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- 10 Marks
Question
PharmaCo provides scientific services to a wide range of clients. Typical assignments range from testing food for illegal additives to providing forensic analysis on items used to commit crimes to assist law enforcement officers.
The annual audit is nearly complete. As audit senior, you have reported to the engagement partner that PharmaCo is having some financial difficulties. Income has fallen due to the adverse effect of two high-profile court cases by customers who bought drugs from the company.
Required:
Explain the audit procedures that may be carried out to determine whether or not PharmaCo has the ability to continue as a going concern entity.
Answer
Audit procedures for determining PharmaCo’s ability to continue as a going concern include:
- Reviewing cash flow forecasts: Assess whether PharmaCo has sufficient liquidity to meet its obligations over the next 12 months.
- Reviewing directors’ assessments: Examine the directors’ view on PharmaCo’s ability to continue as a going concern and the assumptions they have used.
- Evaluating financing arrangements: Check the availability of additional finance that may be required to support PharmaCo’s operations.
- Analyzing interim financial statements: Review interim financial statements to identify any further decline in profitability or liquidity.
- Assessing reliance on key customers: Examine the company’s reliance on major customers and the impact of the loss of contracts due to the adverse publicity.
- Solicitor’s letter: Obtain confirmation from the company’s solicitors regarding the status of ongoing legal cases and any potential liabilities.
- Reviewing events after the reporting period: Identify any events that may impact PharmaCo’s financial stability after the year-end.
- Management representations: Obtain a formal representation from management regarding the company’s going concern status.
- Bank letters: Request confirmation from the company’s bank regarding overdraft facilities and any covenants that might affect PharmaCo’s liquidity.
- Tags: Audit Procedures, Cash Flow Forecasts, Going Concern, ISA 570
- Level: Level 2
- Topic: Completion Procedures and Reporting
- Series: MAY 2017
- Uploader: Theophilus