Question Tag: Going Concern

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  • 20 Marks

AAA – May 2019 – L3 – Q4 – Review of Subsequent Events and Going Concern Assumptions

Analyze the auditor's objectives, implications of going concern assumptions, directors' responsibilities, and risk assessment for going concern status.

Itanforiti Publishers Limited has been in the printing and publishing business for many years in Ibadan. The company has been performing well with a competitive advantage over many companies in the industry as a result of the engagement of a high-profile team of personnel and in-house printing of its published books.

The board of directors comprises two brothers and their wives. The older brother is the chairman, and the younger, the managing director. The fortunes of the company started dwindling in 2013 when conflicts could no longer be resolved amicably among the members of the board of directors.

The chairman, being a majority shareholder, assumed executive powers by combining the roles hitherto played by the managing director with his own as executive chairman in 2015. Governance of the company became unsettled, and key staff of the organization started resigning in turn.

In 2016, the financial reports of the company revealed its inability to pay creditors, and the supply of raw materials became irregular. In addition, the level of receivables became too high with a significant figure of doubtful and irrecoverable debts.

Your firm acts as auditors to the company, and you have been presented with the financial statements for the year ended 31st December 2017, for audit. The financial statements were prepared on a going concern basis.

Required:
a. Identify and explain the objectives of the auditor in the area of going concern in accordance with International Standards on Auditing (ISA 570). (5 Marks)
b. Explain the going concern assumption and the implications for the financial statements if the entity is not a going concern. (5 Marks)
c. Explain the going concern duties of the directors. (3 Marks)
d. Evaluate the risk assessment procedures to be performed by the auditor on the going concern status of the entity. (ISA 570). (7 Marks)

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  • 20 Marks

AAA – Nov 2014 – L3 – SB – Q3 – Review of Subsequent Events and Going Concern Assumptions

Identify going concern risks for Woes Limited and outline post-reporting date audit matters to assess its ability to continue as a going concern.

You are responsible for the audit of Woes Limited for the year-ended 31 December 2013. The principal activity of Woes Ltd is the provision of high-quality packaging services for manufacturing companies. The company was established three years ago and has significantly exceeded its growth targets in each of those years.

Historically, the packaging process was labour-intensive, but in September 2013, in an effort to reduce labour costs and increase efficiency, the company invested in an enhanced automated packing system. The investment was funded by a loan repayable in monthly instalments over four years. The loan covenant agreement includes a term specifying that the company’s debt: equity ratio should not exceed 1:1.

A comparison of the draft accounts for the year ended 31 December 2013 with the previous year indicates a significant increase in revenue with a small increase in profit. The company is currently trading in excess of its overdraft limit and is negotiating an increase in its facility with the bank. Management has prepared, in support of its negotiations, profit and cash flow forecasts based on the assumptions that the anticipated increase in efficiency, including a reduction in labour costs, will be achieved.

The company struggles to meet the weekly wage bill and has fallen behind in its payments to the tax authorities. It has also failed to comply with the terms of the lease in respect of the factory premises and has not paid the last three months’ instalments.

Required:

a. Identify and explain, from the information provided above, factors which indicate that Woes Ltd may not be a going concern. (10 Marks)
b. Outline the matters to which you would direct your attention in the period after the reporting date to determine whether Woes Ltd can continue as a going concern for the foreseeable future. (10 Marks)

(Total: 20 Marks)

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  • 20 Marks

AAA – May 2021 – L3 – Q6 – Review of Subsequent Events and Going Concern Assumptions

Evaluation of going concern issues at Wazobia Nigeria Limited and audit procedures to address identified risks.

Wazobia Nigeria Limited is a manufacturer of corrugated zinc roofs. Due to the economic recession, revenue continued to decline each year for the past three years. You are aware that the company had only N300,000 in cash at the year end. Extracts from the draft financial statements and other relevant information are given below.

Additional information:
(i) The bank loan was obtained in 2016 when the company started recording losses. The collateral for the loan is a fixed and floating charge on the assets of the company to the tune of the loan balance. The first tranche of repayment of the loan is due in 2019 and the amount repayable is N300 million.

(ii) Wazobia renegotiated its credit line with a major supplier and extended payment terms from 60 days to 90 days in order to improve working capital.

(iii) The terms for accessing the undrawn facilities stipulate that the company must meet certain covenants, including that interest cover is maintained at 2:1 and the ratio of bank loan to total assets does not exceed 1:1.

(iv) The contingent liability relates to litigation against the company by one of its customers for an alleged breach of contract to supply roofing sheets based on agreed specifications.

Required:
(a) Identify and explain the matters which may cast significant doubt on the company’s ability to continue as a going concern in the foreseeable future. (10 Marks)
(b) Recommend the appropriate audit procedures to be performed to adequately address the going concern matters identified. (10 Marks)

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  • 9 Marks

CR – Nov 2014 – L3 – SC – Q6b – Introduction to Corporate Reporting

Evaluate Luck & Co's financial position and recommend restructuring options to address going concern threats.

Scenario:
Luck & Co. has been making losses over the last few years. Its statement of financial position at 31 December, 2013, showed the following:

Statement of Financial Position as at 31 December, 2013

Assets N
Property, plant, and equipment 80,000
Inventory 20,000
Receivables 40,000
Total Assets 140,000
Equity and Liabilities N
Ordinary Capital 100,000
Retained Earnings (140,000)
Secured Loan Stock 100,000
Payables 80,000
Total Equity & Liabilities 140,000

On liquidation, the assets would realise the following:

Assets N
Property, plant, and equipment 30,000
Inventory 12,000
Receivables 36,000
Total Realisable Value 78,000

If the company continues to trade for the next four years, profit after charging N20,000 per annum as depreciation on the property, plant and equipment would be as follows:

Year Profit (N)
2014 4,000
2015 20,000
2016 26,000
2017 28,000
Total 78,000

Assume that there would be no surplus cash to settle the payables and loan stock holders until after four years when inventory and receivables could be realised at their book values.

Required:

Evaluate the financials and advise the management of Luck & Co on the options available to them and redraft the statement of financial position of Luck & Co after the exercise. (9 Marks)

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  • 6 Marks

CR – Nov 2014 – L3 – SC – Q6a – Introduction to Corporate Reporting

Evaluate factors indicating going concern threats and propose financial restructuring solutions.

An entity is normally viewed as a going concern. It is assumed that the entity has neither the intention nor the desire of liquidation or of curtailing materially the scale of its operations.

However, if the going concern is threatened, the financial statements would be prepared on a different basis.

Required:

State the factors that indicate an organisation may no longer be a going concern under the following categories:
(i) Financial (ii) Operational (iii) Legal or regulatory (6 Marks)

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  • 15 Marks

AAA – Nov 2013 – L3 – SB – Q5 – Review of Subsequent Events and Going Concern Assumptions

Outline audit procedures to identify material subsequent events and explain the purpose and importance of subsequent events review.

You have just concluded the audit of Roico Limited for the year ended 31 December, 2012. During the review of the working paper file, the partner in charge discovered that no information is available on activities after year-end. The partner instructed the team leader to carry out a review of the company’s activities after year-end. The team leader was not comfortable with the instruction and wants to know why it is necessary to examine accounting information relating to the next accounting period.

You are required to:

(a) Enumerate the audit procedures which would be carried out in order to identify any material subsequent events. (10 Marks)

(b) Discuss the purpose and importance of subsequent events review. (5 Marks)

(Total: 15 Marks)

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  • 8 Marks

CR – May 2023 – L3 – Q5a – Emerging Trends in Corporate Reporting

Discuss four financial reporting issues companies should consider due to COVID-19.

Most regulatory authorities in Nigeria, such as the Securities and Exchange Commission (SEC), Central Bank of Nigeria (CBN), and Federal Inland and State Internal Revenue Services, issued conditional relief for meeting reporting deadlines for filing annual and other returns required by law during the pandemic.

However, companies still need to monitor further reporting updates and evaluate the current and potential effects that COVID-19 could have on their financial reporting.

Required:

Discuss FOUR financial reporting issues that should be considered by companies as a consequence of COVID-19. (8 Marks)

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  • 15 Marks

AAA – Nov 2011 – L3 – SB – Q5 – Review of Subsequent Events and Going Concern Assumptions

Identifies going concern symptoms, audit procedures for evaluating going concern, and factors to assess continuation potential.

When a company is experiencing going concern problems, it may exhibit various financial and non-financial symptoms.

Required:

(a) State FIVE financial and FIVE non-financial going concern symptoms.
(5 Marks)

(b) State the audit procedures you would adopt as an auditor to determine whether a client company is experiencing going concern problems.
(6 Marks)

(c) What other factors would you consider in assessing if the company can continue despite the going concern issues?
(4 Marks)

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  • 1 Marks

AAA – Nov 2011 – L3 – SA – Q10 – Review of Subsequent Events and Going Concern Assumptions

Identifies a factor that may not indicate a going concern issue.

Which ONE of the following may not necessarily be a symptom of a going concern problem?

  • A. Redemption of debentures
  • B. Dividends in arrears
  • C. Existence of long overdue debtors
  • D. Heavy dependence on short-term funds for long-term needs
  • E. Excessive reliance on a supplier or customer

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  • 30 Marks

AAA – Nov 2020 – L3 – Q1 – Regulatory Framework and Professional Standards

Discusses policies for anti-money laundering, indicators of money laundering, ethical issues, and audit procedures for going concern assumptions.

You are a manager in Obuns & Co, a firm of Chartered Accountants, responsible for the audit of Akudre Plc, a listed entity, for the year ended 31 May 2020. The company operates in the textile industry and manufactures a range of goods, including clothing, linen, and soft furnishings. Akudre Plc employs approximately 750 sales staff across the country who sell the company’s products to both households and small to medium-sized businesses. Around 75% of Akudre Plc’s sales transactions are cash-based, and each sales staff member prepares a monthly cash sales report.

According to Akudre Plc’s CEO, Adu Oke, each staff member (including senior management) is encouraged to make cash sales on a commission basis to friends and family. Mr. Oke recently sold products worth N4,000,000 to business associates, depositing these funds into an offshore bank account under his sole control.

Review of Audit Working Papers:
A review of the audit working papers and an initial meeting with Mr. Oke revealed these issues:

  • Obuns & Co performed tax computations for Akudre Plc and completed tax returns for the company and Mr. Oke, invoiced as part of the total fee for audit and professional services. Mr. Oke’s personal tax return reflects numerous property transactions across international locations, which are detailed in off-shore accounts.

Financing Issue:
The audit committee has requested the audit engagement partner attend a post-audit meeting with the company’s bank officials, including the CFO and a representative from the audit committee, to renegotiate Akudre Plc’s lending facility. The audit partner is expected to confirm the company’s financial stability and verify that going concern procedures, including cash flow forecasts, were audited.

Required:
a. Discuss the policies and procedures which Obuns & Co. should have in place in relation to an anti-money laundering programme. (5 Marks)
b. Evaluate whether there are any indicators of money laundering activities by Akudre Plc or its staff. (4 Marks)
c. Describe the requirements of ISA 250: Consideration of Laws and Regulations in an Audit of Financial Statements. (5 Marks)
d. Discuss the actions required when an auditor identifies or suspects material instances of non-compliance by a client under ISA 250. (5 Marks)
e. Identify and evaluate any ethical threats and professional issues arising from the audit committee’s request for the audit engagement partner to attend the financing meeting. (3 Marks)
f. If loan finance is essential for the company’s survival and uncertainty exists regarding agreement finalization, evaluate additional audit procedures to ascertain if a material uncertainty exists. (10 Marks)
g. Evaluate the impact on the audit report in these scenarios:

  • i. Going concern assumption is appropriate, but material uncertainty exists.
  • ii. Going concern assumption is appropriate, material uncertainty exists, and disclosures are adequate.
  • iii. Going concern assumption is appropriate, material uncertainty exists, but disclosures are inadequate.
  • iv. Going concern assumption is inappropriate. (8 Marks)

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  • 20 Marks

AAA – May 2019 – L3 – Q4 – Review of Subsequent Events and Going Concern Assumptions

Analyze the auditor's objectives, implications of going concern assumptions, directors' responsibilities, and risk assessment for going concern status.

Itanforiti Publishers Limited has been in the printing and publishing business for many years in Ibadan. The company has been performing well with a competitive advantage over many companies in the industry as a result of the engagement of a high-profile team of personnel and in-house printing of its published books.

The board of directors comprises two brothers and their wives. The older brother is the chairman, and the younger, the managing director. The fortunes of the company started dwindling in 2013 when conflicts could no longer be resolved amicably among the members of the board of directors.

The chairman, being a majority shareholder, assumed executive powers by combining the roles hitherto played by the managing director with his own as executive chairman in 2015. Governance of the company became unsettled, and key staff of the organization started resigning in turn.

In 2016, the financial reports of the company revealed its inability to pay creditors, and the supply of raw materials became irregular. In addition, the level of receivables became too high with a significant figure of doubtful and irrecoverable debts.

Your firm acts as auditors to the company, and you have been presented with the financial statements for the year ended 31st December 2017, for audit. The financial statements were prepared on a going concern basis.

Required:
a. Identify and explain the objectives of the auditor in the area of going concern in accordance with International Standards on Auditing (ISA 570). (5 Marks)
b. Explain the going concern assumption and the implications for the financial statements if the entity is not a going concern. (5 Marks)
c. Explain the going concern duties of the directors. (3 Marks)
d. Evaluate the risk assessment procedures to be performed by the auditor on the going concern status of the entity. (ISA 570). (7 Marks)

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  • 20 Marks

AAA – Nov 2014 – L3 – SB – Q3 – Review of Subsequent Events and Going Concern Assumptions

Identify going concern risks for Woes Limited and outline post-reporting date audit matters to assess its ability to continue as a going concern.

You are responsible for the audit of Woes Limited for the year-ended 31 December 2013. The principal activity of Woes Ltd is the provision of high-quality packaging services for manufacturing companies. The company was established three years ago and has significantly exceeded its growth targets in each of those years.

Historically, the packaging process was labour-intensive, but in September 2013, in an effort to reduce labour costs and increase efficiency, the company invested in an enhanced automated packing system. The investment was funded by a loan repayable in monthly instalments over four years. The loan covenant agreement includes a term specifying that the company’s debt: equity ratio should not exceed 1:1.

A comparison of the draft accounts for the year ended 31 December 2013 with the previous year indicates a significant increase in revenue with a small increase in profit. The company is currently trading in excess of its overdraft limit and is negotiating an increase in its facility with the bank. Management has prepared, in support of its negotiations, profit and cash flow forecasts based on the assumptions that the anticipated increase in efficiency, including a reduction in labour costs, will be achieved.

The company struggles to meet the weekly wage bill and has fallen behind in its payments to the tax authorities. It has also failed to comply with the terms of the lease in respect of the factory premises and has not paid the last three months’ instalments.

Required:

a. Identify and explain, from the information provided above, factors which indicate that Woes Ltd may not be a going concern. (10 Marks)
b. Outline the matters to which you would direct your attention in the period after the reporting date to determine whether Woes Ltd can continue as a going concern for the foreseeable future. (10 Marks)

(Total: 20 Marks)

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  • 20 Marks

AAA – May 2021 – L3 – Q6 – Review of Subsequent Events and Going Concern Assumptions

Evaluation of going concern issues at Wazobia Nigeria Limited and audit procedures to address identified risks.

Wazobia Nigeria Limited is a manufacturer of corrugated zinc roofs. Due to the economic recession, revenue continued to decline each year for the past three years. You are aware that the company had only N300,000 in cash at the year end. Extracts from the draft financial statements and other relevant information are given below.

Additional information:
(i) The bank loan was obtained in 2016 when the company started recording losses. The collateral for the loan is a fixed and floating charge on the assets of the company to the tune of the loan balance. The first tranche of repayment of the loan is due in 2019 and the amount repayable is N300 million.

(ii) Wazobia renegotiated its credit line with a major supplier and extended payment terms from 60 days to 90 days in order to improve working capital.

(iii) The terms for accessing the undrawn facilities stipulate that the company must meet certain covenants, including that interest cover is maintained at 2:1 and the ratio of bank loan to total assets does not exceed 1:1.

(iv) The contingent liability relates to litigation against the company by one of its customers for an alleged breach of contract to supply roofing sheets based on agreed specifications.

Required:
(a) Identify and explain the matters which may cast significant doubt on the company’s ability to continue as a going concern in the foreseeable future. (10 Marks)
(b) Recommend the appropriate audit procedures to be performed to adequately address the going concern matters identified. (10 Marks)

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  • 9 Marks

CR – Nov 2014 – L3 – SC – Q6b – Introduction to Corporate Reporting

Evaluate Luck & Co's financial position and recommend restructuring options to address going concern threats.

Scenario:
Luck & Co. has been making losses over the last few years. Its statement of financial position at 31 December, 2013, showed the following:

Statement of Financial Position as at 31 December, 2013

Assets N
Property, plant, and equipment 80,000
Inventory 20,000
Receivables 40,000
Total Assets 140,000
Equity and Liabilities N
Ordinary Capital 100,000
Retained Earnings (140,000)
Secured Loan Stock 100,000
Payables 80,000
Total Equity & Liabilities 140,000

On liquidation, the assets would realise the following:

Assets N
Property, plant, and equipment 30,000
Inventory 12,000
Receivables 36,000
Total Realisable Value 78,000

If the company continues to trade for the next four years, profit after charging N20,000 per annum as depreciation on the property, plant and equipment would be as follows:

Year Profit (N)
2014 4,000
2015 20,000
2016 26,000
2017 28,000
Total 78,000

Assume that there would be no surplus cash to settle the payables and loan stock holders until after four years when inventory and receivables could be realised at their book values.

Required:

Evaluate the financials and advise the management of Luck & Co on the options available to them and redraft the statement of financial position of Luck & Co after the exercise. (9 Marks)

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  • 6 Marks

CR – Nov 2014 – L3 – SC – Q6a – Introduction to Corporate Reporting

Evaluate factors indicating going concern threats and propose financial restructuring solutions.

An entity is normally viewed as a going concern. It is assumed that the entity has neither the intention nor the desire of liquidation or of curtailing materially the scale of its operations.

However, if the going concern is threatened, the financial statements would be prepared on a different basis.

Required:

State the factors that indicate an organisation may no longer be a going concern under the following categories:
(i) Financial (ii) Operational (iii) Legal or regulatory (6 Marks)

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  • 15 Marks

AAA – Nov 2013 – L3 – SB – Q5 – Review of Subsequent Events and Going Concern Assumptions

Outline audit procedures to identify material subsequent events and explain the purpose and importance of subsequent events review.

You have just concluded the audit of Roico Limited for the year ended 31 December, 2012. During the review of the working paper file, the partner in charge discovered that no information is available on activities after year-end. The partner instructed the team leader to carry out a review of the company’s activities after year-end. The team leader was not comfortable with the instruction and wants to know why it is necessary to examine accounting information relating to the next accounting period.

You are required to:

(a) Enumerate the audit procedures which would be carried out in order to identify any material subsequent events. (10 Marks)

(b) Discuss the purpose and importance of subsequent events review. (5 Marks)

(Total: 15 Marks)

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  • 8 Marks

CR – May 2023 – L3 – Q5a – Emerging Trends in Corporate Reporting

Discuss four financial reporting issues companies should consider due to COVID-19.

Most regulatory authorities in Nigeria, such as the Securities and Exchange Commission (SEC), Central Bank of Nigeria (CBN), and Federal Inland and State Internal Revenue Services, issued conditional relief for meeting reporting deadlines for filing annual and other returns required by law during the pandemic.

However, companies still need to monitor further reporting updates and evaluate the current and potential effects that COVID-19 could have on their financial reporting.

Required:

Discuss FOUR financial reporting issues that should be considered by companies as a consequence of COVID-19. (8 Marks)

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  • 15 Marks

AAA – Nov 2011 – L3 – SB – Q5 – Review of Subsequent Events and Going Concern Assumptions

Identifies going concern symptoms, audit procedures for evaluating going concern, and factors to assess continuation potential.

When a company is experiencing going concern problems, it may exhibit various financial and non-financial symptoms.

Required:

(a) State FIVE financial and FIVE non-financial going concern symptoms.
(5 Marks)

(b) State the audit procedures you would adopt as an auditor to determine whether a client company is experiencing going concern problems.
(6 Marks)

(c) What other factors would you consider in assessing if the company can continue despite the going concern issues?
(4 Marks)

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  • 1 Marks

AAA – Nov 2011 – L3 – SA – Q10 – Review of Subsequent Events and Going Concern Assumptions

Identifies a factor that may not indicate a going concern issue.

Which ONE of the following may not necessarily be a symptom of a going concern problem?

  • A. Redemption of debentures
  • B. Dividends in arrears
  • C. Existence of long overdue debtors
  • D. Heavy dependence on short-term funds for long-term needs
  • E. Excessive reliance on a supplier or customer

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  • 30 Marks

AAA – Nov 2020 – L3 – Q1 – Regulatory Framework and Professional Standards

Discusses policies for anti-money laundering, indicators of money laundering, ethical issues, and audit procedures for going concern assumptions.

You are a manager in Obuns & Co, a firm of Chartered Accountants, responsible for the audit of Akudre Plc, a listed entity, for the year ended 31 May 2020. The company operates in the textile industry and manufactures a range of goods, including clothing, linen, and soft furnishings. Akudre Plc employs approximately 750 sales staff across the country who sell the company’s products to both households and small to medium-sized businesses. Around 75% of Akudre Plc’s sales transactions are cash-based, and each sales staff member prepares a monthly cash sales report.

According to Akudre Plc’s CEO, Adu Oke, each staff member (including senior management) is encouraged to make cash sales on a commission basis to friends and family. Mr. Oke recently sold products worth N4,000,000 to business associates, depositing these funds into an offshore bank account under his sole control.

Review of Audit Working Papers:
A review of the audit working papers and an initial meeting with Mr. Oke revealed these issues:

  • Obuns & Co performed tax computations for Akudre Plc and completed tax returns for the company and Mr. Oke, invoiced as part of the total fee for audit and professional services. Mr. Oke’s personal tax return reflects numerous property transactions across international locations, which are detailed in off-shore accounts.

Financing Issue:
The audit committee has requested the audit engagement partner attend a post-audit meeting with the company’s bank officials, including the CFO and a representative from the audit committee, to renegotiate Akudre Plc’s lending facility. The audit partner is expected to confirm the company’s financial stability and verify that going concern procedures, including cash flow forecasts, were audited.

Required:
a. Discuss the policies and procedures which Obuns & Co. should have in place in relation to an anti-money laundering programme. (5 Marks)
b. Evaluate whether there are any indicators of money laundering activities by Akudre Plc or its staff. (4 Marks)
c. Describe the requirements of ISA 250: Consideration of Laws and Regulations in an Audit of Financial Statements. (5 Marks)
d. Discuss the actions required when an auditor identifies or suspects material instances of non-compliance by a client under ISA 250. (5 Marks)
e. Identify and evaluate any ethical threats and professional issues arising from the audit committee’s request for the audit engagement partner to attend the financing meeting. (3 Marks)
f. If loan finance is essential for the company’s survival and uncertainty exists regarding agreement finalization, evaluate additional audit procedures to ascertain if a material uncertainty exists. (10 Marks)
g. Evaluate the impact on the audit report in these scenarios:

  • i. Going concern assumption is appropriate, but material uncertainty exists.
  • ii. Going concern assumption is appropriate, material uncertainty exists, and disclosures are adequate.
  • iii. Going concern assumption is appropriate, material uncertainty exists, but disclosures are inadequate.
  • iv. Going concern assumption is inappropriate. (8 Marks)

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