Page 149 - CA Final PARAM Digital Book.

Further, when discussed with the management, the statutory auditor understood that the company had
no action plan to mitigate such circumstances. Further, all such circumstances were not reflected the
financial statements of Sun Moon Ltd. What course of action should the statutory auditor of the company
consider in such situation?
Answer SA 570 - “Going Concern” deals with the auditor’s responsibilities in the audit of financial statements relating
to going concern and the implications for the auditor’s report.

The auditor’s responsibilities are to obtain sufficient appropriate audit evidence regarding, and conclude on,
the appropriateness of management’s use of the going concern basis of accounting in the preparation of the
financial statements, and to conclude, based on the audit evidence obtained, whether a material uncertainty
exists about the entity’s ability to continue as a going concern.

When the use of Going Concern Basis of Accounting Is Inappropriate i.e. if the financial statements have
been prepared using the going concern basis of accounting but, in the auditor’s judgment, management’s
use of the going concern basis of accounting in the preparation of the financial statements is inappropriate,
the auditor shall express an adverse opinion.

Also when adequate Disclosure of a Material Uncertainty Is Not Made in the Financial Statements the auditor
shall:
(i) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705 (Revised); and
(ii) In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a material
uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern and
that the financial statements do not adequately disclose this matter.

In the present case, the following circumstances indicate the inability of Sun Moon Ltd. To continue as a
going concern:
• Ban on the allotment of coal blocks
• Halt in power generation
• Key Managerial Personnel leaving the company.
• Banks decided not to extend further finance and not to fund the working capital requirements of the
company.
• Non availability of sound action plan to mitigate such circumstances.

Therefore, considering the above factors it is clear that the going concern basis is inappropriate for the
company. Further, such circumstances are not reflected in the financial
statements of the company. As such, the statutory auditor of Sun Moon Ltd. should:
1. Express an adverse opinion in accordance with SA 705 (Revised) and
2. In the Basis of Opinion paragraph of the auditor’s report, the statutory auditor should state that a
material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a
going concern and that the financial statements do not adequately disclose this matter.

The auditor is also required to report as per clause (xix) of CARO 2020 that on the basis of the financial ratios,
ageing and expected dates of realisation of financial assets and payment of financial liabilities, other
information accompanying the financial statements, the auditor’s knowledge of the Board of Directors and
management plans, whether the auditor is of the opinion that no material uncertainty exists as on the date
of the audit report that company is capable of meeting its liabilities existing at the date of balance sheet as
and when they fall due within a period of one year from the balance sheet date.

QNO Evaluating Cash flow forecast. Old Course – (N23M)
90.600 TITANIUM CNO-- SA570.040
MZE Limited is engaged in the manufacturing and export of ready-made garments. The company has lost
overseas buyers to Asian competitors with lower raw materials and labour costs. As a result, MZE Limited
has lost out on a significant chunk of export orders, and the trend has become more pronounced in the
year 2022-23. Further, the US economic recession caused delays in the company's overseas payments,
leading to the company being unable to keep its loan repayment commitments with bankers. Further, the
company has not been able to pay its creditors on time. Even statutory dues payable by the company are

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