercial

Question 2

what is factual insolvency?

Answer 2

L>A (fairly valued)

Question 3

what is commercial insolvency?

Answer 3

company cannot pay debts when they become due

Question 4

what happens if a company meets commercial / factual insolvency?

Answer 4

will not automatically be insolvent; these just indicate liquidity issues

Question 5

what is the resp of mgmt with regards to GC?

Answer 5

assess whether and conclude whether the company is a GC and prepare the FS accordingly

Question 6

what will mgmt use to make their judgement about GC?

Answer 6

• prev/interim FS
• forecasts, budgets

Question 7

what is the resp of the auditor with regards to GC?

Answer 7

• obtain sufficient audit evidence about the appropriateness of mgmt’s use of the GC assumption
• conclude about any material uncertainty regarding the GC

Question 8

what if there is no mention of GC uncertainty in the auditors report?

Answer 8

is not a guarantee that the entity is a GC

Question 9

what are operating indicators of an incorrect GC assumption?

Answer 9

• intentions of mgmt to liquidate
• loss of key mgmt without repl.
• loss of major market

Question 10

what is a letter of support?

Answer 10

NOT LEGALLY BINDING
document in which a parent undertakes to financially support a subsidiary with GC issues

Question 11

what is the purpose of a letter of support for the auditor?

Answer 11

provides them with certainty about the GC of the subsidiary

Question 12

what is a guarantee?

Answer 12

LEGALLY BINDING
the parent guarantees to pay some/all of the debts of the subsidiary

Question 13

what is a subordination agreement?

Answer 13

legal agreement which establishes one debt as ranking behind others in the priority for collecting debtor repayments