Question

Going concern Mark Jackson is the partner on the audit team for a new client, Central Companies (CC). The client hired Mark’s firm in August 2022 in preparation for the December 31, 2022, audit. Mark’s firm is replacing the predecessor firm that audited CC for the last 12 years. Since January 2022, CC has experienced a slowdown in sales as evidenced by lower inventory turnover ratios. Slower inventory turnover has negatively impacted operating cash flow, which has resulted in CC paying some of its suppliers late. Some of the smaller suppliers are demanding that CC pay cash on delivery of inventory items.

Mark is also aware of correspondence between CC and its bank that the company started having cash flow problems as far back as 2021. CC has attempted to obtain short-term financing from its bank but has not been successful. CC’s management has adequately disclosed these issues in the 2022 financial statements. Based on the audit evidence, CC’s financial statements are presented fairly in accordance with the financial reporting framework, but Mark has concluded that CC has a substantial going concern issue.

Required

Prepare the appropriate audit report for Central Companies.

Answer 1

Audit Report of Central companies:

While reviewing Books of accounts and records of the CC ( chemical Companies ) financial , Mark noticed that Company present revenue growth is very slow with high Inventory Turnover ratio.

Due to slower Inventory , its impacted badly in companies cash flow and due to poor cash flow , company is not able to make supplier payment on Time .

Due to poor performance , company is not able to obtain shot term financing from bank . So Overall we noticed that company having tremendous cash flow issue . On top , recently companies past Auditor ( who audited last 12 years) also left .

As per above situation . Mark as a new Audit partner , can smell about Going Concern issue in this Organization .

We also noticed that , as per Audit evidence , Companies financial statement are presented fairly in accordance with the financial reporting framework. So with help of this point , We can mentioned that company is not hide any material uncertain documents .

As per present situation , We have noticed that company is presently issue in revenue and clearance Inventory , may be this is not permanent in nature .

We also notice that this company is running for long time and they must have some strategy and future growth plan .

Mark can smell that some issue relates to Gong concern But On the above points , we can not judge immediately .

As we understood from above points that company is following correct accounting policies, procedure and disclose all material facts in Audited financial Statement.

All above slow down may bring some concern at present but We need to wait for few more time and watch movement accordingly