Concept of Going Concern Practice Question Required:
(a) Evaluate the above situation and
Question 3 state the procedures which you would
perform as an auditor in the above
Qasmi Steels Limited (QSL) is a manufacturer of steel and iron products. During the year the situation. (10 marks)
company has incurred a net loss of Rs. 306 million. The following information is also available:
(i) At the year end, the company's accumulated losses amounted to Rs. 17 million whereas its
net equity was Rs. 283 million.
(ii) During the year, QSL has defaulted in repayment of a loan. The management is however
quite hopeful that the lender would agree to a rescheduling.
(iii) The management believes that the company's profitability has been hampered on
account of soaring electricity prices along with a fall in demand for steel which have had a
negative impact on the prices of its finished products. Moreover, its production has also
suffered on account of the prevailing energy crisis. Consequently, the management has
decided to discontinue its operations temporarily.
(iv) To counter the impact of high electricity prices, the company intends to convert its plant
to run on gas as well.
(v) The management has informed you that it would need to install a gas converting unit
which would be imported at a cost of Rs. 30 million. However, as the process of installing the
gas conversion unit and completing the necessary formalities would take at least a year,
therefore the management is negotiating to lease the plant to Nadeem Enterprises for a period
of one year.
Events or conditions Evaluation
During the year, the Company has Therefore it It implies that Company has an adverse key
incurred a net loss of Rs. 306 million financial ratios therefore there is a possibility
and as at year end Company’s will Adversely that financial covenants may be breach
accumulated losses amounting consequently bank may demand all the
to Rs. 17 million. Affect outstanding loan immediately
QSL has defaulted in repayment There is a possibility that Bank may have
of loan to the lender. the right to demand all the outstanding
loan immediately,
Due to high electricity prices with
- Operations
a fall in demand for steel, the If the situation continues management
management has decided to will not be able to continue its operations
discontinue its operation
temporarily.
- Profitability
Due to energy crises in the Country,
Therefore Company would not be
the Company may not be able to
able to run a plant on gas
secure a gas connection on time.
A gas Converting unit would require - Cashflows
the financing of Rs. 30 million. The Therefore it may be difficult for the Company
Company has already defaulted in to obtain additional loan, hence could not be
repayment of loan and covenants able to purchase a new plant
may also have been breached
PROCEDURES as mentioned in ISA
Evaluate management assessment to continue as a going concern based on the
circumstances described above.
Analyzing and discussing latest available interim financial statements
Reading the terms of debentures and loan agreements
Reading minutes of the meetings of shareholders, TCWG and relevant committees
for reference to financing difficulties
Inquiring entity’s legal counsel regarding existence of litigation and claims and
reasonableness of management’s assessments of their outcome and estimate of
their financial implications.
Performing audit procedures regarding subsequent events
Confirming existence, terms and adequacy of the borrowing facilities
Obtaining and reviewing reports of regulatory actions.
Requesting written representations from management and those charged with
governance regarding their plans for the future actions and feasibility of those plans.
SPECIFIC PROCEDURES BASED ON THE QUESTIONS
To inquire whether Bank / lender has agreed to restructure the loan.
If yes, inspect the restructured agreement to assess revised terms
and conditions. If not inspect correspondence file with the banks
Inspect the correspondence file between the management and Bank
for the additional financing of Rs. 30 million.
Inspect the correspondence file between Nadeem enterprise and
the management for the lease of plant.
Inspect the correspondence file with the supplier to assess when the
supplier would be able to deliver the plant