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Homework answers / question archive / Naphtali Co provides scientific services to a wide range of clients
Naphtali Co provides scientific services to a wide range of clients. Typical assignments range from testing food for illegal additives to providing forensic analysis on items used to commit crimes to assist law enforcement officers.
The annual audit is nearly complete. As audit senior you have reported to the engagement partner that Naphtali is having some financial difficulties. Income has fallen due to the adverse effect of two high-profile court cases, where Naphtali's services to assist the prosecution were found to be in error. Not only did this provide adverse publicity for Naphtali, but a number of clients withdrew their contracts. A senior employee then left Naphtali, stating lack of investment in new analysis machines was increasing the risk of incorrect information being provided by the company.
A cash flow forecast prepared internally shows Naphtali requiring significant additional cash within the next 12 months to maintain even the current level of services. Naphtali's auditors have been asked to provide a negative assurance report on this forecast.
Required:
(a) Define 'going concern' and discuss the auditor's responsibilities in respect of going concern.
(b) State the audit procedures that may be carried out to try to determine whether or not Naphtali Co is a going concern.
1) In simple term going concern means ability of entity to continue business for at least 12 month from end of the reporting period .
2) Auditor's responsibility in respect of going concern :
1) To obtain sufficient and appropriate audit evidence
About appropriateness of management's use of going concern basis of accounting in the preparation of financial statement
2) Identify whether there is material uncertainity about entities ability to continue as going concern
3 - Audit procedure to be carried out :
1) Discuss and make inquiry with management .
2) Read minutes of shareholdershareholder's meeting
3) Communicate with entities legal counsel concerning any ongoing or future litigation and assess reasonableness of managements assessment of outcome and estimates.
4) Review report of regulatory actions
5) Obtain entity's mitigating factor (future plan to settle the debt , projected cash flow statement etc )
