Question Tag: Financial Distress

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AAA – Nov 2018 – L3 – Q4 – Review of Subsequent Events and Going Concern Assumptions

Assessing a company's ability to continue as a going concern and forming an audit opinion on material uncertainties

Question

You are an audit senior in a firm of Chartered Accountants. You are about to commence work on the audit of B & Z Pharmaceuticals Limited, a family-owned and managed limited liability company. You have been informed by a business contact that the company has not been trading very successfully and is having difficulties with its bankers. However, you are not aware of any specific details.

The Engagement Manager on the audit is also aware of this information and is concerned about the ability of B & Z Pharmaceuticals Limited to continue in business for the foreseeable future. He has asked you to visit the company to ascertain the current state of affairs.

Required:

a. Prepare a list of questions that you would wish to ask and details of any information that you would wish to obtain from the Finance Director of B & Z Pharmaceuticals Limited, to enable you to identify indicators and assess the ability of the company to continue as a going concern. (16 Marks)

b. Explain briefly the audit opinion that you would give, assuming you concluded, after carrying out appropriate audit procedures, that there was a material uncertainty regarding the ability of the company to continue in business and management has included appropriate disclosures in the financial statements. (You are not required to draft the audit report). (4 Marks)

Answer

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Tags: Audit opinion, Audit Procedures, Financial Disclosures, Financial Distress, Going Concern
Level: Level 3

Topic: Review of Subsequent Events and Going Concern Assumptions

AAA – May 2018 – L3 – SC – Q6 – Risk Management in Audits

Identify and explain audit procedures to assess the going concern of Reliance Ventures Limited and steps if going concern assumption is invalid.

Question

Reliance Ventures Limited has been trading in imported goods for many years. The company’s fortune has started to diminish as a result of the current economic environment. Your firm has been the auditor of the company in the last three years. You have noticed that the shareholders’ equity of the company has been eroded and is currently in deficit. This condition has raised significant doubt on the entity’s ability to continue as a going concern.

Required:

Identify and explain FOUR audit procedures to be performed by the audit team to determine the going concern status of the company. (10 Marks)
Discuss FOUR of the steps that the auditor should take if he considers that the going concern assumption is invalid whereas management considers it to be valid. (5 Marks)

Answer

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Tags: Audit Procedures, Financial Distress, Going Concern, Management's Assumptions
Level: Level 3

Topic: Risk Management in Audits
Series: MAY 2018

BL – Nov 2020 – L1 – SB – Q2c – Company Law

Differentiate insolvency from bankruptcy and outline consequences of insolvency.

Question

Insolvency occurs when a company is unable to pay its debts.

Required:
i. Distinguish insolvency from bankruptcy.
ii. Explain briefly the consequences of insolvency on a company.

Answer

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Tags: Bankruptcy, Corporate Consequences, Financial Distress, Insolvency
Level: Level 1

Topic: Company Law
Series: NOV 2020

BL – May 2021 – L1 – SA – Q5 – Company Law

Identifying a company's option during financial distress in Nigeria.

Question

Which of the following is an option for a company that is in financial distress in Nigeria?

A. Receivership
B. Subrogation
C. Novation
D. Upsizing
E. Redemption

Answer

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Tags: Corporate Recovery, Financial Distress, Receivership
Level: Level 1

Topic: Company Law
Series: MAY 2021

AA – May 2019 – L2 – Q3 – Audit and Assurance Risk Environment

Discusses audit procedures related to inventory misstatement and indicators and audit procedures for going concern assessment.

Question

Damongo Ltd (Damongo) is a computer hardware specialist and has been trading for over ten years. Damongo is the only hardware specialist listed on the Ghana Stock Exchange within five years after incorporation.

The company is funded partly through overdrafts and loans and also by several large shareholders. The year-end is 31 December 2017. Damongo has experienced significant growth in previous years. However, in the current year, a new competitor, HardWare Specialist Co (HardWare), has entered the market and through competitive pricing has gained considerable market share from Damongo. One of Damongo’s large customers has stopped trading with them and has moved its business to HardWare. In addition, a number of Damongo’s specialist developers have left the company and joined HardWare. Damongo has found it difficult to replace these employees due to the level of their skills and knowledge. Damongo has just received notification that its main supplier who provides the company with specialist electrical equipment has ceased trading.

Damongo is looking to develop new products to differentiate itself from the rest of its competitors. It has approached its shareholders to finance this development, however, they declined to invest further in Damongo. Damongo’s loan is long term and it has met all repayments on time. The overdraft has increased significantly over the year and the directors have informed you that the overdraft facility is due for renewal next month, and they are confident it will be renewed.

The directors have produced a cash flow forecast which shows a significantly worsening position in the coming 12 months. They are confident that the new products being developed is viable. Damongo has trading history of significant growth and they believe it is unnecessary to make any disclosures in the financial statements regarding going concern.

At the year end, Damongo received notification from one of its customers that the hardware installed for the customers’ online ordering system has not been operating correctly. As a result, the customer has lost significant revenue and has informed Damongo that they intend to take legal action against them for loss of earnings. Damongo has investigated the problem post year end and discovered that other work-in-progress is similarly affected and inventory should be written down. The Finance Director believes that as this misstatement was identified after the year end, it can be amended in the 2017 financial statements.

Required:
a) Describe THREE (3) procedures the auditors of Damongo Ltd should undertake in relation to the uncorrected inventory misstatement identified above.
(6 marks)

b) Explain FIVE (5) going concern potential indicators of Damongo Ltd.
(10 marks)

c) Identify SIX (6) going concern audit procedures which you should perform for Damongo Ltd.
(6 marks)

d) The auditors have been informed that Damongo’s bankers will not take a decision on the overdraft facility until after the audit report is completed. The directors have now agreed to include some going concern disclosures. Describe the impact on the audit report of Damongo Ltd if the auditor believes the company is a going concern but that this is subject to a material uncertainty.
(3 marks)

Answer

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Tags: Audit Procedures, Financial Distress, Going Concern, Inventory Misstatement, Material Misstatements
Level: Level 2

Topic: Audit and Assurance Risk Environment
Series: MAY 2019

CSEG – May 2019 – L2 – Q4a – Corporate governance framework

Discuss how inadequate corporate governance contributed to the financial distress in the Ghanaian banking sector.

Question

The banking sector in Ghana has witnessed the withdrawal of licenses of seven indigenous commercial banks by the Bank of Ghana. These banks were in serious financial distress that they had to be taken over by another bank. UT Bank and Capital Bank were taken over by the GCB Bank in 2017 because they were in serious financial distress. The Bank of Ghana in August 2018 created the Consolidated Bank Ghana Limited to take over Unibank, Beige Bank, Sovereign Bank, The Royal Bank, and Construction Bank for similar reasons.

Different views about who or what was to blame for the crisis have been advanced, but many commentators agree that senior bankers and the Bank of Ghana had failed to recognize the early signs or ignored the indicators until it was too late. When companies collapse, there is often evidence of poor corporate governance.

Required:
Discuss FOUR (4) ways in which the difficulties faced by these banks may have been attributable to weak or inadequate corporate governance systems.

Answer

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Tags: Banking Sector, Corporate Governance, Financial Distress, Ghana, Governance Failures
Level: Level 2

Topic: Corporate governance framework
Series: MAY 2019

FM – Nov 2017 – L2 – Q4a – Working Capital Management

Explain the concept of overtrading, its symptoms, and how firms can overcome this situation.

Question

Before the credit crunch, tenanted-pub firms borrowed cheaply in order to buy up back street boozers. But the debt crisis and the resulting slowdown have left the tenanted-pub industry nursing the hangover from hell.” – Financial Times, November 27/28, 2010.

Required:
Explain the term “overtrading” and in your answer show how the financial backers could diagnose (or misdiagnose) the main symptoms of this condition, the various possible causes of such symptoms, and how firms could overcome this situation. (8 marks)

Answer

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Tags: Financial Distress, Liquidity management, Overtrading
Level: Level 2

Topic: Working Capital Management
Series: NOV 2017

AAA – Nov 2018 – L3 – Q4 – Review of Subsequent Events and Going Concern Assumptions

Assessing a company's ability to continue as a going concern and forming an audit opinion on material uncertainties

Question

Required:

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit opinion, Audit Procedures, Financial Disclosures, Financial Distress, Going Concern
Level: Level 3

Topic: Review of Subsequent Events and Going Concern Assumptions

AAA – May 2018 – L3 – SC – Q6 – Risk Management in Audits

Identify and explain audit procedures to assess the going concern of Reliance Ventures Limited and steps if going concern assumption is invalid.

Question

Required:

Identify and explain FOUR audit procedures to be performed by the audit team to determine the going concern status of the company. (10 Marks)
Discuss FOUR of the steps that the auditor should take if he considers that the going concern assumption is invalid whereas management considers it to be valid. (5 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit Procedures, Financial Distress, Going Concern, Management's Assumptions
Level: Level 3

Topic: Risk Management in Audits
Series: MAY 2018

BL – Nov 2020 – L1 – SB – Q2c – Company Law

Differentiate insolvency from bankruptcy and outline consequences of insolvency.

Question

Insolvency occurs when a company is unable to pay its debts.

Required:
i. Distinguish insolvency from bankruptcy.
ii. Explain briefly the consequences of insolvency on a company.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Bankruptcy, Corporate Consequences, Financial Distress, Insolvency
Level: Level 1

Topic: Company Law
Series: NOV 2020

BL – May 2021 – L1 – SA – Q5 – Company Law

Identifying a company's option during financial distress in Nigeria.

Question

Which of the following is an option for a company that is in financial distress in Nigeria?

A. Receivership
B. Subrogation
C. Novation
D. Upsizing
E. Redemption

Answer

Find Related Questions by Tags, levels, etc.

Tags: Corporate Recovery, Financial Distress, Receivership
Level: Level 1

Topic: Company Law
Series: MAY 2021

AA – May 2019 – L2 – Q3 – Audit and Assurance Risk Environment

Discusses audit procedures related to inventory misstatement and indicators and audit procedures for going concern assessment.

Question

Required:
a) Describe THREE (3) procedures the auditors of Damongo Ltd should undertake in relation to the uncorrected inventory misstatement identified above.
(6 marks)

b) Explain FIVE (5) going concern potential indicators of Damongo Ltd.
(10 marks)

c) Identify SIX (6) going concern audit procedures which you should perform for Damongo Ltd.
(6 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit Procedures, Financial Distress, Going Concern, Inventory Misstatement, Material Misstatements
Level: Level 2

Topic: Audit and Assurance Risk Environment
Series: MAY 2019

CSEG – May 2019 – L2 – Q4a – Corporate governance framework

Discuss how inadequate corporate governance contributed to the financial distress in the Ghanaian banking sector.

Question

Required:
Discuss FOUR (4) ways in which the difficulties faced by these banks may have been attributable to weak or inadequate corporate governance systems.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Banking Sector, Corporate Governance, Financial Distress, Ghana, Governance Failures
Level: Level 2

Topic: Corporate governance framework
Series: MAY 2019

FM – Nov 2017 – L2 – Q4a – Working Capital Management

Explain the concept of overtrading, its symptoms, and how firms can overcome this situation.

Question

Answer

Find Related Questions by Tags, levels, etc.

Tags: Financial Distress, Liquidity management, Overtrading
Level: Level 2

Topic: Working Capital Management
Series: NOV 2017

Question Tag: Financial Distress

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AAA – Nov 2018 – L3 – Q4 – Review of Subsequent Events and Going Concern Assumptions

Assessing a company's ability to continue as a going concern and forming an audit opinion on material uncertainties

AAA – May 2018 – L3 – SC – Q6 – Risk Management in Audits

Identify and explain audit procedures to assess the going concern of Reliance Ventures Limited and steps if going concern assumption is invalid.

BL – Nov 2020 – L1 – SB – Q2c – Company Law

Differentiate insolvency from bankruptcy and outline consequences of insolvency.

BL – May 2021 – L1 – SA – Q5 – Company Law

Identifying a company's option during financial distress in Nigeria.

AA – May 2019 – L2 – Q3 – Audit and Assurance Risk Environment

Discusses audit procedures related to inventory misstatement and indicators and audit procedures for going concern assessment.

CSEG – May 2019 – L2 – Q4a – Corporate governance framework

Discuss how inadequate corporate governance contributed to the financial distress in the Ghanaian banking sector.

FM – Nov 2017 – L2 – Q4a – Working Capital Management

Explain the concept of overtrading, its symptoms, and how firms can overcome this situation.

AAA – Nov 2018 – L3 – Q4 – Review of Subsequent Events and Going Concern Assumptions

Assessing a company's ability to continue as a going concern and forming an audit opinion on material uncertainties

AAA – May 2018 – L3 – SC – Q6 – Risk Management in Audits

Identify and explain audit procedures to assess the going concern of Reliance Ventures Limited and steps if going concern assumption is invalid.

BL – Nov 2020 – L1 – SB – Q2c – Company Law

Differentiate insolvency from bankruptcy and outline consequences of insolvency.

BL – May 2021 – L1 – SA – Q5 – Company Law

Identifying a company's option during financial distress in Nigeria.

AA – May 2019 – L2 – Q3 – Audit and Assurance Risk Environment

Discusses audit procedures related to inventory misstatement and indicators and audit procedures for going concern assessment.

CSEG – May 2019 – L2 – Q4a – Corporate governance framework

Discuss how inadequate corporate governance contributed to the financial distress in the Ghanaian banking sector.

FM – Nov 2017 – L2 – Q4a – Working Capital Management

Explain the concept of overtrading, its symptoms, and how firms can overcome this situation.

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Question Tag: Financial Distress

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AAA – Nov 2018 – L3 – Q4 – Review of Subsequent Events and Going Concern Assumptions

Assessing a company's ability to continue as a going concern and forming an audit opinion on material uncertainties

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AAA – May 2018 – L3 – SC – Q6 – Risk Management in Audits

Identify and explain audit procedures to assess the going concern of Reliance Ventures Limited and steps if going concern assumption is invalid.

You're reporting an error for "AAA – May 2018 – L3 – SC – Q6 – Risk Management in Audits"

BL – Nov 2020 – L1 – SB – Q2c – Company Law

Differentiate insolvency from bankruptcy and outline consequences of insolvency.

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BL – May 2021 – L1 – SA – Q5 – Company Law

Identifying a company's option during financial distress in Nigeria.

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AA – May 2019 – L2 – Q3 – Audit and Assurance Risk Environment

Discusses audit procedures related to inventory misstatement and indicators and audit procedures for going concern assessment.

You're reporting an error for "AA – May 2019 – L2 – Q3 – Audit and Assurance Risk Environment"

CSEG – May 2019 – L2 – Q4a – Corporate governance framework

Discuss how inadequate corporate governance contributed to the financial distress in the Ghanaian banking sector.

You're reporting an error for "CSEG – May 2019 – L2 – Q4a – Corporate governance framework"

FM – Nov 2017 – L2 – Q4a – Working Capital Management

Explain the concept of overtrading, its symptoms, and how firms can overcome this situation.

You're reporting an error for "FM – Nov 2017 – L2 – Q4a – Working Capital Management"

AAA – Nov 2018 – L3 – Q4 – Review of Subsequent Events and Going Concern Assumptions

Assessing a company's ability to continue as a going concern and forming an audit opinion on material uncertainties

You're reporting an error for "AAA – Nov 2018 – L3 – Q4 – Review of Subsequent Events and Going Concern Assumptions"

AAA – May 2018 – L3 – SC – Q6 – Risk Management in Audits

Identify and explain audit procedures to assess the going concern of Reliance Ventures Limited and steps if going concern assumption is invalid.

You're reporting an error for "AAA – May 2018 – L3 – SC – Q6 – Risk Management in Audits"

BL – Nov 2020 – L1 – SB – Q2c – Company Law

Differentiate insolvency from bankruptcy and outline consequences of insolvency.

You're reporting an error for "BL – Nov 2020 – L1 – SB – Q2c – Company Law"

BL – May 2021 – L1 – SA – Q5 – Company Law

Identifying a company's option during financial distress in Nigeria.

You're reporting an error for "BL – May 2021 – L1 – SA – Q5 – Company Law"

AA – May 2019 – L2 – Q3 – Audit and Assurance Risk Environment

Discusses audit procedures related to inventory misstatement and indicators and audit procedures for going concern assessment.

You're reporting an error for "AA – May 2019 – L2 – Q3 – Audit and Assurance Risk Environment"

CSEG – May 2019 – L2 – Q4a – Corporate governance framework

Discuss how inadequate corporate governance contributed to the financial distress in the Ghanaian banking sector.

You're reporting an error for "CSEG – May 2019 – L2 – Q4a – Corporate governance framework"

FM – Nov 2017 – L2 – Q4a – Working Capital Management

Explain the concept of overtrading, its symptoms, and how firms can overcome this situation.

You're reporting an error for "FM – Nov 2017 – L2 – Q4a – Working Capital Management"

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