Going concern at completion

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Going concern at completion

MODULE 4 | 4.1.2 | STUDENT COMPANION

When events or conditions raise significant doubt about whether the entity can keep going, the auditor must

do more work to decide whether a material uncertainty exists: evaluate management's assessment and

its plans, test the cash flow forecast, look for new facts and obtain written representations. Every

mitigating plan needs its own evidence, and support from others needs evidence of both the supporter's

intention and ability. At Voltana, a signed refinancing offer, a forecast that survives a downside and

covenants still met lead to a conclusion of no material uncertainty.

When doubt exists: the extra procedures

1

Ask for an

assessment

If management hasn't

assessed going concern

yet, ask it to

2

Evaluate the plans

Is the outcome likely to

improve the situation?

Are the plans feasible?

3

Test the forecast

Where it's central:

reliable data?

Assumptions adequately

supported?

4

Look for new facts

Has anything emerged

since management

made its assessment?

5

Get written

representations

From management,

about its plans and their

feasibility

How far ahead the auditor looks in Australia

About 12 months: from the auditor's report to next year's expected report

Year end Auditor's report Next year end Next year's report

(expected)

So it reaches past the end of the next financial year (ASA 570, Aus 13.2). Revised ASA 570, for periods beginning on or after 15 December 2026: at least 12

months after the financial report is approved.

How far ahead each party looks

Who The period

Management (accounting

standards)

At least twelve months from the end of the reporting period, taking into account all

available information about the future

Auditor: current ASA 570 (Aus

13.2)

About twelve months: from this year's report date to the expected date of next

year's report, so past the end of the next financial year

Auditor: revised ASA 570 For periods beginning on or after 15 December 2026: at least twelve months after

the financial report is approved; if management's assessment is shorter, the

auditor asks it to extend it

The forecast. Where a cash flow forecast is central, the auditor tests the data behind it (is it from a reliable

system? how accurate were past forecasts?) and challenges each assumption against what the auditor knows

about the business. The most useful questions are about sensitivity: which assumption, if it failed, would leave

the entity short of cash, and what would a reasonable downside look like?

ADVANCED AUDIT AND ASSURANCE | M4 | 4.1.2 | STUDENT COMPANION

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Every mitigating plan needs its own evidence

Sell assets

EVIDENCE NEEDED

Evidence that buyers exist

and that the sale is permitted,

for example under loan

agreements

e.g. offers or a signed contract;

the lender's consent

Borrow or restructure

debt

EVIDENCE NEEDED

Evidence from the lender,

such as a signed offer or

approved terms

e.g. a credit-approved offer, not

a friendly email

Cut or delay spending

EVIDENCE NEEDED

Evidence that the cuts are

achievable without damaging

the business

e.g. approved plans; costs that

can really stop

Raise new capital

EVIDENCE NEEDED

Evidence of commitments

from investors or underwriters

e.g. signed commitments; an

underwriting agreement

Plans that rely only on management's confidence aren't evidence at all.

Letters of support: four questions

A smaller company may rely on its owners not to demand repayment of their loans; a subsidiary may rely on its

parent. A letter of support helps only if the auditor is satisfied about both the supporter's intention and its ability

to provide the support.

Question Why it matters

Is it legally binding, or only a statement of

present intention?

An intention can change tomorrow; a binding commitment can be

enforced

How long does it last? Support that can be withdrawn at any time gives little comfort

Does it cover the whole assessment

period?

Support that ends early leaves a gap exactly when it may be needed

Can the supporter afford it? Examine the supporter's own financial statements, cash and other

commitments: a promise is only as strong as the person or company

behind it

Case note: Probuild (from Module 2). The lesson returns to Probuild for one point: support is only as good as

the supporter's willingness and capacity to keep giving it. Past support proves nothing about the future.

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

ADVANCED AUDIT AND ASSURANCE | M4 | 4.1.2 | STUDENT COMPANION

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Testing Voltana's forecast and finance

Item What the team did Result

Sales growth of 10% Compared with actual sales for July and

August

About 7% above last year: below the 10%

assumed, so the downside case matters

Gross margin back to 32% Ran a downside case with no margin

recovery (and no growth)

Still enough cash to operate until the

facility matures

About $15m released by

selling older models

Checked against prices achieved after

year end

Assumption checked against real sales

Refinancing of the $60m

facility (due 1 August 2027)

Obtained the bank's letter directly and

confirmed its terms

Signed, credit-approved offer to extend to

2029; standard conditions already met

Interest cover covenant Recalculated after the Module 3

corrections

EBIT about $13.2m: about 3.8 times,

above the minimum of 3

Voltana: the going concern conclusion

A binding refinancing offer

The $60m facility matures on

1 August 2027, inside the

assessment period

August: the bank's signed,

credit-approved offer to

extend it to 2029; standard

conditions already met

Obtained directly from the

bank; terms confirmed

A forecast that survives a

downside

Assumes 10% sales growth,

gross margin back to 32%,

about $15m released from

older stock

July-August sales about 7%

above last year; stock prices

after year end checked

Downside (no growth, no

margin recovery): still

enough cash until maturity

Covenants still met

EBIT about $13.2m after the

Module 3 corrections

Interest cover about 3.8

times, against the bank's

minimum of 3

Conclusion

The going concern basis is

appropriate, and no material

uncertainty exists

Change one fact

one letter different

Suppose the bank had issued only an indicative term sheet: willing to discuss an extension, but no commitment. The

refinancing stays uncertain and the facility falls due inside the assessment period, so a material uncertainty is likely:

clear disclosure in the statements, plus its own section in the auditor's report.

Two other outcomes. If the going concern basis isn't appropriate at all, for example because the directors

intend to liquidate, statements prepared on the going concern basis are materially misstated and the auditor

expresses an adverse opinion. If management won't make or extend its assessment when asked, the auditor

considers what that means for the evidence and the opinion: the scope of the audit may be limited. The Exam

Reference Pack (page 6) maps every going concern outcome.

ADVANCED AUDIT AND ASSURANCE | M4 | 4.1.2 | STUDENT COMPANION

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Practice questions

MODULE 4 | 4.1.2 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Four plans at Keelhaven Boats

Keelhaven Boats Pty Ltd (imagined) builds aluminium fishing boats and small ferries. After two years of losses,

its $2m overdraft is due for review in March 2027. To show it can keep going, the directors put forward four

plans. Evaluate each plan and say what evidence it needs.

The directors' plan Evidence you would need, and your view of the plan

(a) Sell the vacant waterfront yard beside the

factory for about $3m. The bank holds a

mortgage over it.

(b) Convert the $2m overdraft into a five-year

term loan. The bank's relationship manager

has said in an email that he is 'supportive'.

(c) Cut 15 production jobs from October and

delay building a new paint shop.

(d) Raise $4m by issuing new shares to the

founding family and a private investor.

Question 2 - Two letters of support

Keelhaven's auditor expects to sign the report in September 2026. Judge each letter.

The letter How much comfort does it give, and

why?

Letter A, from Brinkhaven Holdings Pty Ltd (imagined), which owns

60% of Keelhaven: a deed approved by Brinkhaven's board,

promising whatever funds Keelhaven needs to pay its debts as they

fall due until 31 October 2027, and not to call in its own $2m loan

before then. Its latest audited statements show net assets of $40m

and cash of $6m.

Letter B, from Keelhaven's founding managing director, who owns

the other 40% and has lent the company $1.5m: 'I currently intend to

keep supporting the company and have no plans to call in my loan.' It

has no end date, and most of his wealth is his shares in Keelhaven.

ADVANCED AUDIT AND ASSURANCE | M4 | 4.1.2 | STUDENT COMPANION

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Question 3 - Keelhaven's cash flow forecast

Identify the three most sensitive assumptions in the forecast below, and give a procedure to test each one.

Item (year to 30 June 2027) $m Key assumption

Receipts from boat sales 14.4 160 boats at an average $90,000 (last year: 130 boats at

$88,000)

Ferry contract progress payments 2.5 A contract with a regional council, expected to be signed in

October

Proceeds from selling the vacant yard 3.0 Sold by December at the agent's appraised value

Payments for materials (8.6) Aluminium prices 10% lower than this year

Wages and overheads (9.8) 15 jobs cut from October

Interest and loan repayments (1.1) Overdraft renewed in March 2027

Net cash flow for the year 0.4 Opening overdraft $1.5m; limit $2.0m

ADVANCED AUDIT AND ASSURANCE | M4 | 4.1.2 | STUDENT COMPANION

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Worked answers

MODULE 4 | 4.1.2 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Keelhaven's four plans (suggested)

Watch for plans that contradict each other: cutting 15 production jobs sits awkwardly with a forecast that needs

23% more boats.

Plan Evidence needed, and comment

(a) Sell the yard An agent's appraisal and, better, written offers or a signed contract; the bank's consent,

because it holds a mortgage and may take the proceeds to reduce the debt; the timing of

settlement; confirmation that the yard isn't needed for production

(b) Convert the overdraft A friendly email isn't a commitment. Look for a signed, credit-approved offer or approved

new terms, with any conditions and covenants, before the March 2027 review

(c) Cut jobs, delay the

paint shop

A board-approved plan, the redundancy costs (cash goes out first), and whether the

remaining staff can still build the boats the forecast assumes; whether the paint shop

contract can be delayed without penalty

(d) Issue shares Signed, unconditional commitments from the investors, evidence they can pay (for

example bank statements), the timetable, and any shareholder approvals needed

Question 2 - The two letters (suggested)

Comfort Why

A Substantial, once

verified

Legally binding, approved by Brinkhaven's board, and it runs to 31 October 2027, beyond

the twelve months after a September 2026 report. Brinkhaven appears able to pay:

confirm the board minute, read its audited statements and recent cash position, and check

that the deed can't be withdrawn

B Little Only a statement of present intention, not binding, with no end date; his ability is doubtful

because his wealth depends on Keelhaven itself. At most it supports the other evidence

Question 3 - The most sensitive assumptions (suggested)

Closing overdraft = $1.5m - $0.4m = $1.1m, only $0.9m inside the $2.0m limit, so losing any of these three would

breach it:

The yard sale ($3.0m by December): obtain the agent's appraisal, any offers or a signed contract, the settlement

date and the bank's consent; check whether the bank will take the proceeds.

The ferry contract ($2.5m, not yet signed): read the council's tender documents and correspondence, ask for

the signed contract and payment schedule, and check Keelhaven can deliver on time.

Boat sales of 160 (23% more than last year): compare with the order book, deposits taken and dealers' orders;

compare July to September actual sales with the forecast; check how accurate past forecasts were. Every 10

boats is about $0.9m.

Also check the overdraft renewal itself (evidence from the bank) and the aluminium price assumption (supplier

quotes), and ask management for a downside case combining the risks.

ADVANCED AUDIT AND ASSURANCE | M4 | 4.1.2 | WORKED ANSWERS

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