You are carrying out the audit of ACB Computers limited for the year ended 31 December 2003. The company assembles microcomputers purchased from the Far East and sells them to retailers, and to individuals and other businesses. In the current year, there has been a recession and strong competition, which has resulted in a fall in sales and the profits. This has led to a trading loss and the company is experiencing going concern problems. Required; Consider the form of audit report (i.e. qualified or unqualified) you would issue of ACB Computers limited if you conclude that the company is experiencing serious going concern problems, in the following two situations: You conclude that the financial statements give sufficient disclosure of the going concern problems. There is no disclosure of the going concern problems in the financial statements and you believe there is a serious risk that the company will fail in the foreseeable future

Where there is adequate disclosure in the financial statements

I) According to ISA 700 the auditors report on financial statements, the going concern problem is a fundamental uncertainty i.e. it is uncertain whether the company will continue to trade to 31 December 2004, and if the company failed, the consequences of the failure would have a fundamental effect on the financial statements. Since the financial statements have given adequate disclosures about the uncertainty created by the going concern problem the auditor should issue an unqualified opinion with an emphasis of matters paragraph. The emphasis of matters paragraph will disclose the going concern problems and refer to the relevant notes in the financial statements. Normally, the paragraph will say that the continuation of the business will depend on the company becoming profitable and the bank and creditors
continuing support to ACB Computers Limited.
II) If there is no disclosure of the going concern problem in the financial statements then the financial statements are misleading since the effect of the disagreement is so material and pervasive. The auditor should issue an adverse opinion. The opinion paragraph should give details that have led to the qualification i.e. the need for the company to become profitable and obtain support from the creditors and the bank and also because of the failure to include details of the going concern problems, the financial statements do not show a true and fair view of the company‘s affairs as at 31 December 2003 and of its loss for the year then ended.

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