Sniffit & Koff plc is an established pharmaceutical company that has for many years generated 90% of its revenue through the sale of two specific cold and flu remedies. Sniffit & Koff plc has lately seen a real growth in the level of competition that it faces in its market and demand for its products has significantly declined. To make matters worse, in the past the company has not invested sufficiently in new product development and so has been trying to remedy this by recruiting suitably trained scientific staff, but this has proved more difficult than anticipated.
In addition to recruiting staff the company also needed to invest R12m in plant and machinery. The company wanted to borrow this sum but was unable to agree suitable terms with the bank; therefore it used its overdraft facility, which carried a higher interest rate. Consequently, some of Sniffit & Koff’s suppliers have been paid much later than usual and
hence some of them have withdrawn credit terms meaning the company must pay cash on delivery. As a result of the above the company’s overdraft balance has grown substantially.
The directors have produced a cash flow forecast and this shows a significantly worsening position over the coming 12 months.
The directors have informed you that the bank overdraft facility is due for renewal next month, but they are confident that it will be renewed. They also strongly believe that the new products which are being developed will be ready to market soon and hence trading levels will improve and therefore that the company is a going concern. Therefore they do not intend to make any disclosures in the accounts regarding going concern.
Identify any potential indicators that the company is not a going concern and outline the procedures the auditors should carry out in this situation.