Assignment:
INSTRUCTIONS
The assignment should be completed using the table format shown below. A maximum word limit for the assignment in total is 1000 words.
Part A :
For each of the following situations, explain how inherent risk should be assessed and what effect that assessment will have on detection risk.
· Wahabi Services is a fast-growing transportation company. Wahabi and his sons one 55 percent of the issued share capital. Mr. Wahabi is chairman of the board and CEO. He personally makes all the major decisions with little consultation with the board of directors. Most of the directors, however are either members of Wahabi family or long-standing friends. The board basically rubber-stamps Mr. Wahabi's decisions.
· Karim Pin Ltd. Has experienced slower sales during the last year. There is a new director of finance and a new controller. V. Selvam, a retired tennis player whom remain undefeated for 20 years, is the new chairman of the company has a reputation for hard-noses business tactics, and he is always concerned with meeting forecast earnings.
· The Premier Finance Ltd has been your client for the past two years. During that period you have had numerous arguments with the CEO and controller over a number of accounting issues. The major issue has related to the provision for doubtful debts and the value of collateral. Your prior audits have indicated that a significant adjustment is required each year to the provision.
Part B :
1. Your firm is the auditor for Excel Ltd, a large construction company. During the audit for the year ended 31 December 2017, you were informed by the managing director that the company has recently lost a major government contract. You know that Excel's projections include a major share of the work from this contract. The company has been experiencing some cash flow difficulties, although this is not unusual in the industry. Management has recently fully extended their bank credit facility in order to pay day to day expenses. The audit partner is concerned that the company may be facing going concern problem, but the managing director maintains that they intend to cut back future capital expenditure to alleviate the going concern issue.
Required:
a. Identify five indicators of a financial nature that may raise doubt on entity's ability to continue as going concern.
b. In addition to the plan action mentioned by the managing director, what are other possible mitigating factors that may help a company to alleviate its going concern problems?
c. What evidence should the auditor obtain with respect to management's plan about the various mitigating factors identified in part (b)?