Case Study 3
a) What events or condition above may cause substantial doubt about the entity’s ability to continue as a going concern?
Events or condition that may cause substantial doubt about the entity’s ability to continue as a going concern are the first one, because of the high competition in the industry, it has affected the sales of the Fast Go. The effect of vigorous competition in the markets has makes it difficult for Fast Go to attract and retain customers and to grow their customer base and revenue. Furthermore, many competitors of Fast Go’s are larger and have greater financial resources, less average, and their coverage are more extensive. Furthermore, Fast Go also suffer high turnover of staff of the company. It is resulted from the high competition in the industry. Many staff left Fast Go and join bigger companies that offer better pay for them. Besides that, Fast Go also predicts that the market prices will be decline in the future, it just make them unable to attract more customer. And the important thing that cause the substantial doubt in order Fast Go to carry on the business is, the company has debt totaling RM 25 Million. The debt has financial covenants as well as material adverse change clause. Furthermore, Fast Go must maintain Debt Ratio to Total Assets not exceeding 35%. If Fast Go unable to comply with the agreement, they need to pay the loan in full.
b) Assuming the events of conditions identified in (a) above cause the audit team to have substantial doubt about Fast Go ability to continue as a going concern, what is the next step the audit team needs to perform?
The next step that the audit needs to perform are, the audit team must seek information about management’s plans to mitigate all the problem that Fast Go suffer for example the debt, the competition and etc. Besides, the audit team also must assess the likelihood that such plans can be successfully implemented. Furthermore, the audit team also must consider the Fast Go ability to continue or not.
c) What types of audit procedures should be perform by the audit team?
Types of audit procedures should be perform by the audit team are, the audit team should analyzing and discussing the Fast Go’s cash flow, profit and other relevant forecasts with the management. They should analyze the latest company’s financial statement. Besides, the audit team also must reviewing the terms of debentures and loan agreement with the bank to ensure that there is no breach of the contract between Fast Go and the bank. Furthermore, they also must enquire the entity’s lawyer regarding the existence of litigation and claims and reasonableness management assessments of their outcomes and the estimate of their financial implications. Another procedure that audit team should take is they have to reviewing the events after period ends in order to identify those that either mitigate or otherwise effect the Fast Go’s ability to continue as going concern.
d) What are mitigating factors that Fast Go should implement in order to continue as going concern?
Mitigating factors that Fast Go should implement in order to continue as going concern are, Fast Go should consider whether to sell the assets to pay off debt or dispose of the operations that are losing money. Frequently, Fast Go also may develop plan to reduce wages or cut back the workforce. Besides that, Fast Go also may negotiate with the bank or the creditor in order to restructure back the debt or seek for additional financing. Furthermore, they also can reduce the non- added value activities that incurred in their company that makes the bare high cost rather than get high profit.
e) What are the responsibilities of the audit team with regard to Fast Go ability to continue as a going concern?
Responsibilities of the audit team in order Fast Go to continue as a going concern are, the audit team should be consider the appropriateness of management’s use of the...
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