Question 2
John and Jane Co (John and Jane) is a computer hardware specialist and has been trading for over five years. The company is funded partly through overdrafts and loans and also by several large shareholders; the year end is 30 April 2014. John and Jane has experienced significant growth in previous years; however, in the current year a new competitor, Drums Design Co (Drums), has entered the market and through competitive pricing has gained considerable market share from John and Jane. One of John and Jane’s larger customers has stopped trading with them and has moved its business to Drums. In addition, a number of John and Jane’s specialist developers have left the company and joined Drums. John and Jane has found it difficult to replace these employees due to the level of their skills and knowledge. John and Jane have just received notification that its main supplier who provides the company with specialist electrical equipment has ceased to trade. John and Jane is looking to develop new products to differentiate itself from the rest of its competitors. It has approached its shareholders to finance this development; however, they declined to invest further in John and Jane. John and Jane’s loan is long term and it has met all repayments on time. The overdraft has increased significantly over the year and the directors have informed you that the overdraft facility is due for renewal next month, and they are confident it will be renewed.
The directors have produced a cash flow forecast which shows a significantly worsening position over the coming 12 months. They are confident with the new products being developed, and in light of their trading history of significant growth, believe it is unnecessary to make any disclosures in the financial statements regarding going concern. At the year end, John and Jane received notification from one of its customers that the hardware installed by John and Jane for the customers’ online ordering system has not been operating correctly. As a result, the customer has lost significant revenue and has informed John and Jane that they intend to take legal action against them for loss of earnings. John and Jane has investigated the problem post year end and discovered that other work-in-progress is similarly affected, and inventory should be written down. The finance director believes that
as this misstatement was identified after the year end, it can be amended in the 2015 financial statements.
Required:
(a) Describe the procedures the auditors of John and Jane Co should undertake in relation to the uncorrected inventory misstatement identified above. (4 marks)
(b) Explain SIX potential indicators that John and Jane Co is not a going concern. (6 marks)
(c) Describe the audit procedures which you should perform in assessing whether or not John and Jane Co is a going concern. (6 marks)
(d) The auditors have been informed that John and Jane’s bankers will not make a decision on the overdraft facility until after the auditor’s report is completed. The directors have now agreed to include some going concern disclosures. Describe the impact on the auditor’s report of John and Jane Co if the auditor believes the
company is a going concern but that this is subject to a material uncertainty. (4 marks)
