Going concern

Definition :
Assumption that an enterprise will continue in operational existence in the foreesable future(min. period of one year after the accounting period)

Indicator of non going concern ( P & L > S E L L )
1. P rofit
2. L iquidity (inadequate working capital & inability to finance loan when they fall due)
3. Supplies lesser & business failure
4. E xchange rate (adverse)
5. L ow margin (high cost can compensate with increase sales price)
6. L iquidity problem (high gearing & LT asset finance by ST borrowing)

Audit approaches on going concern issues (C O M A ):
1. C hecklist to review the going concern
2. O pinion formulation ( qualify or not qualify)
3. M anagement discussion
~ significant unexplained variance
~ future managerial action
~ future funding requirement
4. A nalytical review
~ financial ratios (P/L & B/S)
~ internal management ratios (effiency & productivity)

Auditor role - techniques determining GC concept (F A R C E)

1. F inancial support availability
~ co ability to maintain viability of itself & pension fund
~ assurance of fund in writing ( representation letter)
2. A uditor task & opinion
~ procedure specifically identify matter doubt director view GC
~ opinion on uncertainty to audit report
3. R eview / report :
~ assess adequacy on going concern through enquire management, observe the staffs, examine cash flow & profit forecast
4. C ash flow forecast :
~ director prepare cash flow
~ cash flow prepared (review consider available)
5. E vidence from director
~ adequate cash resources
~ no post balance sheet events which significant after balance sheet position
~ written statement going concern status

Auditor responsibility look for going concern (G A P E > opinion)

1. G rounds
~ Consider there are reasonable ground that the financial statement are prepared on going concern basis
2. A lternative counter lancing factors
Plan management to overcome problem
(a)well plan support by a profit forecast, cash flow, operating budget, reasonable key assumption concern profit forecast & consistency of pass performance.
(b) written confirmation from third party
~ borrowing facilities will continue extend / renew at what level together with any securities require
3. P reparatory procedure
(a) review interim and management account
(b) consult from management & staff to determine going concern
~ determine the post Balance sheet performance
~ ensure consistent of forecast
4. E vidence
(a) inspect corresponding files in supplier & customer to see any potential litigation
5. O pinion
~ after G A P E whether he have sufficient appropriate audit evidence to determine the going concern status of the finacial statement .

Mitigating evidence to be consider before qualify audit report (where going concern is in doubt) ( director P E T )

1. D irector (discuss with director)
(a) to ascertain they aware of circumstances
(b) find out any plans developed to deal with going concern
2. P eriod of time covered the plan
(a) the longer the period ( the less certain of the plan become)
3. E xpectation , forecast, plan, budget to be examined
(a) consider assumption made
(b) more specific of the plan, the more relevant of evidence
4. T hird party confirmation
~ provide of financial / guarantee

Further detailed audit procedures on going concern :
( C L U E S > C F & minutes )

1. C ash flow, P&L and other relevant forecast
~ Analyse & discuss with the management
2.
(a)L oan agreement
~ Review to determine any bleached of term
(b)L itigation claims
~ Enquire lawyer about the existence, reasonable of mgt assessment & estimate of fin.implication
3. U nfulfilled customer orders
~ consider entity plans
4. E vents after period end
~ review & identify those mitigate or otherwise affect GC
5. S ystem reliability in generating cash flow information & whether there is adequate support for assumption underlying
6. Compare prospective financial information
~ recent prior period to historical period
~ current period to result achieved up to date
7.
(a)F inancial statement (latest interim)
~ arrange & discuss
(b)F inancial support
~ Confirm existence,legality & enforce ability of arrange with related party
~ Assess financial ability of such party provide additional funds
8. M inutes of meeting with shareholder, BOD & committee
~ review references to finacial difficulties

Symptoms of overtrading ( S C A R E )

1. S tock level increase
2. C ash flow & heavy reliance on short term creditor & overdraft
3. A ctivity level increase ( sales increase)
4. R atio (quick & current ratio decrease to unaccepatable level)
5. E xpenses on fixed asset