ACCA F8 - Audit and Assurance Revision Kit 2016

the company’s overdraft which is expected to rise to $0.8m. Ultimately the company may breach its
overdraft limit.
(c)
(iv)
(v)
(vi)
(vii)
(viii)
The company has been slow in paying its suppliers. This may result in a loss of goodwill with some
suppliers refusing to supply the company in future. Other suppliers may impose ‘cash on delivery
terms’ which would have a further negative impact on the company’s cash flow position.
Some suppliers are threatening legal action to recover sums due. This provides an indication of the
age of these debts and hence the seriousness of the company’s position. If they are taken to court
they will incur legal fees in addition to having to pay the amounts due. Again this will have a negative
impact on the cash position of the business.
The company has breached loan covenants and has to repay a $4.8m bank loan within six months.
The company does not appear to have the funds to repay this loan currently and with only six months
to pay it is difficult to see how the company will be able to raise this substantial sum of cash before
the deadline.
No final dividend will be paid in 2012. This may result in a loss of investor confidence as the
shareholders will not be receiving any return on their investment. Some shareholders may decide to
sell their shares which may have an adverse effect on the share price. Remaining shareholders may
be reluctant to invest further in this business.
This current ratio (current assets/current liabilities) has fallen from 4.55 (5.0/1.1) in 2011 to a
predicted 0.64 (4.8/7.5) in the draft financial statements. The main reason for this appears to be the
reclassification of the loan as a current liability.
Audit procedures to assess whether the company is a going concern
– Discuss with management any further attempts that might be made to recover the cash owed by the
major customer and steps taken to win major new customers.
– Discuss with management whether steps are being taken to replace the sales director, and if not
future plans for generating new sales.
– Review the post year end sales order book to determine the likely levels of trade and the impact this
will have on future revenues.
– Obtain a copy of the cash flow forecast and review the nature of the cash flows and the
reasonableness of any assumptions made. Discuss the findings with the finance director.
– Perform a sensitivity analysis on the cash flow forecast to assess the amount of head-room which
exists.
– Review legal correspondence and make enquiries of the company’s lawyers to determine whether any
suppliers have commenced legal action and the amounts for which the company might be liable.
– Review correspondence with suppliers post year-end to determine whether any additional suppliers
are to take legal action or are refusing to supply Strawberry.
– Obtain a copy of the loan agreement and confirm that the covenant has been breached. Check the
terms of the loan and confirm that the amount and timing of the repayment are accurate.
– Review correspondence with the bank to determine whether any other covenants exist and whether
these have been breached.
– Discuss with the directors any alternative sources of finance/ any future plans that they have to
generate the cash required to repay the loan.
– Assess the likelihood of new shareholder investment by reviewing any correspondence between the
company and the shareholders.
– Perform a subsequent events review, including a review of board minutes, to determine whether any
further information is relevant that would suggest that the company is or is not a going concern.
– Review post-year end management accounts and assess whether the results are in line with the draft
accounts and the cash flow forecast. Discuss any discrepancies with the finance director.
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