Page 150 - CA Final PARAM Digital Book.

either not paid or being paid after a gap of 5 -6 months, leading to extra costs. Due to declining revenue,
the company cannot cover its fixed costs and has begun laying off employees.

Considering all these circumstances, CA P doubts the company's ability to continue as a going concern
while conducting the statutory audit for the year 2022-23. He is studying management’s assessment of
the company’s ability to continue as a going concern by studying projected profitability statements for the
next two years containing turnover, expenses and profits estimates. Comment on the above situation with
specific reference to audit procedures being performed by CA P in context of relevant Standards on
Auditing.
Answer The indicated events or conditions in MZE Limited may cast significant doubt on ability of company to
continue as going concern. SA 570 requires that if events or conditions have been identified that may cast
significant doubt on the entity’s ability to continue as a going concern, the auditor shall obtain sufficient
appropriate audit evidence to determine whether or not a material uncertainty exists related to events or
conditions that may cast significant doubt on the entity’s ability to continue as a going concern through
performing additional audit procedures, including consideration of mitigating factors.

In the given situation, the auditor is studying management’s assessment of the company’s ability to continue
as going concern, including its future plan of action containing projected profitability statements for the next
two years containing estimates of turnover, expenses and profits. However, as required in SA 570, auditor’s
procedures should focus on cash flow forecast and not on future profit projections. It is quite possible that
a company may continue to carry on as a going concern so long as it can meet its liabilities. Therefore,
analysing the projected profitability statements alone is insufficient to support the conclusion on the going
concern assumption followed by the company.

Therefore, the auditor should require management to prepare a cash flow forecast in the given
circumstances. The auditor should then analyse the cash flow forecast in the evaluation of management’s
future plan of action. It includes: -
(i) Evaluating the reliability of the underlying data generated to prepare the forecast and
(ii) Determining whether there is adequate support for the assumptions underlying the forecast.

Further, some major overseas payments of the company are stuck up. It is quite possible that the timing of
cash inflows on account of these payments may affect the situation. The auditor would have to evaluate the
reliability of data for preparation for such a forecast and its underlying assumptions. He should perform
procedures to obtain evidence regarding assumptions and timing of cash inflows and outflows like any
restructuring undertaken by bankers providing relief to the company, future sales and consequent cash
realization in downturn conditions, willingness of creditors to provide credit in such a situation, incurring of
expenditures to keep the company afloat. All these assumptions underlying such cash flow forecasts need
to be challenged and examined.

QNO Drafting Para on Material Uncertainty Over Going Concern New Course – (SM23)
90.900 TITANIUM CNO-- SA570.060
CA Sameer is the statutory auditor of Tram Fram Ltd. for the FY 2022-23. While concluding the audit CA
Sameer decided to issue an unmodified opinion, though he also concluded that a material uncertainty
exists with respect to the company’s ability to continue as a going concern on account of a pending
litigation related to labour laws. He is of the view that the company has made appropriate disclosures
with respect to such pending litigation in the notes to accounts annexed to the financial statements of
Tram Fram Ltd. for the FY 2022-23. Explain how CA Sameer will deal with the above situation in his
auditor’s report (draft the relevant portion of the auditor’s report.)
Answer Material Uncertainty Related to Going Concern

We draw attention to Note 10 in the financial statements, which indicates that the outcome of a litigation
on account of labour laws is pending in case of the company during the year 31 March, 2023. As stated in
Note 11, this event or condition, indicate that a material uncertainty exists that may cast significant doubt
on the Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.

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