Skyblue Pty Ltd is a large private company that manufacturesspecial reinforced concrete and other products used in theconstruction of airport runways and heavy use motor vehiclefreeways. During the course of the audit for the year ended 30 June2020, the government announced that it intends to scrap itsproposed third runway project. You know that Skyblue Pty Ltd’sprojections include a major share of the work expected to flow fromthis project.
The company has been experiencing some cash flow difficulties,although this is not unusual in the industry. Management hasrecently fully extended their overdraft facility in order to payday-to-day expenses such as wages and salaries. The audit partneris concerned that the company may be facing going concern problems,but the managing director maintains that future capital expenditurecan be cut back to alleviate the going concern issue. In addition,surplus assets can be sold to the growing Asian market andlong-term debt can be rescheduled if necessary.
Required:
(a) Give examples of three other possible mitigating factorsthat have not yet been mentioned.
(b) What evidence should you obtain with respect to management’srepresentation about the various mitigating factors presented inquestion 6 and identified in part (a) above? (
(c) The engagement partner has decided to qualify the financialreport on the basis of uncertainty as to going concern. However,the managing director argues that, as the company is privately heldand all the shareholders are involved in the business, goingconcern problems should not be viewed as seriously as if thecompany was publicly listed and, therefore, an unqualified reportshould be signed. How would you respond to the managing director’scomments?
(d) What would be the impact on the audit of a comfort letterfrom a related company promising to provide financial support inthe event that Skyblue Pty Ltd was unable to meet its debts?
