Page 221 - CA Inter Audit PARAM

CA Ravi Taori
• For example,
o the effect of an entity being unable to make its normal debt repayments
may be counter-balanced by management’s plans to maintain adequate
cash flows by alternative means, such as by disposing of assets,
rescheduling loan repayments, or obtaining additional capital.
o Similarly, the loss of a principal supplier may be mitigated by the availability
of a suitable alternative source of supply.
• The risk assessment procedures help the auditor to determine whether management’s use
of the going concern assumption is likely to be an important issue and its impact on planning
the audit. These procedures also allow for more timely discussions with management,
including a discussion of management’s plans and resolution of any identified going concern
issues.

QNO Company in problem & no satisfactory plan Old Course -- (SM20/SM21/ P16M)
570.05 #Unique
M/s ANS & Associates has been appointed as the statutory auditors of MNO Ltd. The company has been
suffering losses due to the emergence of highly successful competitor, thereby leading to negative net
worth. Also, the sales head, key management personnel, of the company left the company due to health
issues. When CA Amar, the engagement partner discussed the scenario with the management of the
company, he did not get any satisfactory reply from the management. What is the responsibility of M/s

ANS & Associates with regard to SA 570?
OR
TT Ltd. has suffered recurring losses due to steep fall in production and has negative net worth. Its
production head, an expert, has also left the company. Reply of the management is inadequate to these
developments and there is no sound action plan to mitigate these situations. Comment.
Answer ➢ As per SA 570, one of the objectives of the auditor regarding going concern is to obtain sufficient and
appropriate audit evidence regarding the same and to conclude on the appropriateness of the
management’s use of the going concern basis of accounting in the preparation of the financial
statements.
➢ Further it also contains the list of events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern which are:
• Financial indicator- Negative net worth
• Operating indicator- Loss of key management and emergence of highly successful competitor.
➢ In the present case, MNO Ltd. has negative net worth on account of emergence of highly successful
competitor and the sales head of the company has also left the company. Also, CA Amar did not get
any satisfactory reply when he discussed the going concern matter with the management.
➢ Thus, from the above facts, it appears that MNO Ltd. is not going concern. If the management of MNO
Ltd. has used the going concern basis of accounting, the auditor should first ask the management to
adjust the financial statements.
➢ If the management of MNO Ltd. does not agree with the same, CA Amar shall consider the impact on
his audit report.

QNO Additional Procedures Old Course -- (P16M)
570.07 Bhaskar CNO- SA570.080 New Course -- (SM25/J25M/J25R)
During course of audit of a company, CA. Varun Aggarwal notices that company is facing significant skilled
labour shortages resulting in hampering of operations of company. The company’s manufacturing is
dependent upon skilled labour coming from villages in certain districts of Eastern UP. However, due to job
opportunities available near villages now, many are not interested in going out from their native villages.

Such a situation has led to company not being able to keep its commitments, losing out on orders and fall

in its revenues. Fixed costs of the company remain at a high level. As a result, company is facing a liquidity
crunch and is not able to pay its creditors on time. The bankers of company are also not willing to help the
company to tide over liquidity crisis. The auditor is having doubts over going concern status of the company.

How should management of the company try to address auditor’s concerns? What audit procedures may
be performed by auditor in such a situation?

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