 a growth in the level of competition Medimade Co faces

　　 a significant decline in demand for its products

　　 failing to re-invest in new product development

　　 difficulties in recruiting suitably trained scientific staff

　　 an inability to agree suitable financing terms with the bank

　　 investing $2m in new plant and machinery using an overdraft (a short-term borrowing facility which carries higher rates of interest)

　　 delayed payments to suppliers with some suppliers withdrawing credit and insisting on cash on delivery, which further impacts the overdrawn balance at the bank

　　 cash flow forecast showing a significantly worsening position within the next 12 months.

　　In the Paper F8 exam, candidates must be able to identify factors that may have an impact on an entity’s ability to continue as a going concern. The factors present in Question 5 of the June 2010 exam are not exhaustive and there are many other indicators that an entity may not be a going concern, such as:

　　 inability to pay dividends to shareholders

　　 major losses or cash flow difficulties that have arisen since the reporting date

　　 adverse key financial ratios

　　 indications of withdrawal of financial support from the bank or other financial institutions

　　 negative operating cash flows

　　 major debt repayments falling due which the entity will not be able to meet

　　 pending legal or regulatory proceedings against the entity that may, if successful, result in claims that are unlikely to be satisfied

　　If there are any material uncertainties relating to the going concern assumption, then management must make adequate going concern disclosures in the financial statements.

　　AUDITOR’S RESPONSIBILITIES

　　As mentioned earlier, it is not the auditor’s responsibility to determine whether, or not, an entity can prepare its financial statements under the going concern presumption; this is the responsibility of management. The auditor’s responsibility under ISA 570 is to obtain sufficient appropriate audit evidence about the appropriateness of management’s use of the going concern assumption in the preparation of the financial statements, and to conclude whether there is a material uncertainty about the entity’s ability to continue as a going concern.

　　In the June 2010 exam, question 5(c) required candidates to: ‘Explain the audit procedures that the auditor of Medimade should perform in assessing whether or not the company is a going concern.’

　　When faced with such a requirement, candidates must be careful not to produce a list of generic audit procedures, but instead identify and highlight the factors from the scenario that may call into question the entity’s ability to continue as a going concern. Once these factors have been identified, candidates should then be able to think about the procedures the auditor may adopt to establish whether the factors mean the going concern presumption is appropriate in the circumstances, or not.

　　In Question 5(c) of the June 2010 exam, if candidates simply wrote ‘Obtain confirmation from the bank that the overdraft facility will be renewed’ this will generate no marks for two reasons:

　　 The scenario clearly says that Medimade’s bankers will not make a decision on the overdraft facility until AFTER the audit report is completed.

　　 A bank, or other financial institution, is not going to give this sort of information directly to the auditor.

　　Candidates should generate the audit procedures specifically from information contained in the scenario to demonstrate application skills, and candidates should refer to the model answer in the June 2010 exam to make sure the procedures they have generated are specific to the scenario.

　　Many candidates fall into the trap of relying on ‘discussions with management/directors’ and ‘obtaining a written representation’. Candidates must appreciate that while discussion/inquiry is a valid audit procedure under ISA 500, Audit Evidence, such a procedure is always used in addition to other procedures – in other words, inquiry on its own will not generate sufficient appropriate audit evidence. Similarly ISA 580, Written Representations recognises that while written representations