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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  • 15 Marks

AAA – Nov 2018 – L3 – Q5 – Ethical Issues in Auditing

Examining professional skepticism, its necessity across audit stages, and its application in audits.

As a result of recent global financial crises, audit inspection reports in various jurisdictions have noted areas requiring professional judgment. Such areas include fair value, related party transactions, and going concern assessments, where regulators and oversight bodies believe that auditors should clearly demonstrate professional scepticism.

Required:

a. Explain the term “Professional Scepticism.” (3 Marks)

b. Identify the stages in the audit process where professional scepticism is necessary. (3 Marks)

c. Discuss three ways in which the application of professional scepticism can be demonstrated by the auditor. (9 Marks)

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  • 20 Marks

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 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)

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  • 15 Marks

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.

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:

  1. Identify and explain FOUR audit procedures to be performed by the audit team to determine the going concern status of the company. (10 Marks)
  2. 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)

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  • 6 Marks

AA – May 2016 – L2 – Q7a – Audit Evidence

Identify additional information needed to determine the audit opinion for Musky Fresh Ltd following supplier difficulties.

Musky Fresh Limited has been in existence, for a number of years, importing perfume. The managing director had built up the business using contacts he already had in the industry. The company imports only one brand of perfume which is manufactured exclusively by one company. The perfume is distributed via ‘shops within shops’ at 20 branches of a well-known store. Under this agreement, Musky Fresh Limited pays a percentage of its takings to the store, with a minimum annual payment of N100,000 per store.

The audit is nearing completion, but you have just heard that the Arabian manufacturer is facing serious financial difficulties, and that supplies have ceased.

Required:

a. Set out the further information the auditor would require before reaching his audit opinion. (6 Marks)

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  • 30 Marks

AA – Nov 2014 – L2 – Q1 – Risk Assessment and Internal Control

Analyze audit risks and ethical considerations for a new audit engagement with a telecommunication firm.

You are the Principal Partner in charge of a four-partner firm of Chartered Accountants. Your firm has been invited to tender for the audit of Poles Apart Limited for the year ended 31 December 2013.

Poles Apart Limited was established two years ago and provides mobile phone service for individuals and businesses. The system established by the company comprises:

  1. Small portable mobile phones, which allow subscribers to contact or be contacted by any other telephone.
  2. The mobile phones can be used within the range of a local relay station that receives and sends calls to the mobile phone.
  3. The local relay stations are linked to a central computer that connects the calls to other users, often through a computer telephone network.
  4. Currently, the local relay stations cover one large city with a population of about 1,000,000. In the next year, the system will expand to all cities in Nigeria with populations over 250,000. By 2017, it will cover all motorways and cities with populations over 100,000, which will involve substantial capital expenditure and require additional borrowings.
  5. The cost of the relay stations and central computer is capitalized and amortized over six years.
  6. The mobile phones are manufactured by other companies and sold through retailers. Poles Apart Limited pays ₦2,000 to the retailer for each phone sold, which is capitalized and amortized over four years.
  7. Subscribers are invoiced monthly with a fixed line rental and a variable call charge. Charges for calls from other operators are also calculated by the company’s main computer.
  8. All shares are owned by three wealthy individuals who serve as non-executive directors. They receive a fixed allowance and do not plan further investment in the company.
  9. Establishing the network of relay stations and subscribers will result in losses for at least three years, with current borrowings at about 20% of shareholders’ funds. It is expected that the company will be highly geared by 2016.
  10. As the company will not be immediately profitable, executive directors receive a basic salary and a bonus based on the number of subscribers.
  11. The owners plan to float the company on the local Stock Exchange in 2016. The flotation will involve issuing new shares to the public and the three non-executive directors selling some of their shares.
  12. Poles Apart Limited has several large competitors, each with comprehensive coverage of over 90% of the population.

Required:

a. Consider the risks associated with the audit of Poles Apart Limited. (12 Marks)

b. Describe the ethical matters you should consider in deciding whether your audit firm should accept the audit engagement. This should include considering whether your firm has the technical and logistical ability to carry out the audit. (12 Marks)

c. Advise on whether you should accept or decline the audit assignment, giving your principal reasons for coming to this decision. (6 Marks)

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  • 6 Marks

FR – Nov 2019 – L2 – Q4a – Ethical Issues in Financial Reporting

Explain the concepts of substance over form and going concern in financial reporting.

The IASB’s framework for preparation and presentation of financial statements requires financial statements to be prepared on the basis that they comply with certain accounting concepts and underlying assumptions.

Required:

Explain the meaning of each of the following concepts and the underlying assumption:

  • Substance over form
  • Going concern
    (6 Marks)

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  • 14 Marks

FA – May 2021 – L1 – SB – Q1a – Accounting Concepts

Explanation of seven fundamental accounting concepts used in financial statement preparation.

Briefly explain the following fundamental accounting concepts used in the preparation of financial statements in accordance with IAS 1 – Presentation of financial statement:

i. Going concern (2 Marks)
ii. Consistency of presentation (2 Marks)
iii. Accrual (2 Marks)
iv. Fair presentation (2 Marks)
v. Substance over form (2 Marks)
vi. Prudence (2 Marks)
vii. Materiality (2 Marks)

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  • 1 Marks

FA – Mar/July 2020 – L1 – SA – Q7 – Accounting Concepts (e.g., Going Concern, Accruals, Materiality)

Accounting concept that gives special treatment to significant items

Which of the following concepts requires the accountant to give special accounting treatment to items of significant value?
A. Accrual
B. Going concern
C. Materiality
D. Entity
E. Dual aspect

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  • 10 Marks

AA – July 2023 – L2 – Q4a – Completion Procedures and Reporting, Planning and Approach for Audit and Assurance Engagements

Explanation of going concern indicators for Kitchenhub Ltd and the stages when analytical procedures can be used.

a) You are an Audit Assistant of Abinchi & Associate and your firm is planning the audit of a client. You have been provided with draft financial statements extracts and the following information is about your client, Kitchenhub Ltd, who is a kitchen equipment manufacturer. The company’s year-end is 30 April 2022.

Kitchenhub Ltd has recently been experiencing trading difficulties, as its major customer who owes GH¢0.6 million to Kitchenhub Ltd has ceased trading, and it is unlikely any of this will be received. However, the balance is included in the financial statements extracts below. The sales director has recently left Kitchenhub Ltd and is yet to be replaced.

The monthly cash flow has shown a net cash outflow for the last two months of the financial year and is forecast as negative for the forthcoming financial year. As a result of this, the company is unable to settle suppliers whose payments are due, and some are threatening legal action to recover the sums owing.

Due to its financial difficulties, Kitchenhub Ltd defaulted on a loan repayment, and as a result of this breach in the loan contract, the bank has asked that the loan of GH¢4.8 million be repaid in full within six months. In view of this, the directors have decided not to pay dividends for the period.

Below is the Financial Statement extract for Kitchenhub Ltd for the year ended 30 April:

Draft 2022 (GH¢) Actual 2021 (GH¢)
Current assets
Inventory 3.4 1.6
Receivables 1.4 2.2
Cash – 1.2
Current liabilities
Trade payables 1.9 0.9
Overdraft 0.8 –
Loans 4.8 0.2

Required:
i) Explain SEVEN (7) factors that indicate that Kitchenhub Ltd may not be operating as a going concern entity. (7 marks)
ii) Identify THREE (3) stages of an audit when analytical procedures can be used by Abinchi & Associate. (3 marks)

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  • 3 Marks

AA – Nov 2017 – L2 – Q5b – Completion Procedures and Reporting

Explain three matters that should be communicated to those charged with governance as per ISA 260.

ISA 260 Communication with those charged with governance requires that certain issues are communicated to those charged with governance. You are an audit manager of Adiepena and Co. Chartered Accountants, and one of the junior staff has asked you about concerns that can be communicated to those charged with governance.

Required:
Explain three matters that could be communicated to those charged with governance.
(3 marks)

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