(a)

(i) Identify and explain going concern matters
Up to 2½ marks for matter identified and explained, to include 1 mark for relevant calculations:
– Revenue, operating margins and profitability
– Bank loan
– Trade payables
– Borrowing facility
– Contingent liability
Maximum marks 9
(ii) Audit procedures in respect of going concern matters
Up to 1 mark for each well explained procedure:
– Obtain and review management accounts, perform analytical review to ascertain the trends in
profitability and cash flows since the year end
– Read the minutes of the meetings for reference to trading and financing difficulties
– Discuss with management the strategy which is being developed to halt the trend in declining
sales and evaluate the reasonableness of the strategies in light of the economic recession and
auditor’s knowledge of the business
– Review the company’s current order book and assess the level of future turnover to level required
to break even/make a profit
– Analyse and discuss the cash flow, profit and other relevant forecasts with management and
review assumptions are in line with management strategy and auditor’s knowledge of the
business
– Obtain the bank loan agreement to confirm the amount of the loan, the interest rate and
repayment dates and whether the charge over assets is specific or general in nature
– Review the bank loan agreement for any clauses or covenants to determine whether there are
any breaches
– Calculate the average payment period for trade payables and consider whether any increase is
due to lack of cash or changes in the terms of trade
– Obtain the contract in relation to the borrowing facility to confirm the covenant measures and to
see if any further covenants are included in the agreement
– Discuss correspondence with the bank in relation to the loan and the borrowing facility to gauge
the bank’s level of support for Kandinsky Co and for evidence of deteriorating relationships
between the bank and the company’s management. Inspect minutes of management meetings
where those charged with governance discussed the letter of support and authorised its issuance
– Obtain any further documentation available in relation to the letter of support, for example, legal
documentation and correspondence with the supplier, to confirm the extent of Kandinsky Co’s
involvement with the supplier and that no further amounts could become payable
Maximum marks 6