Going concern, covenant waiver and a subsequent customer bankruptcy
Astana construction company Kun Boldy JSC has a year end of 31 December 2025. Current liabilities exceed current assets by KZT 2.4 billion and the company reported a net loss of KZT 1.1 billion. A bank loan of KZT 3 billion is classified as current because a financial covenant was breached at year-end. In February 2026 the bank issued a waiver valid until 31 December 2026, but the agreement requires immediate repayment if a major contract is terminated. In March 2026, before the auditor's report is dated 15 April 2026, the company's main customer filed for bankruptcy; that customer represents 35% of receivables. Management prepares a cash flow forecast to December 2026 showing headroom only if the customer pays 40% of its balance and the bank does not demand repayment. The engagement partner asks about going concern, subsequent events and whether an emphasis of matter paragraph is enough.
1. Evaluate whether management's going concern assessment is adequate and describe the additional audit procedures you would perform.
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The assessment is not adequate as presented. A single forecast with headroom dependent on a 40% recovery from a customer that has now filed for bankruptcy is not a robust base case. Management should provide a sensitivity analysis showing the effect of zero recovery, delayed bank waiver, contract termination and reduced margins. The assessment period should cover at least 12 months from the date of the auditor's report, not merely to December 2026. The waiver is relevant, but its value depends on the covenant and termination clauses, and a waiver until 31 December 2026 does not by itself remove the going concern risk after that date.
Additional procedures include: obtain the signed waiver and read its conditions; confirm directly with the bank; review the loan agreement for cross-default and termination triggers; obtain updated cash-flow forecasts, including a downside case; test the arithmetic and key assumptions; review the aged receivable ledger and post-year-end receipts; obtain legal confirmation on the customer bankruptcy; inspect board minutes and correspondence with customers; and assess whether management has the ability to defer or reduce costs. The auditor should also consider whether the bankruptcy is evidence of a condition existing at year-end, which would make it an adjusting event for the receivable balance.
2. Determine the effect on the auditor's report. Distinguish between a material uncertainty and a situation where the going concern basis is inappropriate. Explain the treatment of the customer bankruptcy.
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If the auditor concludes that the going concern basis is appropriate but a material uncertainty exists, the report includes a separate 'Material Uncertainty Related to Going Concern' section. That section is not the same as an emphasis of matter; ISA 570 requires a specific section that draws attention to the relevant disclosure and states that the auditor's opinion is not modified. An emphasis of matter paragraph is not a substitute for the going concern section.
If the going concern basis is inappropriate because liquidation is imminent or the entity cannot continue, the opinion is adverse. If management's disclosures about the material uncertainty are inadequate, the opinion is qualified or adverse, depending on materiality and pervasiveness.
The customer bankruptcy is a subsequent event. Because it provides evidence of conditions existing at 31 December 2025, it is an adjusting event: the receivable should be remeasured and the loss recognised in the 2025 financial statements. It may also be a further going concern indicator. The auditor should not simply add an emphasis of matter paragraph; the financial statements must be adjusted and the going concern assessment updated.
3. What should the engagement partner document and communicate to those charged with governance before signing the report?
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The partner should document the going concern assessment, the procedures performed, the waiver terms, the sensitivity analysis, the conclusion on the customer receivable, and the reasons for the opinion. The documentation should show why the auditor concluded that a material uncertainty exists or does not exist, including the period covered and the assumptions challenged. The partner should also document the review by the engagement quality control reviewer and any consultation with the firm's technical or legal specialists.
Before signing, the partner should communicate with those charged with governance: the going concern risk, the need for adjustment of the receivable, the adequacy of disclosures and the intended form of the audit report. If management refuses to adjust or disclose, the partner should explain the effect on the opinion and escalate within the firm. The auditor should also consider whether the bank or the customer situation triggers a legal or regulatory reporting obligation. Signing should be delayed until the evidence is sufficient and the disclosures are final.