5 [P.T.O.5 (a) Explain the three stages of an audit when analytical procedures can be used by the auditor. (3 marks)
You are the audit manager of Kiwi & Co and you have been provided with financial statements extracts and the
following information about your client, Strawberry Kitchen Designs Co (Strawberry), who is a kitchen manufacturer.
The company’s year end is 30 April 2012.
Strawberry has recently been experiencing trading difficulties, as its major customer who owes $0·6m to Strawberry
has ceased trading, and it is unlikely any of this will be received. However, the balance is included within the financial
statements extracts below. The sales director has recently left Strawberry and has yet to be replaced.
The monthly cash flow has shown a net cash outflow for the last two months of the financial year and is forecast as
negative for the forthcoming financial year. As a result of this, the company has been slow in paying its suppliers and
some are threatening legal action to recover the sums owing.
Due to its financial difficulties, Strawberry missed a loan repayment and, as a result of this breach in the loan
covenants, the bank has asked that the loan of $4·8m be repaid in full within six months. The directors have decided
that in order to conserve cash, no final dividend will be paid in 2012.
Required:
(b) Explain the potential indicators that Strawberry Kitchen Designs Co is not a going concern. (6 marks)
(c) Describe the audit procedures that you should perform in assessing whether or not the company is a going
concern. (6 marks)
(d) Having performed the going concern audit procedures, you have serious concerns in relation to the going concern
status of Strawberry. The finance director has informed you that as the cash flow issues are short term he does
not propose to make any amendments to the financial statements.
Required:
(i) State Kiwi & Co’s responsibility for reporting on going concern to the directors of Strawberry Kitchen
Designs Co; and (2 marks)
(ii) If the directors refuse to amend the financial statements, describe the impact on the audit report.
(3 marks)
(20 marks)
End of Question Paper
