Auditing and Assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

J Ltd. is a very famous and 50 years old company and is operating through its own premises which is situated in a costlier locality of the city. During the finance year 200X the auditor observed the following information from the financial statement of the company:

Share Capital (Issued, Called and Paid up) Rs. 100 Lacs
Reserve and Surplus (including undistributed profit) Rs. 50 Lacs
Term Loan and Current Liability Rs. 200 Lacs
Fixed Assets at Book value Rs. 150 Lacs
Current Assets Rs. 50 Lacs
Current Years Profit (Loss)

Here, the auditor has made the following analysis:

Total assets of the company:
(Fixed Assets Rs. 150 Lacs + Current Assets Rs. 50 Lacs) Rs. 200 Lacs
Less: Unabsorbed Losses Rs. 150 Lacs
Balance of assets to discharge its liabilities Rs. 50 Lacs
Less: (Liabilities) Term Loan and Current Liabilities Rs. 200 Lacs

Net worth of the company: (Rs. 150 lacs)

In this case, the auditor observes that an adequate disclosure is made in the financial statements and the auditor need not express and qualified opinion as all the above information are drawn up from the financial statements. However, he should, in his report, add a paragraph that highlights the going concern problem drawing attention to the note in the financial statement that discloses:

i. adequately, describe the principal conditions that raise substantial doubt about the entity’s ability to continue in operation for the foreseeable future;

ii. state that there is significant uncertainty that the entity will be able to continue as a going concern and, therefore, may be unable to realize its assets and discharge its liabilities in the normal course of businesses.

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