Chikondi Holdings: covenant breach, component auditor and subsequent event
Chikondi Holdings Ltd is a Malawi-listed group with a 75%-owned Tanzanian subsidiary and a 100%-owned Kenyan subsidiary. For the year ended 31 December 2025, group revenue is MWK 9.8bn and profit before tax is MWK 640m. Group materiality is MWK 120m and performance materiality is MWK 84m. The Tanzanian component represents 32% of group revenue and 28% of assets; component materiality is MWK 45m. The group bank loan is MWK 2.4bn. A covenant requires a current ratio of at least 1.2:1; the actual ratio at 31 December 2025 was 1.05:1. The bank gave a written waiver on 10 February 2026, before the financial statements were approved on 25 March 2026, but the waiver expires on 31 December 2026. A group customer owing MWK 95m entered liquidation on 5 February 2026; its cash flow had deteriorated since September 2025. The receivable is unprovided. The component auditor reported an unreconciled intercompany balance of MWK 18m that management says is immaterial.
1. Evaluate the classification of the bank loan and the going concern conclusion. What additional evidence is needed?
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The covenant was breached at 31 December 2025. Under IAS 1, a breach at the reporting date makes the loan current, even if a waiver is obtained after the reporting date. The waiver on 10 February 2026 does not cure the year-end breach. The loan of MWK 2.4bn should be reclassified from non-current to current unless the lender had agreed before 31 December 2025 to provide an unconditional right to defer settlement for at least twelve months after the reporting date. The waiver expiring on 31 December 2026 is also only just twelve months and was obtained late, so its terms need scrutiny.
For going concern, the waiver may remove immediate repayment risk, but the group still needs to demonstrate it can meet covenants and refinance after expiry. Obtain the waiver letter, loan agreement, covenant calculations, cash-flow forecasts covering at least twelve months, sensitivity analysis, post-year-end receipts and bank correspondence. If material uncertainty remains but is adequately disclosed, an unmodified opinion with a material uncertainty paragraph may be appropriate. If disclosure is inadequate, modify the opinion.
2. Determine the effect of the customer liquidation and the intercompany difference on the audit opinion and materiality assessment.
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The customer liquidation is an adjusting event: the deterioration since September 2025 indicates the receivable was impaired at year-end. The MWK 95m receivable should be provided, reducing profit before tax by 95m. This is 79% of group materiality of MWK 120m and above performance materiality of MWK 84m. It is not clearly trivial and is qualitatively material because it affects the covenant and going concern. If management refuses to adjust, the financial statements are materially misstated; issue a qualified opinion unless the effect is pervasive, in which case an adverse opinion is required.
The MWK 18m intercompany difference is below component materiality of MWK 45m and group materiality. Individually it is not material, but it may indicate a control deficiency and could affect consolidation. Aggregate it with the 95m receivable: 113m is close to group materiality. Also consider qualitative effects. Management should correct the elimination if it is an error, and the auditor should document why any uncorrected difference is immaterial.
3. Design the group audit response to the Tanzanian component auditor, including review and communication.
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The Tanzanian component is significant: 32% of revenue and 28% of assets. The group auditor must evaluate the component auditor's independence, competence, quality control and understanding of the group's requirements. Issue group audit instructions covering component materiality of MWK 45m, significant risks, related-party transactions, going concern, inventory and revenue cut-off.
Require the component auditor to report on the intercompany balance and any covenant or going concern matters. Review the component auditor's workpapers for significant risks, attend the clearance meeting, and test the consolidation and intercompany eliminations at group level. Obtain written representations from component management and the component auditor. Communicate findings to those charged with governance. If the component auditor's work is unsatisfactory, perform additional procedures at the component or modify the group audit opinion.