QUESTION 4
Labs Ltd provides scientific services to a wide range of clients. Common services range from testing food for illegal additives to providing Labs Ltd analysis on items used to commit crimes to assist law enforcement officers. The 2021 annual audit is nearing completion and as an audit senior on the audit engagement you have reported to the engagement partner that Labs Ltd is having some financial difficulties.
Income has fallen due to the adverse effect of more than one high-profile court case, where Labs Ltd‘s services to assist the prosecution were found to be erraneous. Not only did this provide adverse publicity for Labs Ltd, but a number of clients withdrew their contracts. A senior employee then left Labs Ltd, stating lack of investment in new Labs analys machines was increasing the risk of incorrect information being provided by the company.
A cash flow forecast prepared internally shows Labs Ltd requires significant additional cash within the next 12 months to maintain even the current level of services.
Required:
In accordance with ISA 570 Going Concern, define going concern and discuss the reponsibilities of management and the auditor regarding going concern. (10 marks)
State FIVE audit procedures that may be carried out to try to determine whether or not Labs Ltd is a going concern. (5 marks)
You have determined that the warranty provision included within the statement of financial position is material. The audit team has performed testing over the calculations and assumptions which are consistent with prior years. The team has requested a written representation from management confirming the basis and amount of the provision are reasonable. Management has yet to confirm acceptance of this representation.
Required:
Discuss the appropriateness of written reppresentations as form of audit evidence.
(5 marks)
Explain the steps you as the auditor should now take and the impact on the audit report if managment refuses to provide written representation. (10 marks)
