Question

Question 4

Al Maza Company is one of the leading investment firm in Oman. They have investment in portfolio nationally and internationally. You have been appointed as the chief auditor in this company last year. Management of the company have been cooperating with you to get required audit evidence. You identified that one of the companies’ American customer sued the company for 1.5 million RO for a breach of contractual obligation. The case is still pending under a court in New York. You found something messy, but management did not divulge any further information to you.

When you evaluated the portfolio of the company, you found that the value of company’s investment portfolios are less than its cost due to the international economic slowdown. This is reflecting in their current years earning also. You enquired the management and finance director about this, they could not chart a plan to get out of this crisis. Even if management did not get you the evidence, you have collected all required evidence through third parties.

Now it is the time for you to compile all the audit evidence to express your audit opinion. When you and your team evaluated the audit evidence, you found that the company is prepared its financial statement by following the rules and regulation applicable. Even at the time of final assessment and critical evaluation of audit evidence, you could not find any material misstatement in the financial statement prepared by the company.

You are required to:-

1. Why does an auditor must assess the ability of the firm to continue as going concern? Can you consider the report given by the auditor in this regard as an absolute guarantee for companies ability to continue as going concern? Give reason for your answer​​​​​​

2. Are you able to find any threat for this company to continue as going concern? You can write more than one if applicable. Give reason for your answer.​​​​​​( 5 Marks)

Answer 1

1. Why does an auditor must assess the ability of the firm to continue as going concern? Can you consider the report given by the auditor in this regard as an absolute guarantee for companies ability to continue as going concern?

Ans. An auditor must assess the ability of the firm to continue as going concern because it is the fundamental accounting assumption used in preparation of any financial statement. Besides auditor role is to assess whether financial statements are prepared using fundamental accounting assumption. Revenues from discontinued operations or operations which are about to be dicontinued in coming year are disclosed separately. Reason for separately disclosing these operations is that the business would not be able to realise the book value & fair value of business assets. Creditors, suppliers, shareholders, employees of the company ought to know that company will discontinue it's operations or going concern assumption is not valid for the company & accordingly maintain dealings with the company. Otherwise it can jeopardize there respective investments & carrers. From above discussion it is apparent that why auditor must assess the ability of the firm to continue as going concern     

No, report given by the auditor in this regard cannot be an absolute guarantee for companies ability to continue as going concern. Auditor report provides reasonable assurance, not absolute assurance on future viability of company. Auditor is a watchdog, he is not blood hound. So, auditor should exercise due diligence & reasonable skills while exercising his duties as an auditor of company.

2. Are you able to find any threat for this company to continue as going concern? You can write more than one if applicable.

Ans. Threats for this company to continue as going concern :

- American customer sued the company for 1.5 million RO for a breach of contractual obligation. The case is still pending under a court in New York. Management is not providing complete information on this case.

-  Value of company’s investment portfolios are less than its cost. This is reflecting in their current years earning also. Management and finance director could not chart a plan to get out of this crisis.

Both of above factors indicate uncertainity about company to continue as a going concern. Reason is that both of above amounts are material i.e., they can cause disruptions to operations of company. Besides management is not able to provide complete information i.e., it is hiding something. Management  and finance director could not chart a plan to get out of this crisis is also a major reason for assuming threats for this company to continue as going concern.