Going Concern Under Pressure
You are the manager on Kestrel Logistics Ltd, year end 31 March 2025. The company has a bank loan of $8m due for repayment on 30 September 2025. At the date of the audit report (planned 20 June 2025) the directors have not begun refinancing discussions. Cash flow forecasts to 30 June 2026 show a net cash outflow of $1.1m and a cash balance falling to $140,000 by December 2025. The forecasts assume a 6% revenue growth, but revenue fell 9% in the year just ended and the largest customer (28% of revenue) has given notice. The directors have prepared the financial statements on a going concern basis and disclosed the loan maturity and the customer loss, but state that 'the directors are confident refinancing will be obtained'. The audit report is due; the directors refuse to extend the assessment period or to include a material uncertainty paragraph.
1. Evaluate the appropriateness of the going concern basis and determine the effect on the audit report.
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Framework: ISA 570 (revised) - management must assess going concern for at least 12 months from the date of approval (here to June 2026). The auditor evaluates that assessment and considers whether a material uncertainty exists.
Evidence against the basis:
- $8m loan repayable 30 September 2025 - within 12 months of the reporting date and before the forecast period end. No refinancing discussions have begun; there is no committed facility.
- Forecast cash falls to $140,000 by December 2025 - thin buffer; the company may not meet the repayment.
- Forecasts assume 6% growth contradicted by actual -9% and the loss of 28% of revenue. The assumptions are not supportable - the forecast is unreliable.
- Refusal to extend the assessment period is itself a red flag.
Conclusion: A material uncertainty exists. The going concern basis may still be appropriate if the directors believe refinancing is probable, but the uncertainty must be disclosed.
Effect on the report:
- If the disclosure of the material uncertainty is adequate → unmodified opinion with a 'Material Uncertainty Related to Going Concern' section (ISA 570), placed after the basis for opinion.
- If disclosure is inadequate (as here - 'confident refinancing will be obtained' without disclosing the uncertainty) → qualified opinion ('except for') due to material misstatement in the disclosures.
- If the going concern basis is not appropriate → adverse opinion.
Here, the directors' refusal to disclose the uncertainty points to a qualified opinion; document the discussion and escalate to the partner and those charged with governance.
2. What additional audit procedures should be performed before the report is signed, and what is the auditor's responsibility if the directors refuse?
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Additional procedures (ISA 570):
- Obtain written representations from the directors on their going concern assessment and their plans.
- Inspect correspondence with the bank, loan agreements and covenant terms; confirm whether any waiver or extension exists.
- Review post year-end management accounts and cash position to the latest practicable date.
- Challenge the 6% growth assumption: obtain the underlying model, test the customer-loss effect, perform sensitivity analysis (what happens if growth is 0% or negative?).
- Enquire of the directors about refinancing steps taken; obtain evidence of any term sheets or lender discussions.
- Review board minutes and correspondence with the largest customer.
- Consider whether the loss of the customer is an adjusting or non-adjusting event (ISA 560).
If the directors refuse:
- The auditor cannot accept management's assertion without evidence. The refusal to disclose a material uncertainty is a misstatement.
- Escalate to those charged with governance (the board / audit committee), documenting the matter and the response.
- If unresolved, issue a qualified opinion for inadequate disclosure. The auditor does not have the option of omitting the matter - the report must reflect the position.
- Record the matter in the key audit matters section if applicable, and consider whether the refusal indicates a broader integrity issue affecting other representations.