• Review management’s plans for future actions based on its going concern assessment.
• Gather additional sufficient and appropriate audit evidence to confirm or dispel whether or not a material uncertainty exists regarding the going concern concept.
• Seek written representations from management regarding its plans for future action.
• Obtain information from company bankers regarding the continuance of loan facilities.
• Review receivables ageing analysis to determine whether there is an increase in days, indicating cash flow problems.

• The responsibility for the preparation of the financial statements which should give a true and fair view is that of management.
• This responsibility includes the choice of going concern basis for the preparation of the financial statements. If the financial statements are prepared on a going concern basis but the entity lacks ability to continue in operational existence for the foreseeable future such financial statements will not give a true and fair view.
• The choice of going concern basis for the preparation of the financial statements requires that management should carryout going concern assessment during the preparation of the financial statements and ensure that the basis chosen is reasonable and acceptable before approving the financial statements.
  The auditor however also has a responsibility to evaluate the going concern basis used in the preparation of the financial statements. This will enable him form conclusion that the basis used is reasonable and acceptable and therefore the financial statement give a true an fair view or to express a modified opinion if the basis used is not acceptable and management has not adopted an alternative suitable basis to present the financial statements.

• Financial indications. Examples include inability to pay debt as and when they fall due and borrowing far above borrowing limits.
• Operational indicators. For example loss of key managerial or technical staff without immediate replacement.
• Other indications for example natural disaster or government action, expropriation, or new law rendering the operations illegal.

• A new competitor, HardWare Specialist Co (Hardwares), has entered the market and gained considerable market share from Damongo through competitive pricing. There is a risk that if Damongo continues to lose market share this will impact on future cash flows. In addition, there may be pressure on Damongo to drop their prices in order to compete, which will impact profits and cash flows.
• A significant customer has stopped trading with Damongo and moved its business to Hardwares. This could result in a significant loss of future revenues and profit, and unless this customer can be replaced, there will be a reduction of future cash flows.
• A number of Damongo’s specialist developers have left the company and joined Hardwares and the company has found it difficult to replace these employees due to their experience and skills. The company is looking to develop new products and in order to do this, it needs sufficiently trained staff. If it cannot recruit enough staff, then it could hold up the product development and stop the company from increasing revenue.
• Damongo’s main supplier who provides specialist equipment has just stopped trading. If the equipment is highly specialised, there is a risk that Damongo may not be able to obtain these products from other suppliers which would impact on their ability to trade. More likely, there are other suppliers available but they may be more expensive which will increase the outflows of Damongo and worsen the cash flow forecast.
• Damongo needs to raise finance to develop new products in order to gain market share; they approached their shareholders for further finance but they declined to invest further. If Damongo is unable to obtain suitable finance, then it may be that the shareholders deem Damongo to be too risky to invest in further. They may be concerned that Damongo will not be able to offer them a suitable return on their investment, suggesting cash flow problems. In addition, if Damongo cannot obtain alternative finance, then it will not be able to develop the products it needs to.
• Damongo’s overdraft has grown significantly during the year. If the bank does not renew the overdraft and the company is unable to obtain alternative finance, then it may not be able to continue to trade.
• Damongo’s cash flow forecast shows a significantly worsening position for the coming 12 months. If the company continues to have cash outflows, then it will increase its overdraft further and will start to run out of available cash.
• One of Damongo’s customers is planning to sue the company for loss of revenue due to hardware being installed by Damongo in the customer’s online ordering system not operating correctly. If the customer is successful, then Damongo may have to pay a significant settlement which will put further pressure on cash flows. In addition, it is unlikely that this customer will continue to trade with Damongo and if the problems become known to other customers, this may lead to a further loss of revenue and cash flows as well as impact on Damongo’s reputation.
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• Obtain the company’s cash flow forecast and review the cash in and outflows. Assess the assumptions for reasonableness and discuss the findings with management to understand if the company will have sufficient cash flows.
• Perform a sensitivity analysis on the cash flows to understand the margin of safety the company has in terms of its net cash in/outflow.
• Discuss with the finance director whether any new customers have been obtained to replace the one lost.
• Review the company’s post year-end sales and order book to assess if the levels of trade are likely to increase in light of the increased competition from Hardware and if the revenue figures in the cash flow forecast are reasonable.
• Discuss with the directors whether replacement specialist developers have been recruited to replace those lost to Hardware.
• Review any agreements with the bank to determine whether any covenants have been breached, especially in relation to the overdraft.
• Review any bank correspondence to assess the likelihood of the bank renewing the overdraft facility.
• Review the correspondence with shareholders to assess whether any of these are likely to reconsider increasing their investment in the company.
•  Discuss with the directors whether they have contacted any banks for finance to help with the new product development.
• Enquire of the lawyers of Damongo as to the existence of any additional litigation and request their assessment of the likelihood of Damongo having to make payment to their customer who intends to sue for loss of revenue.
•  Perform audit tests in relation to subsequent events to identify any items which might indicate or mitigate the risk of going concern not being appropriate.
• Review the post year-end board minutes to identify any other issues which might indicate further financial difficulties for the company.
• Review post year-end management accounts to assess if in line with cash flow forecast.
• Consider whether any additional disclosures as required by IAS 1 Presentation of Financial Statements in relation to material uncertainties over going concern should be made in the financial statements.
• Consider whether the going concern basis is appropriate for the preparation of the financial statements.
• Obtain a written representation confirming the directors’ view that Damongo is a going concern.
                                                                                                                                                                              (Any 6 points)

Audit report

• The directors of Damongo have agreed to make going concern disclosures; however, the impact on the audit report will be dependent on the adequacy of these disclosures. If the disclosures are adequate, then the audit report will be modified as an emphasis of matter paragraph would be required.
• The paragraph will state that the audit opinion is not modified, indicate that there is a material uncertainty and will cross reference to the disclosure note made by management. It would be included immediately after the opinion paragraph.
• If the disclosures made by management are not adequate, the audit opinion will need to be modified as there is a material misstatement. Depending on the materiality of the issue, this will be either qualified or an adverse opinion.
• A paragraph describing the matter giving rise to the modification will be included just before the opinion paragraph and this will clearly identify the lack of disclosure over the going concern uncertainty. The opinion paragraph will be amended to state ‘except for’ or the financial statements are not fairly presented.
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When planning the audit the auditor must:

• Consider in particular whether there are any events, conditions and business risks which might cast doubt on the entity’s ability to continue as a going concern.
• Evaluate management’s assessment of the entity’s ability to continue as a going concern.
• When events or conditions have been identified which cast significant doubts on the viability of the business the following additional actions should be taken:
• Review management’s plans for future actions based on its going concern assessment and ensure that these are feasible and that the outcome of these plans will improve the situation. (Specific procedures might include analysing and discussing cash flow, reviewing the terms of debentures and loan agreements).
• Gather sufficient appropriate audit evidence to confirm or dispel whether or not a material uncertainty exists regarding going concern. This will involve considering any additional facts or information which has become available since management’s going concern assessment.
• Seek written representations from management regarding its plans for future actions and the feasibility of these plans.
• Obtain information regarding the continuance of loan facilities from the company’s bankers.
• Identify indications of cash flow problems eg. determine whether there has been an increase in receivables days by reviewing the receivables ageing analysis.
                                                                                                                                                                                 (Any 5 points)

• Net liability or net current liability position
• Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment
• Indications of withdrawal of financial support by creditors
• Negative operating cash flows (historical or prospective)
• Adverse key financial ratios
• Substantial operating losses or significant deterioration in the value of assets used to generate cash flows
• Arrears or discontinuance of dividends
• Inability to comply with terms of loan agreements
• Inability to pay creditors on due dates
• Change from credit to cash-on-delivery transactions with suppliers
• Inability to obtain financing for essential new product development or other essential investments.

– Cash flow
– Directors’ view going concern
– Other finance
– Interim financial statements
– Lack of non-current assets
– Reliance on senior employee
– Solicitor’s letter
– Review order book
– Review bank letter
– Review other events after the reporting period
– Management representation
– Other relevant points

Going Concern – This assumes that the entity will continue to operate for the foreseeable future with neither the intention nor the necessity of liquidation, ceasing trading or seeking protection from creditors pursuant to laws or regulation.
The following are tests and procedures the auditor needs to perform to form an opinion on management’s conclusion that the company is a going concern:

• Check whether management has carried out going concern assessment and evaluate the assessment done by management.
• Perform further processes as follows:
• Review the cash flow forecast in the subsequent accounting period for improvement
• Review management accounts and the financial records in the subsequent accounting period
• Review correspondence with creditors/suppliers so as to ensure that pressures are not being mounting by them
• Review the client profit forecast prepared for the subsequent accounting period
• Where financial assistance is to be given by banks and other sister companies, review their degree of commitment.
• Review minutes of meeting of directors and management.
• Review management rescue plans and ensure that they are consistent with facts already known to the auditor.

(i) Where the use of the going concern assumption is appropriate but a material uncertainty exists, provided that the auditor agrees with the basis of preparation of the accounts and the situation is adequately disclosed, an unmodified opinion is issued. The audit report will however include an emphasis of matter paragraph highlighting the uncertainty to the user and referring them to the details in the disclosure note.
(ii) Where the material uncertainty exists but the situation is not adequately disclosed the opinion should be modified on the grounds that there is insufficient disclosure and the financial statements are materially misstated. Depending on the specific circumstances this may be a qualified ‘except for’ or adverse opinion.
(iii) If in the auditor’s judgement the company will not be able to continue as a going concern and the financial statements have been prepared on a going concern basis the auditor shall express an adverse opinion.
(iv) If the auditors are unable to form an opinion because they were not able to obtain sufficient appropriate audit evidence they shall issue an ‘except for’ qualified opinion or a disclaimer.
(v) If management is unwilling to extend its assessment where the period considered is less than twelve months from the reporting date the auditor shall consider the need to modify the opinion as a result of not obtaining this evidence.

External auditor’s responsibilities and the work that the auditor should perform in relation to going concern
Responsibilities
According to ISA 570 the auditor must:

• Evaluate management’s assessment of the entity’s ability to continue as a going concern.
• Consider whether there are, and remain alert throughout the audit for, events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern.
• Enquire of management its knowledge of events or conditions beyond the period of the assessment that may cast significant doubt on the entity’s ability to continue as a going concern.
• Obtain sufficient appropriate audit evidence to determine whether a material uncertainty exists if events or conditions are identified that cast significant doubt on the entity’s ability to continue as a going concern.
  Audit work
• As part of the overall risk assessment the auditor must consider whether there are any events or conditions and related business risks which may cast significant doubt on the company’s ability to continue.
• The auditor should evaluate the process by which management has assessed the viability of the company. The auditor should make enquires of those charged with governance and examine supporting documentation such as cash flow forecasts and budgets.
• The auditor must consider whether the period used by management to assess the viability of the company is sufficient. If the period covers less than twelve months from the reporting date the auditor should ask management to extend the period to twelve months from the reporting date.
• The auditor should evaluate the assumptions used by management and determine whether they seem reasonable in the light of other known facts.
• Where events or conditions have been identified which may cast significant doubt on the entity’s ability to continue as a going concern the auditor must review management’s plans for future actions and gather sufficient appropriate audit evidence to confirm whether a material uncertainty exists. This will include:
• Analysing and discussing the cash flow and interim financial statements.
• Reviewing the terms of debentures and loan agreements
• Reading minutes of the meetings of shareholders and directors for reference to financing difficulties.
• Inquiring of the company’s lawyers regarding litigation and claims.
• Assessing the possibility of raising additional funds.
• Reviewing events after the period end.
• The auditor must seek written representations from management regarding its plans for future action.