Topic: Review of Subsequent Events and Going Concern Assumptions

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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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  • 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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  • 1 Marks

AAA – Nov 2012 – L3 – SA – Q16 – Review of Subsequent Events and Going Concern Assumptions

Identifying the appropriate signatories for a Letter of Representation.

The Letter of representation is normally signed by:

A. Managing Director and Chairman of the Board
B. Managing Director and Company Secretary
C. Managing Director and Finance Director
D. Chairman of the Board and Finance Director
E. Chairman of Audit Committee and the Managing Director

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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 – SAII – Q18 – Review of Subsequent Events and Going Concern Assumptions

Definition of audit procedures for recording transactions in the correct period.

The audit procedures that ensure that transactions are recorded in the period to which they belong are known as…………………….

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  • 1 Marks

AAA – Nov 2011 – L3 – SAII – Q17 – Review of Subsequent Events and Going Concern Assumptions

Definition of a company's inability to meet financial obligations on time.

The inability of a company to meet its financial obligations as and when due is called……………..

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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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  • 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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  • 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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  • 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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  • 1 Marks

AAA – Nov 2012 – L3 – SA – Q16 – Review of Subsequent Events and Going Concern Assumptions

Identifying the appropriate signatories for a Letter of Representation.

The Letter of representation is normally signed by:

A. Managing Director and Chairman of the Board
B. Managing Director and Company Secretary
C. Managing Director and Finance Director
D. Chairman of the Board and Finance Director
E. Chairman of Audit Committee and the Managing Director

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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 – SAII – Q18 – Review of Subsequent Events and Going Concern Assumptions

Definition of audit procedures for recording transactions in the correct period.

The audit procedures that ensure that transactions are recorded in the period to which they belong are known as…………………….

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You're reporting an error for "AAA – Nov 2011 – L3 – SAII – Q18 – Review of Subsequent Events and Going Concern Assumptions"

  • 1 Marks

AAA – Nov 2011 – L3 – SAII – Q17 – Review of Subsequent Events and Going Concern Assumptions

Definition of a company's inability to meet financial obligations on time.

The inability of a company to meet its financial obligations as and when due is called……………..

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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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  • 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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