Enquiry:

1. The Company was a GOING CONCERN as at June 30, 2012 and there was no intention of the management to dispose of the assets of the company. In fact the company earned reasonable profits during the period.
2. Financial Statements of Company ‘A’ for the year ended June 30, 2013 have been prepared on historical cost basis. The management concludes that the Going Concern basis is appropriate. No material uncertainties leading to significant doubts about Going Concern have been identified. However, the Auditor does not agree with management conclusion that the Going Concern basis is appropriate due to the fact that the assets of the company have been disposed off in subsequent period.
3. Due to unavoidable circumstances the company stopped its operations during the period under audit i.e. June 30, 2013.
4. After reporting date i.e. June 30, 2013 the company ‘A’ disposed all of its assets (including land, building & machinery).
5. No revaluation of Assets including Land, Building and Plant & Machinery was carried out by the company before the sale of the company ‘A’ assets.
6. No depreciation has been charged on assets of the company during the period under audit.

MANAGEMENT OPINION

There was no revaluation carried out by the company before the sale of the company ‘A’ that is why the accounts have been prepared on historical cost basis.

Management of company ‘A’ is of the opinion that as the company have been sold out there is no need to provide depreciation in the period under audit.

Your opinion is sought for the correct treatment of the afore-stated events in case the Company had not accounted for the afore-stated events in accordance with the IAS, IFRS & ISA.

Opinion:

The Committee would like to draw your attention to the following paragraph of ISA 570
‘Going Concern’ which is self-explanatory:

Use of Going Concern Assumption Inappropriate

21.    If the financial statements have been prepared on a going concern basis but, in the auditor’s judgment, management’s use of the going concern assumption in the financial statements is inappropriate, the auditor shall express an adverse opinion. (Ref: Para. A25–A26)

However, where management also concludes or agrees with auditors that the going concern assumption is not appropriate, they should comply with the requirements of para A26 of ISA 570 which is reproduced below for ready reference:

A26.    If the entity’s management is required, or elects, to prepare financial statements when the use of the going concern assumption is not appropriate in the circumstances, the financial statements are prepared on an alternative basis (for example, liquidation basis). The auditor may be able to perform an audit of those financial statements provided that the auditor determines that the alternative basis is an acceptable financial reporting framework in the circumstances. The auditor may be able to express an unmodified opinion on those financial statements, provided there is adequate disclosure therein but may consider it appropriate or necessary to include an Emphasis of Matter paragraph in the auditor’s report to draw the user’s attention to that alternative basis and the reasons for its use.

Further, the management must be apprised of the fact that when a going concern assumption becomes inappropriate, the financial statement must be prepared on an alternative basis (for example, liquidation basis) instead of normal fair value presentation framework.

In conclusion, where the going concern assumption does not remain appropriate, the carrying values of assets and liabilities must be reassessed and stated at their recoverable/ realizable and settlement values, respectively.

(March 19, 2014)