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Audit Review and Finalization, Subsequent Events, Going Concern Assumption…
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Subsequent Events
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Adjusting Events
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Examples:
- Settlement of court case
- Sale of inventory after year-end providing evidence of its NRV at year-end
- Fraud or error showing the accounts are incorrect
Non-adjusting events
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Examples:
- Dividends declared after the year-end
- Fire causing destruction of major plant after the year
- Announcement of a major restructuring after year-end
Definition
There are events occurring between the date of the financial statements and the date of the auditor’s report, and facts that become known to the auditor after the date of the auditor’s report.
Going Concern Assumption
Financial Indicators
- Net liability position = Liabilities more than asset. This indicates that the co cannot generate sufficient cash for repayment
- Negative operating cashflow = serious issue that indicates that the co does not generate sufficient cash
- Adverse key financial ratios = You get negative ratios
- Substantial operating losses or significant deterioration in the value of assets used to generate cash flows = The company does not have sufficient cash to replace the asset
- Indications of withdrawal of financial support by creditors
- Fixed term borrowings approaching maturity without realistic prospects of renewal of repayment
Operating Indicators
- Management intentions to liquidate or cease operations (stop their production)(cant get their raw materials
- Loss of key management without replacement
- Loss of a major market, key customers, license, or principal suppliers. (company is facing a problem)
- Labour difficulties (co did not pay their employee salary)
- Shortages of important supplies (smtg like chip shortages)
- Emergence of a highly successful competitor
Managements responsibility
- Ensure that the financial statements are prepared under the going concern basis
- If they are going concern issues, prepare under break-up basis
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Break-up basis
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Impact
Asset values will need to be stated at their realizable value as they are no longer to be used in an ongoing business
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More liabilities may arise as a result of closing down operation, and extra provisions may be necessary (e.g. inventories to be sold at a reduced price).