Question

You are currently auditing Speed Pty Ltd (Speed), a subsidiary of Tech Ltd (Tech). Speed is an internet service provider that provides free internet access to its subscribers. In return, subscribers agree to provide their name, address and other details to Speed for the purpose of on-selling this information to various marketing firms. When Speed was established two years ago, its business plan stated that it would need 25,000 subscribers in order to break even. Speed has experienced demand far in excess of this but unfortunately, due to technological problems, it can only provide services to 21,000 subscribers at the present time. This has reduced the price that third parties are prepared to pay for subscriber information, as they need a certain volume of each type of consumer (for example, males aged 25-35 earning more than $60,000 p.a.) to make their marketing efforts worthwhile. Speed is the third-largest of seven ‘free-access’ providers in the industry. The two biggest providers are each approximately 30 percent larger than Speed, and both are seeking to rapidly expand their customer base. Over the past few months, Speed has been negotiating to buy the business of one of its smaller rivals, Network Pty Ltd (Network). This would give Speed access to more subscribers and, more critically, access to Network’s software, which has the capacity to support another 50,000 users.

In response to Speed’s directors’ concerns regarding Speed’s financial situation, Tech has agreed to become a ‘lender of last resort’ should Speed need urgent financial assistance. However, Tech’s management has made it clear that this assistance will only be provided if Speed is in serious danger of going into receivership.

Speed’s directors are all young ‘whiz-kids’ with backgrounds in the computer and technology industries. Each has an equity share in the business. Recently the board split into two distinct factions, and relations among the board members are now less than harmonious. The financial controller has expressed concern that key business decisions are being delayed because the board is not focused on the business. Unresolved issues include a proposed additional capital injection from each of Speed’s directors to see the company through its present difficulties.

Required:

a) List the factors that indicate that Speed may have a going concern problem. For each factor, identify and discuss any related mitigating factors.

b) Outline the key additional information you would need to obtain before reaching a conclusion on Speed’s going concern status.

c) If all seven entities in the industry are experiencing software problems and are unable to satisfy demand for their services, how will this change the way you assess the going concern status of Speed?

Answer 1

a.

1. Currenty Soeed pty ltd.(Speed) has only 21000 subscribers but they need atleast 25000 subscribers to meet the breakeven level and due to which company will be in loss.

Mitigating Factor:

Speed is considering to buy Techs management through which its subscriber base will be increased by 50000 which will help in generating income.

2. Speed financial position is not good. and key business decisions are being delayed because the board is not focused on the business.

Mitigating factor:

-Tech's management has promised to become the lender of last resort whenever speed ltd. is in serious danger of going into receivership.

b. Before reaching out to the conclusion we need some other information like :

1. Liquidity position of speed business: That whether speed will have enough cash to manage its liquidity position.

c. If all seven entities in the industry are experiencing software problems and are unable to satisfy demand for their services, then speed will be at good positiona and will be able to able manage this problem because speed’s directors all are with the backgrounds in the computer and technology industries, so they can manage this problem with thier knowledge and that's how it will have impact on accessing the going concern position of speed.