Question

You and your senior auditor are auditing VAX LLC Muscat. Your senior auditor asked you to check whether there is any doubt over VAX LLC’s ability to continue as going concern. You know that you may have to check multiples details to ensure the ability to continue as going concern like if there is any abnormal fluctuation in key financial ratios or variables, future risk prospectus of the business etc. You evaluated the pros and cons of various methods of evidence collection to verify the given assertion of use of going concern, you are not able to reach a conclusion on the methods to be used. You are scared of checking with your manager because u feel that he may undermine your capability. Finally one of your colleagues suggested you to go for analytical procedure as audit method to collect the required evidence for ability of a firm to continue as going concern.​​​​​​​

1. Do you think analytical procedure will give you the best audit evidence in the above-mentioned assertion? Justify your answer.​​​​​​​​​​

2. How would you collect audit evidence using analytical procedure related to going concern in your client? Illustrate your answer using the above case as an example.

Answer 1

1) Analytical procedure along with other supporting evidences will best to conclude upon the going concern. Analytical procedures alone can't determine the appropriateness of going concern in the firm.

Financial ratios such as Net current liability, negative operating cash flows, adverse key financial ratios such net profit margin, Creditors turnover etc can validate the conclusion of going concern to a certain extent. Beside this the auditor also needs to forecasted financial projections, business plans, future finance available to conclude on this issue.

2) By analytical procedure we can collect the below audit evidences.

a) By computing net profit margin ratio, we can ask the client for business plan. Business plan will help in understanding how the firm will recover from losses in next year.

b) By computing liquidity ratios, we can ask the client to share future plan for getting finance. These evidences may include revised sanction facility from bank, comfort letter given by the parent company. These all can be done by computing liquidity ratios and be aware of the actual position of the client.

c) By comparing major market, auditor can try to ascertain whether management is thinking to cease operation in particular product line or market.

d) Compliance of ratios for debt covenants -: If debt covenants has not be followed by client then waiver letter needs to be collected as an audit evidence.

Hence by performing above analytical procedures, auditors can collect sufficient audit evidence.