Page 155 - CA Final PARAM Digital Book.

Besides above, current ratio, debt-equity ratio, trade payables turnover ratio and net profit ratio disclosed
in notes to accounts have slipped drastically as compared to last year and from standard norms. Most of
the key financial ratios are in red. There is no other relevant information concerning above in notes to
accounts.
Further, on reviewing bank statement of cash credit limit (against hypothecation of paid stocks), it was
noticed that there is no debit transaction in the month of March,2022. On inquiry, he came to know that
stock audit of company was conducted in the month of January,2022 and stock auditors have commented
vide their report dated 25.2.2022 that company had negative drawing power due to high creditors.
Accordingly, the bankers have refused further debits in cash credit account from start of March,2022.
There is no information in this respect in financial statements and notes to accounts.
Discuss how CA K should deal with above for reporting in his audit report under the Companies Act, 2013
Answer In the given situation, it is clear from the ageing schedule that company is not able to pay its creditors on
time. Outstanding to creditors for a period of 1 year or more account for 80% of total dues to the creditors

of the company from due date of payment. Most of key financial ratios are adverse.

Further, bankers have refused further debits in cash credit account due to negative drawing power from
March 2022. Cash credit loans are repayable on demand. There is no other information or disclosure
available how the company plans to run its business without bank finance.

All the above factors are indicators that a material uncertainty exists that may cast a significant doubt on the
company’s ability to continue as going concern. There is no express disclosure of this fact in financial
statements.

Therefore, it is a situation where material uncertainty exists which has cast a significant doubt on company’s
ability to continue as going concern in accordance with SA 570, “Going Concern”.

Keeping in view above the fact that although a material uncertainty exists casting a significant doubt on the
ability of company to continue as going concern, adequate disclosure of material uncertainty is not made in
financial statements, CA K shall give qualified or adverse opinion in accordance with SA-705, “Modifications
to the Opinion in the Independent Auditor’s Report”.

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