Question

Your audit firm is currently auditing Jack’s Bistro, a subsidiary of Martha Jem Ltd. Jack’s Bistro provides free internet access to its customers who agree to provide their personal information to Jack’s who sells this information to various marketing firms. When Jack’s was established two years ago, it estimated that it would need 40,000 customers to break even. Though the company has experienced more-than-expected demand it can only provide services to 30,000 customers at the present time, due to technological problems. 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 to justify their marketing efforts. Jack’s is the third-largest of five providers in the industry. The two biggest providers are each about 35 per cent larger than Jack’s. Both are seeking to rapidly expand their customer base. Over the past few months, Jack’s has been negotiating to acquire one of its smaller rivals. This would give Jack’s access to the rival’s software which has the capacity to support another 32,000 users, and give it access to more subscribers.

In response to the concerns of Jack’s directors regarding its financial situation, Martha Jem Ltd. has agreed to lend some money to Jack’s should it need urgent financial assistance. However, Martha Jem’s management has made it clear that this assistance will only be provided if Jack’s is in serious danger of becoming insolvent.

Jack’s directors are all young experts with backgrounds in the computer and technology industries, and all have equity share in the business. Recently the board split into two factions, and relations among the board members are now less than harmonious. The CFO is concerned 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 Jack’s directors to see the company through its present situation.

Required:

List the factors that indicate that Jack’s Bistro may have a going concern problem. For each factor, identify any related mitigating factors.

Answer 1

List of factors that indicated that Jack’s Bistro may have going concern problem and their related mitigating factors:

Business structure: as company are operating 30,000 customers which is below the break even point of 40,000 customers. However this can be mitigated by acquiring one of its smaller rivals.

Employees/Board of directors: Jack’s board are splits into two faction which impact the function of the company and having pending resolution for capital injection from each of Jack’s directors. However this can be mitigated by bringing harmony between both group of director together in a single group.

Financing: company is unable to locate new financing as Martha Jem’s management have condition for providing financing and if that condition fulfilled that means Jack’ Bistro become insolvent. However this can be mitigated by bringing harmony among board member and bringing capital injection by passing pending board resolution.