Page 223 - CA Inter Audit PARAM

CA Ravi Taori

QNO-- Cash Flow Forecast Evaluation New Course – (M24R/J25M)
570.08 Bhaskar CNO – SA570.080

Kundan, a CA student, is part of an engagement team conducting audit of an entity. The audit procedures are
nearing completion. He notices that engagement partner has asked for a cash flow forecast from
management for next twelve months from date of financial statements. Keeping in view above, answer the
following: -

(i) Discuss likely purpose of engagement partner in the above situation. Elaborate upon significance of
such testing being performed by engagement partner.
(ii) State any two audit procedures in relation to cash flow forecast likely to be performed by
engagement partner.
Answer In the given situation, the engagement partner has asked for a cash flow forecast from management for next
twelve months from date of financial statements. The audit procedures are also nearing completion.

Therefore, purpose of engagement partner in requiring a cash flow forecast is to obtain sufficient appropriate
audit evidence regarding and to conclude on appropriateness of management’s use of going concern basis of
accounting in preparation of its financial statements. Further, his purpose is also to conclude on basis of audit
evidence obtained, whether a material uncertainty exists related to events or conditions that may cast a
significant doubt on ability to entity to continue as a going concern, and to report in accordance with SA 570.

The significance of testing going concern assumption is due to its effect on preparation of financial statements.
When the use of going concern is considered as appropriate, assets and liabilities are recorded on the basis
that entity will be able to realize its assets and discharge liabilities in normal course of business. In case it is
not so viewed, financial statements are prepared on liquidation basis. Hence, testing such an assumption
provides evidence to auditor whether use of such assumption is appropriate or not.

Two audit procedures in relation to cash flow forecast likely to be performed
• Evaluate reliability of underlying data generated to prepare the forecast

• Determine whether there is adequate support for assumptions underlying the forecast

Implication on Audit Report depending on adequacy of Old course-- (N21R/M23E)
QNO
570.10 disclosure of material uncertainty in notes to accounts
Bhaskar CNO- SA570.090
While doing audit of ABC Pvt Ltd, on the basis of sufficient and appropriate evidence, auditor comes to a
conclusion that use of the Going Concern Basis of Accounting is appropriate, but a material uncertainty
exists. Discuss the implications for auditor’s report if:
(a) Adequate Disclosure of a Material Uncertainty is Made in the Financial Statements
(b) Adequate Disclosure of a Material Uncertainty is Not Made in the Financial Statements
Answer Use of the Going Concern Basis of Accounting is Appropriate but a Material Uncertainty Exists
The identification of a material uncertainty is a matter that is important to users’ understanding of the
financial statements. The use of a separate section with a heading that includes reference to the fact
that a material uncertainty related to going concern exists alerts users to this circumstance.

(a) Adequate Disclosure of a Material Uncertainty is Made in the Financial Statements
If adequate disclosure about the material uncertainty is made in the financial statements, the auditor
shall express an unmodified opinion and the auditor ’s report shall include a separate section under the
heading “Material Uncertainty Related to Going Concern.”

(b) Adequate Disclosure of a Material Uncertainty is Not Made in the Financial Statements
If adequate disclosure about the material uncertainty is not made in the financial statements, the
auditor shall:
(i) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705
(Revised); and
(ii) 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.

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