Page 151 - CA Final PARAM Digital Book.

QNO Going Concern (Case - Inappropriate) Old Course – (M15R, N15E,PM17,N17R,N17M, SM21)
94.000 TITANIUM CNO--SA570.060 New Course – (SM23)
Sun Moon Ltd. is a power generating company which uses coal as raw material for its power generating
plant. The company has been allotted coal blocks in the state of Jharkhand and Odisha. During the FY
2020-21, a scam regarding allotment of coal blocks was unveiled leading to a ban on the allotment of
coal blocks to various companies including Sun Moon Ltd. This happened in the month of December
2020 and as such entire power generation process of Sun Moon Ltd, came to a halt in that month.
As a result of such ban, and the resultant stoppage of the production process, many key managerial
personnel of the company left the company. There were delays in the of payment of wages and
salaries and the banks from whom the company had taken funds for project financing also decided
not to extend further finance or to fund further working capital requirements of the company.

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?
OR
S N Projects Limited, a manufacturing company in the Steel industry was allegedly involved in some
irregularity relating to allotment of coal blocks for which a complaint was lodged against the company by
the government The financial institutions stopped additional working capital finance which caused a
financial crisis resulting in stoppage of production The company incurred a massive loss during the year
2015-16 There were delays in salary and other payments Certain key managerial personnel including
GM Finance and certain other employees left the company The company has no sound action plan
to mitigate these situations Guide the statutory auditor on how he should deal with this situation.
Answer Part I -- Relevant Standards & Laws
▪ SA 570 on “Going Concern,”

Part II -- Requirements of Relevant Standards & Laws
➢ 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.

• When adequate Disclosure of a Material Uncertainty Is Not Made in the Financial Statements the
auditor shall:
• Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705
(Revised); and
• 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.
Part III – Case Discussion
➢ 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.
Part IV -- Conclusion

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