M6 Going Concern

Question 1

What is the legislation applicable to the audit of going concern?

Answer 1

ISA 570

Question 2

What is meant by the term going concnern?

Answer 2

When an entity is going to continue in business for the next 12 months, with neither the intention nor the necessity of liquidation, ceasing trading or seeking protection from creditors pursuant to laws and regulations

Question 3

What are the implications for the auditor’s report if the use of going concern for the financial statements is inappropriate?

Answer 3

• the auditor will most likely be going to issue an adverse opinion about the financial statements

Question 4

What are the implications for the auditor’s report if the use of going concern for the financial statements is appropriate while material uncertainty exists?

Answer 4

• If they do not disclose this material uncertainty appropriately, the auditor will have to express either a qualified opinion or adverse opinion

Question 5

What does it mean to be insolvent?

Answer 5

you can be insolvent in two ways
- Factual insolvency - fairly valued liabilities > fairly valued Assets
- Commercial insolvency - the inability to pay your debts as they become due, even though your assets might exceed your liabilities

Question 6

Is it still possible to trade while insolvent?

Answer 6

Yes however the companies Act s22(1) states that a business cannot carry on trade recklessly, with gross negligence, with intent to defraud any person or for any fraudulent person. This means they will need to be very careful how they carry on business

Question 7

What are the directors responsibilities if a company becomes financially distressed in terms of companies Act

Answer 7

look in the notes, I don’t think its super NB

Question 8

What are some methods that a business can perform to prove that they are not insolvent?

Answer 8

• an imminent share issue
• a subordination agreement that has been signed by a substantial creditor
• the company earning profits soon
• letters of support
• guarantees
• initiation of a business rescue

Question 9

What is a subordination agreement?

Answer 9

also known as “backranking”, this is an agreement by a substantial creditor(s) whereby they bind
themselves either indefinitely, or for a limited period, either
unconditionally or subject to specific conditions, not to claim or accept
payment of the amounts owing to them until the happening of a
particular event (e.g., the restoration of solvency)

Question 10

What is a letter of Support?

Answer 10

A Letter of Support is an undertaking, usually but not necessarily by a parent company
giving comfort about financial support to be provided to its subsidiary

Question 11

Can a Letter of support and a subordination agreement help you seem solvent?

Answer 11

Yes however a letter of support will need to be examined to see if it is enforceable and won’t be reneged as soon as the audit is complete