BAC 3624

Advanced Auditing

Tutorial 9 Q & A

Question 1
In the situations stated below identify any potential indicators that the company is
having a going concern problem and describe why these could impact upon the
ability of the company to continue trading on a going concern basis.
Situation 1
Your audit client, Brighton Berhad, is an established manufacturing company. This
company is lately facing stiff competition that its market and demand for its products has
dropped significantly.
ANSWER
What could happen to the company?
If the company is not able to increase the demand for its products then it will struggle to
generate enough operating cash flows leading to going concern difficulties.
Situation 2
Your audit client, Dundee Berhad, needed to invest RM 5 million in plant and machinery
to increase its production and be more competitive. The company wanted to borrow this
sum from the bank but was unable to agree on suitable terms with the bank; therefore the
company used its overdraft facility, which carried a higher rate of interest.
ANSWER
What could happen to the company?
If the company was unable to obtain finance for its investment, then this could indicate
that the banks deem the company to be too risky to lend money to. They may be
concerned that the company is unable to meet its loan payments, suggesting cash flow
problems leading to going concern difficulties.
Situation 3
Your audit client paid its suppliers much later than usual and hence some of the suppliers
have withdrawn credit terms meaning the company must pay cash on delivery. As a result
of the above the companys overdraft balance has grown substantially.
ANSWER
What could happen to the company?
Failing to make payments to suppliers on time could ultimately lead to some of them
refusing to supply goods to the company. Therefore the company may need to find
alternative suppliers and they could be more expensive which will decrease operating
cash flows and profits leading to going concern difficulties.
Situation 4
The directors of Plymouth Berhad, the company you are auditing inform you that the
bank has turned down the companys application for a bank loan. The overdraft facility
the bank has given the company is due for renewal next month, but the directors are
confident that it will be renewed. They also strongly believe that the new products which
they are developing will be ready to market soon and hence trading levels will improve

BAC 3624

Advanced Auditing

Tutorial 9 Q & A

and the company will not have a going concern problem. Therefore they do not intend to
make any disclosures in the accounts regarding going concern.
ANSWER
What could happen to the company?
If the bank does not renew the overdraft and the company is unable to obtain alternative
finance then it may not be able to continue to trade leading to going concern difficulties.
Question 2
Discuss the external auditors responsibilities and the work that the auditor should
perform in relation to the going concern status of companies.
ANSWER
External auditor responsibilities going concern
AI 570 Going Concern deals with this issue
(i) Auditors are required to consider the going concern status of companies and any
disclosures regarding going concern in forming their audit opinion.
(ii) Auditors are required to assess the adequacy of the processes by which directors have
satisfied themselves that the going concern basis is appropriate and that adequate
disclosures have been made
.
(iii) Auditors should make enquiries of the directors and examine appropriate
documentation supporting the companys going concern status.
(iv). Auditors should consider whether the period to which directors have paid particular
attention is adequate. This should normally be at least 12 months from the balance sheet
date.
(v) Auditors need to consider the appropriateness of assumptions which directors have
made.
(vi) Auditors are required to document the extent of any concerns, taking account of
matters that have come to their attention during the course of the audit.
(vii) Indicators of going concern issues would include trading losses, impairment of
assets, net liabilities, defaults on loans, liquidity problems, an inability to refinance loans
where necessary, fundamental changes in the markets or technology having an adverse
effect on the company, loss of management, staff, customers or suppliers, or major
litigation.
(viii) Auditors should consider the need to obtain written management representations.
(ix) Auditors should consider the adequacy of any disclosures in the financial statements.