Assume FS prepared on GC basis in business rescue. Discuss effect of audit report with understanding that a material uncertainty regarding GC exists
- Consider whether the use of GC assumptions is appropriate
- Consider whether these events and conditions may cause significant doubt
- Consider that company might only be GC in foreseeable future if business rescue is success
- If business rescue plan is not successful significant uncertainty would exist
- Consider if it constitutes subsequent event ito ISA 560
- Consider adjusting or non-adjusting events ISA510 (existed prior to YE it is adjusting)
- Auditor can reasonably conclude use of GC is appropriate
- If mngt refuses to change basis,express adverse opinion
Improve the financial position of company
- Additional Capital obtained (rights issue)
- Land and buildings need to be revalued and non-distribution reserves created
- Reduce discretionary costs wherever possible
- Interest burden reduced by reducing overdraft with cash generated by decreasing debtors and stock levels
- Negotiate with bank for an alternative long term loan with lower interest rate
- Negotiate with trade creditors
- Identify loss making and low profit lines and discontinue these
- Re-evaluate assets to identify further items not required
- Delay any planned capital expenditures
- Evaluate running expenses and identify areas where these can be decreased
Evaluate management assessment
- Auditor needs to consider same period as management (IAS1)
- Consider if management assessment is complete
- Inquire with management if they have knowledge of events beyond assessment period
Going Concern at assertion level
- Care more about presentation and disclosure
- Management may have an incentive to mistake due to
1. Factual insolvent s22
2. Covenants
3. Raising more funding
Overstate revenue - occurrence
Understate cost- completeness
Overstate assets - existence/valuation
Understate liabilities - completeness / valuation
Classification - short-term and long term assets and liabilities
Will the company return to profitability?
- Obtain and evaluate from plan, budgets and financial projections
- Obtain and inspect copies of contracts for new orders and evaluate effect these will have on profitability of the company
- Obtain and evaluate on undertaking from major SH/H that they will inject capital
- Obtain copies of arrangement with bank for replacing current long term borrowings with a new loan
- Inspect terms of bank overdraft and written confirmations
What would increase the risk that going concern basis of accounting is appropriately applied
- Company incurred a sizeable loss in FY
- Solvency situation has deteriorated significantly resulting in factual insolvency
- Liquidity position is weak and has deteriorated eg do current ratio
- No cash on hand and large overdraft
Actions of audit team if Co is insolvent and won’t return to profitability
- Consider full RI in terms of s45 of API
- Consider s22 (apply to scenario)
- Consider of they should have considered a business rescue s129 of Companies Act
- Found guilty of common law
- S77
Impact on auditors report
- Use of GC would appear to be inappropriate, AFS should be prepared on a liquidation basis with full disclosure
- An adverse auditors opinion (material and pervasive)
- FS should be prepared on a liquidation basis “emphasis of matter section”
- Since we have RI deal with it in the auditors report under “ Report on other legal and regulatory responsibilities”
Audit procedures on the reasonability of cash flows on going concern
- Enquire from directors who was responsible for preparing CF and evaluate the process followed
- Inspect forecasts that it covers
- Compare the forecasts in PY to actual figures
- Compare CF figures to actual figures
- Compare data used in forecasts to audited data to ascertain the accuracy
- Evaluate assumptions made eg growth forecasts, industry norms
- Evaluate whether forecasts take into account all indicators casting doubt on GC
- Reperform arithmetic calculations
- Request that directors include reference to the appropriateness of key assumptions
- Inspect correspondence with banks on the willingness to increase bank overdraft
- Compare the amounts in forecasts on a month to month basis and investigate unusual fluctuations
- Enquire additional information affecting CF
- Obtain CF forecast from mngt indicating expected CF
- Enquire from xxx process followed to compile forecast and identify person involved
- Evaluate Competency of persons who prepared forecast ISA 620
- Inspect minutes that CF forecast was evaluated for reasonableness
- Confirm availability of loan and overdraft facilities with bankers and other credit providers
- Agree by inspection data used in preparing forecast to support documents
- Perform ARP to compare figures used in forecasts to comparable figures
Audit Plan: Going Concern
.1 Risk assessment procedures – nature, extent, timing
* Nature
the procedures will be conventional, i.e. inquiry, analytical procedures and
inspection and will centre around management’s assessment of going concern.
Extent:
the extent of risk assessment procedures will depend upon many factors but will be most affected by the perceived future uncertainties which face the company and which may affect its going concern ability. There is no “one size fits all” when assessing risk, the circumstances and level of uncertainty will vary considerably from company to company.
Timing:
although the auditor may do some work on going concern at interim visits to the client, the major thrust of the risk assessment procedures will be centred around the financial year end audit. The most current and up to date information is required to make an appropriate assessment.
Risk Assessment procedures: Going Concern
Financial:
- The company is in a net liability or net current liability position
- Fixed term borrowing are approaching maturity
- Excess of reliance on short term and long term liability
-indications of withdrawal of financial support by suppliers and other creditors
-Adverse key ratios
-negative operating cash flows
- Inability to pay creditors
-change from credit to cash-on-delivery transactions with suppliers
- inability to obtain financing for essential new product development or other essential
investments.
Operating:
- management intentions to liquidate the entity or to cease operations
- loss of key management without replacement
- loss of a major market, franchise, licence, or principal supplier
- labour difficulties e.g. strikes, go slows, lack of skills
- shortage of important supplies e.g. raw materials
- technological obsolescence
- threats from cheap imported goods
- emergence of high successful competitors
Identify and discuss the matters that the group auditor should consider, and the actions should take, following the communication received from the component auditor (xy Parent)
-As x is a significant component of the group, representing 20% of consolidated assets, xy as group auditor should obtain sufficient and appropriate audit evidence on the financial
statements of x to base the group audit opinion on
Considering reliance on the work of the subsidiary auditor:
-To do this we should consider whether they are qualified, independent and have performed the work without restriction and limitation (ISA 600)
- Scope limitation exist and we cannot place reliance
-If we cannot rely on the subsidiary auditors, we as group auditors should perform sufficient and appropriate audit procedures to obtain the assurance ourselves
-Consider the accuracy and reliability of the internal budge
-Consider the integrity of the (subsidiary) management and the reasons for restricting access
-Consider whether xy management are aware of/party to Canada Auditors being denied access to the information (integrity).
-Consider the impact on the group financial statements,
*Consider KAM eg impairment
-Consider the impact of the possible impairment and managements response on the risk assessment on the audit of xy (fraud risk) from a group perspective:
-Consider the audit responses applied by the component auditors to this increased risk assessment
-Impact it can have on going concern of the group financials.
-Should the management/directors of xy not allow access to the information requested by yourself, consider if there is a possibility of a Reportable Irregularity
-Audit opinion: We should come to an overall conclusion on the possible qualification of the group
audit report:
sufficient appropriate audit evidence was obtained in support of the audit opinion on the
group financial statements; or
-There has been a limitation of scope on the audit performed by not being given access to an independent expert; the fact the Audit Profession Act will require the group audit report to be qualified if the group audit was not carried out free of restriction (sec 44(2) &(3))
ACTIONS TO TAKE AS GROUP AUDITOR
-Request those charged with governance of xy (audit committee) to instruct x management to allow Canada Auditors access to all information
- Requesting access to the
information through the directors of xy
-Obtain an independent valuation using an expert ISA 620
-Communicate the problems experienced regarding the subsidiary valuation of the plant/ group audit of the plant to those charged with governance
-MRL
General notes on going concern
- Auditor assesses going concern on completeness and accuracy If
Company is no longer a going concern:
- Placed in business rescue
- It can be liquidated
- AFS are prepared on a liquidation basis
- In a liquidation all assets are sold and the cash is used to settle the liabilities of the company
No longer a going concern
- Business rescue
- Can be liquidated
