Wayamba Tyre Retreads: A Bank Demand, a Collapsed Customer and Unsaleable Inventory
Wayamba Tyre Retreads (Pvt) Ltd has a 31 March 2025 year end, revenue of LKR 1.62 billion and overall materiality set at LKR 12 million. The LKR 350 million term loan was due for renewal in April 2025, and a covenant test at year end was breached because EBITDA fell 18%. On 12 May 2025 the bank wrote demanding repayment within 60 days and froze the overdraft. On 20 May 2025 the company's largest customer, representing 22% of trade receivables (LKR 90 million), was placed in liquidation. Inventory of LKR 210 million includes LKR 70 million of retreaded tyres for a bus model withdrawn from service in June 2025. Management's cash flow forecast assumes the loan is renewed, a LKR 120 million rights issue succeeds in August and receivables are collected in full; on those assumptions September still shows a cash shortfall. Management proposes to disclose nothing, arguing the bank "has always renewed". The finance director has offered a written representation that the going concern basis is appropriate.
1. Evaluate the going concern conclusion. What opinion would you issue if management refuses to disclose, and what if it discloses fully?
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Conclusion on going concern. A material uncertainty exists. Three independent, interrelated facts drive it: the loan is legally repayable on demand, the overdraft is frozen, and the largest debtor has failed. Management's forecast is internally inconsistent – it already shows a September shortfall even when every optimistic assumption holds – so the forecast does not support the going concern basis without a material uncertainty.
If disclosure is adequate. The financial statements are still prepared on a going concern basis, but LKAS 1 and SLAuS 570 require clear disclosure of the uncertainty. The opinion stays unmodified, with a separate Material Uncertainty Related to Going Concern section placed immediately after the Opinion paragraph. It is not reported as a Key Audit Matter, because SLAuS 701 excludes going concern from KAM reporting where that section is used.
If management refuses to disclose. This is a disagreement about disclosure, not about recognition. The effect is potentially pervasive: the uncertainty affects the classification of the entire loan, the valuation of receivables, the inventory write-down, and the presentation of assets and liabilities as current or non-current. Where the possible effects are both material and pervasive, issue an adverse opinion under SLAuS 705; a qualified opinion would understate the breadth of the problem. If management also refuses to extend its assessment, consider a disclaimer and take legal advice on withdrawal.
2. How should the LKR 70 million of withdrawn-model tyres be treated, and what is the opinion impact if management refuses any adjustment?
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Measurement. LKAS 2 requires inventory to be measured at the lower of cost and net realisable value. NRV is estimated selling price less costs to complete and sell. Tyres for a bus model removed from service in June 2025 have no credible route to sale at cost; at best there is a scrap or export value. Establish the NRV from evidence – scrap quotations, any export buyer – and write the carrying amount down to that figure. On the facts, a write-down of about LKR 70 million is the working assumption until better evidence appears.
Materiality. LKR 70 million is roughly 5.8 times overall materiality of LKR 12 million and about 4.3% of revenue. It is clearly material.
Pervasiveness. The misstatement is confined to one class of inventory. It does not affect the financial statements as a whole, so if management refuses the adjustment the opinion should be qualified (except for) on the grounds of misstatement under SLAuS 705, with the quantified effect disclosed in the Basis for Qualified Opinion.
Knock-on effects. The write-down reduces EBITDA further and worsens the covenant position, so it must feed into the going concern assessment rather than being treated as an isolated valuation matter. Also check whether the same model's tyres exist in work in progress or in raw materials, which would widen the adjustment.
3. The finance director offers a written representation that the going concern basis is appropriate. How much reliance can you place on it, and what actions follow?
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Written representations are not audit evidence. They corroborate other evidence; they can never substitute for it, and they cannot cure a conclusion the auditor has reached on the underlying facts. A representation that the going concern basis is appropriate carries little weight when the bank has demanded repayment, the overdraft is frozen, a major debtor is in liquidation and the company's own forecast shows a shortfall.
Assess management's assessment first. Ask for the forecast, the assumptions, the bank correspondence and the rights issue documentation. If management will not extend its assessment or will not make the disclosure the auditor considers necessary, that is a scope limitation and a matter to report.
Consequences of doubt about management integrity. If the refusal looks like deliberate concealment rather than disagreement, reassess management's reliability for the whole audit, re-perform procedures on other areas, and consider whether to continue. Communicate with those charged with governance, document the discussion, and take legal advice on withdrawal where the auditor is unable to obtain sufficient appropriate evidence.
Reporting. Any material uncertainty or modification must be described in the auditor's report with the facts, not in vague language, and the reasons for a qualified or adverse opinion must be quantified where possible.