The Audit Partner's Pressure on a Going-Concern Judgement
You are the manager on the audit of Baraka Logistics Ltd. Draft financial statements show a loss of KES 9,000,000, net current liabilities of KES 4,500,000, and a bank loan of KES 20,000,000 due for repayment in eight months. The directors have prepared cash-flow forecasts showing the company can continue as a going concern, but the forecasts assume: (a) the bank will roll over the loan; (b) a major customer contract will be renewed; and (c) a KES 6,000,000 receivable from a related party will be collected in full. You have written confirmation from the bank that rollover is 'under consideration' but no commitment. The customer contract has not been signed. The related-party receivable is from a company with net liabilities. The engagement partner says the client is 'a long-standing fee earner' and wants an unmodified opinion with no going-concern paragraph, arguing the directors' forecasts are 'management's judgement'.
1. Evaluate the adequacy of the going-concern evidence and the appropriateness of the partner's proposed opinion.
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The evidence does not support an unmodified opinion without a going-concern paragraph.
Assessing each assumption.
- Bank rollover: 'Under consideration' is not a commitment. ISA 570 requires the auditor to consider the availability of confirmed financing; a letter stating rollover is being considered is weak evidence for a KES 20m loan due in eight months.
- Customer contract: Unsigned. A forecast built on an unsigned contract is a hope, not a basis.
- Related-party receivable: The debtor has net liabilities, so collectability in full is doubtful. This is also a related-party transaction requiring scrutiny and disclosure.
Conclusion on going concern. Taken together, all three pillars of the forecast are unconfirmed. There is a material uncertainty that may cast significant doubt on the entity's ability to continue as a going concern. That does not necessarily mean the going-concern basis is inappropriate - but it does mean the uncertainty must be disclosed and the auditor must include an Emphasis of Matter / Material Uncertainty paragraph.
On the partner's argument.
- 'Management's judgement' does not relieve the auditor of the duty to evaluate it. The auditor must assess whether the judgements are reasonable and supported.
- 'Long-standing fee earner' is a self-interest threat to independence and objectivity; it is not a valid basis for an opinion.
- Issuing an unmodified opinion without a going-concern paragraph would mislead users and breach professional standards.
2. State the actions you would take as audit manager, including how you would document the matter and handle the disagreement with the partner.
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Further procedures before concluding.
- Seek a written bank commitment or a term sheet; escalate to the bank directly if necessary.
- Obtain the signed customer contract or evidence of renewal.
- Obtain evidence of the related-party receivable's recoverability - financial statements of the debtor, payment history, security.
- Perform sensitivity analysis: if rollover is refused, can the entity survive? Quantify the shortfall.
- Obtain written management representations on the assumptions and their plans.
- Consider whether disclosure in the financial statements is adequate; if not, qualify.
Documentation.
- Record the facts, the evidence obtained, the judgements made and the reasoning in the audit file.
- Document the disagreement with the partner, the options considered and the resolution.
Handling the disagreement.
- Raise it formally with the engagement partner, citing ISA 570 and the evidence.
- If unresolved, escalate to the engagement quality control reviewer and, if necessary, the firm's ethics/risk partner.
- The firm must not allow fee pressure to override the evidence.
- If the partner insists, the matter may need to go to the firm's leadership; the auditor's report is the firm's, not the partner's.
Likely outcome. An unmodified opinion with a material uncertainty paragraph (and possibly a qualified opinion if disclosure is inadequate), not a clean report with no mention of going concern.