Question

a) What are the auditor's responsibilities for 'going concern assumptions’'? (b) Maxim Stewart is the partner in charge of the audit for a new client, Southern Southerland (SS). The client engaged Maxim's audit firm in November 2017, in preparation for the 2018 audit. From 30 January 2018 onwards, SS has consistently paid its suppliers late, well in excess of the suppliers' agreed credit terms. This has resulted in some suppliers demanding cash on delivery from SS. Maxim is also aware from his review of correspondence between SS and its bank that the company has been experiencing cash flow problems since 2016. Required: Identify any significant events or conditions that individually or collectively may cast significant doubt on SS's ability to continue as a going concern

Answer 1

solution a) auditor's responsibilities for 'going concern assumptions’'

The auditor's Responsibilities is to obtain sufficient and appropriate audit evidence about the appropriateness of management 's use of the going concern assumption in perparation of financial statement and also conclude that whether any material uncertanity which shows that entity has unbale to contiune as going concern.

b)following are the significant event that may cast doubt about the going concern assumption

Financial

· Net liability or net current liability position.

· Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment; or excessive reliance on short-term borrowings to finance long-term assets.

· Indications of withdrawal of financial support by trade payables.

· Negative operating cash flows indicated by historical or prospective financial statements.

· Adverse key financial ratios.

· Substantial operating losses or significant deterioration in the value of assets used to generate cash flows.

· Arrears or discontinuance of dividends.

· Inability to pay trade payables on due dates.

· Inability to comply with the terms of loan agreements.

· Change from credit to cash-on-delivery transactions with suppliers.

· Inability to obtain financing for essential new product development or other essential investments.

Operating

· Management intentions to liquidate the entity or to cease operations.

· Loss of key management without replacement.

· Loss of a major market, key customer(s), franchise, license, or principal supplier(s).

· Labour difficulties.

· Shortages of important supplies.

· Emergence of a highly successful competitor.

Other

· Non-compliance with capital or other statutory requirements.

· Pending legal or regulatory proceedings against the entity that may, if successful, result   in claims that the entity is unlikely to be able to satisfy.

· Changes in law or regulation or government policy expected to adversely affect the entity.

here ss not able to pay timely to creditors moreover bank said that cash flow of the firm is not so well since 2016 hence this may create siginficant doubt about going concern so auditor should obtaibn SAAE to ensure that going concern is well .