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; Describe the factors, which indicate that a company may not be a going concern. Your list should include all factors and not just those, which relate to ACB Computers Limited

  • The indications or risk that continuance as a going concern may be questionable could come from financial statements or from other sources

Financial indicators

  •  Liabilities are more than the assets of the company;
  • Borrowings with fixed repayment dates approaching maturity without realistic prospects of renewal or repayment, or excessive reliance on short-term borrowings to finance long-term projects undertaken by the company.
  •  Adverse key financial ratios e.g. current ratio below one;
  •  Substantial operating losses.
  •  Inability to pay creditors on due dates.
  •  Difficulty in complying with terms of loan agreements e.g. failure to pay interest and principal on due dates.
  •  Change from credit to cash on delivery transactions with suppliers.
    Operating Indicators
  • Loss of key management without replacement.
  •  Loss of major market or customer.
  •  Labour difficulties or shortage.

Other Indicators

  •  Non-compliance with capital or other statutory requirements. This could lead to the company being wound up under the law.
  •  Pending legal cases against the entity that may, if successful result in judgments that could not be met.
  •  Changes in legislation or government policy that adversely affects the client‘s business.

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