Question

Corsco is a large telecommunications company that is listed on a stock exchange.It is highly geared because,like many such companies,it borrowed a large sum to pay for a licence to operate a mobile phone network with technology that has not proved popular.The companiy's share price has dropped by 50% during the last three years and there has been several changes of senior management during that period.There's been considerable speculation in the press over the last six month about whether the company can survive without being taken over by a rival:

(a) Describe the external auditors responsibilities and the work that the auditor should perform in relation to the going concern status of companies

(b) Descrbe the possible audit reports that can be issued where the going concern status of a company is called into question;your answer should describe the circumstances in which they can be issued.

(c) On the basis of the information provided above desribe the audit report that you consider is likely to be issued in the case of Corsco,giving reasons

(d) Explain the difficulties that would be faced by Corsco and its auditors if Corsco's audit report made references to going concern,giving reasons

Answer 1

Answer (a)

It is the responsibility of the Auditor to report on the going concern status of a company and before that auditor should obtain sufficient evidences on the management's remarks of going concern status for the basis of accounting in the preparation of financial statement.

in the given case, corsco has huge amount of borrowed money for the purpose which is not favorable to the company and since three year market value also been down by 50% and also there are lots of changes in the management as well. However these situations and circumstances indicate the questionablity of going concern, but auditor shall first have deep discussion with the management over these situations and also obtain necessary and substantial material evidences which support the claim of non going concern status. Auditor shall make risk assessment whether these situation have significant doubt on the company's ability to continue as going concern.

Answer (b)

Auditor may issue Adverse Opinion, may provide unmodified report or may make qualified report where going concern status of a company is questioned, below are the circumstances where these can be issued.

Where use of going concern basis of accounting is INAPPROPRIATE.

if auditor's judgement over the management's reporting of financial statement on going concern basis is inappropriate, then auditor may make adverse opinion in the Audit Report, however auditor's judgement should have proper and substantial material evidences to support.

Where Going concern status is appropriate bu material uncertainty exist related to going concern status.

If adequate disclosure about the material uncertainty is made in the financial statements, the auditor shall express an unmodified opinion.Auditor shall disclose properly those events and conditions that indicate significant doubt on the entity’s ability to continue as a going concern.

Adequate Disclosure of a Material Uncertainty Is Not Made in the Financial Statements.

in this situation, auditor shall express Qualified opinion.

Answer (c)

On the basis of information provided,there is no need of making audit report qualified. This is because down of share by 50% and speculation in press over survive of the company is not substantial to question over corsco's ability to continue,

Answer (d)

If Corsco's Audit Report have reference to going concern status, then this may shake shareholder's, investor's and employee's faith on the company and due to this company's operation may hamper and situation may go worse.

This reference may also have impact on Auditor;s working as Auditor need to provide substantial evidences and prove that the report is right.