Question 14:


Which of the following may NOT impair the going-concern of a business organisation?  

A. Failure of proper control mechanism and insider abuse 

B. Management incompetence 

C. Fraudulent practices by management 

D. Political unrest 

E. Ability to meet creditors bill as at when due  


The correct answer is (E)


Past Question Review:

Financial statements are usually prepared under the presumption that the audited entity  is carrying on business as a going concern.  Unless otherwise stated, it is assumed that the financial statements are prepared on this  basis. 

The auditors should assess whether it is  appropriate for the directors to prepare the financial statements on the going concern basis, and should take account of the assessment in preparing their reports. The  auditors should: 

a. consider a written assertion from the  directors as to the directors' assessment of  the appropriateness of the going concern  basis of preparing the financial statements 

b. consider the adequacy of disclosures on the  financial statements relevant to the appropriateness of the going concern basis,  and 

c. take account of their findings in preparing  their report. 

There are a number of symptoms that may be used to diagnose going concern difficulties, and most checklists drafted for this purpose will incorporate some or all of the following: 

1. Loan repayments are falling due in the near future, and refinancing facilities are not immediately available. 

2. High or increasing debt to equity ratios exist (high gearing) 

3. The company is heavily or increasingly dependent upon short term finance, particularly from trade creditors and overdrafts. 

4. There is inability to take advantage of discounts, the time taken to pay creditors is increasing, and suppliers impose cash terms. 

5. Normal purchases are being deferred, thereby reducing stocks to dangerously low levels. 

6. Substantial losses are occurring, or the state of profitability is declining.

7. Normal capital expenditure is being switched to leasing agreements. 

8. The company has a net deficiency of current assets or its ratio of current assets to current liabilities is declining. 

9. The company is near to its present borrowing limits, with no sign of reduction in requirements. 

10. Collection rate from debtors is slowing down. 

11. Rapid development of business is in danger of creating an over trading situation. 

12. There is dependence upon a limited number of products, customers or suppliers. 

13. There is evidence of major reductions or cancellations of capital projects. 

14. There is heavy dependence on an overseas holding company for finance or trade. 

As per the above question, the correct answer is (E)

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