22) Going Concern Flashcards
what are the two types of insolvency?
- factual
- commercial
what is factual insolvency?
L>A (fairly valued)
what is commercial insolvency?
company cannot pay debts when they become due
what happens if a company meets commercial / factual insolvency?
will not automatically be insolvent; these just indicate liquidity issues
what is the resp of mgmt with regards to GC?
assess whether and conclude whether the company is a GC and prepare the FS accordingly
what will mgmt use to make their judgement about GC?
- prev/interim FS
- forecasts, budgets
what is the resp of the auditor with regards to GC?
- obtain sufficient audit evidence about the appropriateness of mgmt’s use of the GC assumption
- conclude about any material uncertainty regarding the GC
what if there is no mention of GC uncertainty in the auditors report?
is not a guarantee that the entity is a GC
what are operating indicators of an incorrect GC assumption?
- intentions of mgmt to liquidate
- loss of key mgmt without repl.
- loss of major market
what is a letter of support?
NOT LEGALLY BINDING
document in which a parent undertakes to financially support a subsidiary with GC issues
what is the purpose of a letter of support for the auditor?
provides them with certainty about the GC of the subsidiary
what is a guarantee?
LEGALLY BINDING
the parent guarantees to pay some/all of the debts of the subsidiary
what is a subordination agreement?
legal agreement which establishes one debt as ranking behind others in the priority for collecting debtor repayments
