Question

You are a Public Accountant from PT Jaya Alami for the financial year ending on September 30, 2007. The company's main activities are design, manufacture and sell clothes. For the book year ended 30 September 2007 the company suffered losses, but profit forecast for the year ended 30 September 2008 show profit. The loss suffered by the company was due to the loss of its main customer, a national retailer who had been ordering clothing for years companies with brands from these national retailers. Currently the company focusing on its own clothing brand that has been sold in the market for a long time high margin. The company also plans to expand its customer base for new model clothes and have signed several contracts with several new customers from abroad. The company has also negotiated a contract with a major supplier that causes the purchase price of materials to decrease monthly purchases. During the financial year ended September 30, 2007,The company experiences negative cash flow several times, but can survive thanks to the facilities overdraft from banks and slow down payments on trade debts and VAT payments.
The company has credit from XYZ bank which is due in March 2008 and in the process of negotiating with KLM bank in order to repay loans from XYZ bank.

Question:
a. Explain what is meant by the concept of going concern and why Public Accountants must consider going concern companies.
b. Mention the things that the auditor should consider when reviewing profit and loss and cash flow forecost made by the company, in considering the company's going concern.
c. Explain the effect on PT Jaya's audit report for the fiscal year ending September 30, 2007, if credit negotiations with KLM bank cannot be finalized when the audit report is signed.

Answer 1

Qa.

Public Accountants must consider whether the company is a going concern while Auditing as it should do the Audit considering that the company under audit is and will continue to be a going concern in the unforeseeable future.

The going concern implies that the company would be in a position discharge its assets , discharge its liabilities, and obtain refinancing when necessary. If the company has no intention or ability to run its operation and wants to liquidate the business, then it should not prepare the Financial statements under going concern basis.

Therefore the Auditor must do an assessment on whether the company is in a position to be treated as a going concern and should get management inputs to establish that aspect.

Qb.

The Auditor must reveiew some financial aspects to assess whether PT Jaya Alami can be audited as going concern.

In the year ending Sep 30,2017, the company makes a loss. It is mainly due to the loss of the main customer. It is forecasting a profit as it is acquiring new customers and also focusing on increasing sales of its high margin products. It has also negotiated a purchase contract with a major supplier that will reduce the purchase cost.

The auditor needs to asses the new customer and vendor contracts and the future revenue and cost projections to understand if the projection is reasonable and the company can recover from the current loss making stage to a profit maiking company.

The company also needs to deep dive into the details of frequent cash flow issues faced by the company to assess whether there is cash collection issue or the current cash flow shortage is due to lower sales and higher fixed costs. The Auditor needs to satisfy himself that the next years projection of cash flow would be improved and the company will be in a sustainable position and it would not required to defer trade payments and can meet debt payment obligations. This will ensure that going concern concept will be valid for PT Jaya Alami.

The Auditor also needs to ascertain the status of refinancing from the management and assess whether there is certainty of refinancing and the going concern concept can be used.

Qc.

If PT Jaya Alami Management confirms that the credit negotiations cannot be completed by Sep 30,2007, Auditors may conclude that going concern is valid in the overdraft refinancing aspect and complete the Audit for the period.