Page 220 - CA Inter Audit PARAM

CA Ravi Taori
continued existence or when policy decisions are made that affect the services provided by
such an entity.
• However, the auditor should consider the risk that the going concern assumption may no
longer be appropriate.
• The following are examples of events or conditions that, individually or collectively, may cast
significant doubt about the going concern assumption. This listing is not all-inclusive nor does
the existence of one or more of the items always signify that a material uncertainty exists.
• Financial
(In sequence of falling business)
o Substantial operating losses or significant deterioration in the value of assets
used to generate cash flows.
o Negative operating cash flows indicated by historical or prospective financial
statements.
o Arrears or discontinuance of dividends.
o Net liability or net current liability position.
o Adverse key financial ratios.

(Borrowing Related Points)
o Inability to comply with the terms of loan agreements.
(Maintaining Stock Levels, Margin Money)

o Fixed-term borrowings approaching maturity without realistic prospects of
renewal or repayment; or excessive reliance on short-term borrowings to
finance long-term assets.
(Kingfisher Airlines)

o Inability to obtain financing for essential new product development or other
essential investments.
(Satyam, Banks refused to give new loans)

(Creditor Related Points)
o Inability to pay creditors on due dates.
o Indications of withdrawal of financial support by creditors.
(No extension from creditors)
o Change from credit to cash-on-delivery transactions with suppliers.

• Operating
o Management intentions to liquidate the entity or to cease operations.
(E.g. Start-up’s)
o Loss of key management without replacement.
o Shortages of important supplies.
(E.g.Power Generating Plants)
o Labour difficulties.
o Loss of a major market, key customer(s), franchise, license, or principal
supplier(s).
o Emergence of a highly successful competitor.
(E.g.Milk Butter Vs Peanut Butter)

• Other
o Uninsured or underinsured catastrophes when they occur.

(Law related matters)
o Non-compliance with capital or other statutory requirements.
(E.g. CAR in Banks)
o Changes in law or regulation or government policy expected to adversely
affect the entity.
o Pending legal or regulatory proceedings against the entity that may, if
successful, result in claims that the entity is unlikely to be able to satisfy.

• The significance of such events or conditions often can be mitigated by other factors.

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