Going concern, climate and NOCLAR risks

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Going concern, climate and NOCLAR risks

MODULE 2 | 2.6.3 | STUDENT COMPANION

Statements are normally prepared on the going concern basis. Management assesses it; the auditor gets

evidence about whether the basis is appropriate and whether a material uncertainty exists, starting at

planning. Climate-related risks reach the statements through estimates and going concern, even where

the word climate never appears. For NOCLAR (an entity not complying with the law), laws with a direct

effect on the statements need evidence of compliance; other important laws need specific limited

procedures, and a breach may bring a duty to report.

Who looks how far ahead

Who The assessment

Management Whether the going concern basis is appropriate, looking at least 12 months ahead from

the reporting date, and disclosing any material uncertainties

Directors (Australia) Declare whether there are reasonable grounds to believe the company can pay its

debts on time

Auditor, current ASA 570 Looks roughly 12 months beyond the date of its own report

Auditor, revised ASA 570 For periods beginning on or after 15 December 2026: at least a year beyond the date

the financial report is approved

Going concern warning signs

Financial

Net current liabilities

Borrowings due with no realistic way to renew or repay

them

Heavy reliance on short-term borrowing to fund long-term

assets

Lenders or a parent withdrawing financial support

Negative operating cash flows

Substantial operating losses

Unable to pay creditors on time

Breaches of loan conditions

Suppliers that will only deal on cash terms

Operating

Loss of key managers

Loss of a major market, a key

customer, a licence or a principal

supplier

Labour difficulties

Shortages of important supplies

A highly successful new

competitor

Other

Breaches of capital requirements

Legal claims the entity couldn't

meet

Changes in law or government

policy expected to hurt it

Uninsured catastrophes

One sign rarely decides anything. Weigh the signs together with mitigating factors, such as plans to sell assets or raise new funding, which

need evidence of their own.

ADVANCED AUDIT AND ASSURANCE | M2 | 2.6.3 | STUDENT COMPANION

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Case note: Probuild

Probuild was one of Australia's largest building contractors, majority owned by the South African construction

group Wilson Bayly Holmes-Ovcon. Through the pandemic years, many builders were locked into fixed-price

contracts while the cost of materials and labour rose sharply. On 23 February 2022, Probuild's parent

announced it would no longer provide financial support to its Australian business, and that same day Probuild

entered voluntary administration, leaving projects stalled and subcontractors unpaid. The lesson: a parent's

support is a powerful mitigating factor only while the parent is willing and able to give it. Past support proves

nothing about the future; the auditor needs a written commitment, its terms and duration, whether it is legally

binding, and evidence that the parent can afford to honour it.

Source: Wilson Bayly Holmes-Ovcon announcement (23 February 2022).

Voltana at planning

Voltana's $60 million bank facility matures in about 13 months (1 August 2027), inside the period the auditor

must consider, and operating cash flow was negative because inventory grew. But it meets its loan conditions

comfortably, with profit covering interest more than four times against a minimum of three. The team rates the

going concern risk as moderate and plans to obtain management's cash flow forecast, test its assumptions

against past performance and the order book, read the bank correspondence about refinancing, and watch

events after year end. Whether there is a material uncertainty is a question for Module 4.

Climate in the financial statements

Climate risks can affect the statements even when the word climate never appears in them, and they are

assessed like any other risk.

Source of the guidance Where climate risks can reach the statements

Australian standard setters (AASB and

AUASB joint bulletin)

Impairment testing, useful lives, fair values, provisions and expected credit

losses on loans

International guidance (IFRS

Foundation)

Adds the valuation of inventory and going concern

At Voltana Extreme summer heat may shorten battery life (the warranty provision); a

warehouse on a flood plain puts inventory at physical risk; the shift to

renewables supports demand, but rebate changes can swing sales quickly

Reporting from FY2027. With revenue above $200 million and about 850 employees, Voltana falls in the

second group of entities under Australia's mandatory climate reporting, so its first climate disclosures are for the

year beginning 1 July 2026. There is no mandatory climate report for this year, but the climate risks management

is preparing to report must fit the assumptions in this year's financial statements, and the auditor checks that

they do.

Sources: AASB and AUASB joint bulletin (December 2018, revised April 2019); IFRS Foundation educational material on climate-related

matters (November 2020, republished July 2023).

ADVANCED AUDIT AND ASSURANCE | M2 | 2.6.3 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Non-compliance with laws and regulations

Non-compliance means acts or omissions, intentional or not, by the entity, its governing body, management or

others working for it, that are contrary to the law. Compliance is a job for management and those charged with

governance, not the auditor; the auditor's duties depend on which category a law falls into.

Two categories of laws and regulations

Laws with a direct effect

Decide material amounts and disclosures in the statements

Tax and superannuation laws

The Corporations Act's financial reporting requirements

The auditor

Obtain sufficient appropriate evidence of compliance

Other laws

No direct effect, but may be essential to the business

Operating licences

Safety rules

Environmental rules

The auditor

Specific limited procedures: ask management and those charged with

governance about compliance; inspect correspondence with licensing

and regulatory authorities; stay alert during other work

If non-compliance is identified or suspected

Understand what happened Discuss with management

and the board

Consider the effect on the

statements Consider legal advice Consider reporting outside

the entity

Reporting outside the entity. In Australia an auditor must notify ASIC in writing, within 28 days, of

circumstances that give reasonable grounds to suspect a significant contravention of the Corporations Act, or a

contravention that won't be adequately dealt with through the auditor's report or by raising it with the directors.

Beyond that, the Code (APES 110, section 360) expects the auditor to weigh the wider public interest, and in

some cases to disclose the matter to an appropriate authority, usually after legal advice.

Voltana: going concern, climate and compliance

Risk What the team sees Planned response

Going concern

Rated moderate

$60m bank facility matures in about 13 months (1 August

2027), inside the period the auditor considers; operating

cash flow negative as inventory grew; loan conditions met

comfortably (interest cover above 4 times; minimum 3)

Obtain management's cash flow forecast; test its

assumptions against past performance and the order book;

read correspondence with the bank on refinancing; watch

events after year end

Climate

Through the estimates

Extreme heat may shorten battery life; a warehouse on a

flood plain; rebate changes can swing sales. First

mandatory climate disclosures from FY2027 (the year

beginning 1 July 2026)

Ask the engineer to allow for heat in the warranty range;

consider flood exposure in inventory values and insurance;

check the climate risks being prepared for FY2027

reporting fit this year's assumptions

Compliance

Lapsed electrical

licences

Some batteries installed by workers whose licences had

lapsed: a breach of safety laws, rebate claims that may

be invalid, and possible penalties

Understand what happened; discuss with management and

the board; test the rebate receivable and any penalty

provision; consider legal advice and any duty to report

ADVANCED AUDIT AND ASSURANCE | M2 | 2.6.3 | STUDENT COMPANION

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Practice questions

MODULE 2 | 2.6.3 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Spot the warning signs

Yarrabee Freight Pty Ltd (imagined) runs a fleet of trucks carrying groceries and building materials across two

states. Which facts are going concern warning signs, and of which type?

Fact Warning sign? Financial,

operating or

other?

(a) At 30 June, current liabilities exceed current assets by $3.1 million

(b) Its largest customer, a supermarket chain providing 35% of revenue,

will move its contract to a rival in October

(c) The operations director and the fleet manager resigned in May and

haven't been replaced

(d) The fuel supplier now wants payment on delivery instead of 30-day

terms

(e) Yarrabee signed a five-year lease on a new depot in March

(f) The state government will charge heavy vehicles a new road-user

fee from January, which will cut Yarrabee's margin

(g) Its depot was flooded in February, and the insurer has rejected the

claim

(h) Revenue rose 8% this year, and the company made a profit of $1.2

million

ADVANCED AUDIT AND ASSURANCE | M2 | 2.6.3 | STUDENT COMPANION

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Question 2 - Sort the laws

Sort each law into the two categories and describe the auditor's procedures for each.

Law affecting Yarrabee Direct or

other?

The auditor's procedures

(a) Payroll tax law

(b) Fringe benefits tax law

(c) The Corporations Act's financial reporting

requirements, including accounting

standards

(d) Heavy vehicle law on driver fatigue and

vehicle mass limits

(e) Work health and safety laws

(f) The environmental licence for the depot's

fuel storage

Question 3 - Voltana's lapsed licences

The team discovers that some Voltana batteries were installed by workers whose electrical licences had lapsed.

Plan the response, from the first conversation to any reporting duty.

Stage Your planned response

The first conversation

Understanding what

happened

Effect on the financial

statements

Effect on the rest of the

audit

Reporting duties

ADVANCED AUDIT AND ASSURANCE | M2 | 2.6.3 | STUDENT COMPANION

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Worked answers

MODULE 2 | 2.6.3 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Yarrabee Freight

Weigh them together: (a), (b), (d) and (g) at once would make the risk high.

Warning sign? Why

(a) Yes: financial Net current liabilities

(b) Yes: operating Loss of a key customer worth over a third of revenue

(c) Yes: operating Loss of key managers, with no replacements

(d) Yes: financial Suppliers moving to cash terms signal a loss of trust in its credit

(e) Not on its own A normal commitment, though it adds to fixed costs if revenue falls

(f) Yes: other A change in government policy expected to hurt the business

(g) Yes: other An uninsured catastrophe

(h) No Possibly mitigating, but profit isn't cash: test whether it is turning into cash

Question 2 - The two categories

Category The auditor's procedures

(a), (b) Direct Recalculate the tax, check rates, thresholds and lodgements, and test the liability, to obtain

sufficient appropriate evidence of compliance

(c) Direct Evidence of compliance runs through the whole audit: every recognition, measurement and

disclosure requirement

(d), (e), (f) Other Ask management and those charged with governance about compliance; inspect

correspondence with the heavy vehicle, safety and environmental regulators; stay alert for

fines, incidents or notices during other work. Breaches could still bring penalties or

provisions, or threaten the licence to operate

Question 3 - Voltana's lapsed licences (suggested)

Stage Response

The first conversation Raise it promptly with management and, given its seriousness, with those charged with

governance (go straight to them if management may be involved)

Understanding what

happened

Which workers and installations, since when; match installers on rebate claims to the

licence register; was it known or deliberate? Consider legal advice

Effect on the financial

statements

The rebate receivable (claims that may be invalid); repayments, penalties or

re-inspection costs as provisions or contingent liabilities; disclosures

Effect on the rest of the audit Reassess fraud risk and management's integrity; report the control deficiency; obtain

written representations on known non-compliance

Reporting duties Tell those charged with governance; consider the auditor's report; with legal advice,

weigh reporting to an appropriate authority (such as the electrical safety regulator) under

the Code; notify ASIC only for a significant contravention of the Corporations Act

ADVANCED AUDIT AND ASSURANCE | M2 | 2.6.3 | WORKED ANSWERS

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