The audit team at Harmonium Ltd, a manufacturer of toys and games, have noted several points which they have brought to the attention of you, the audit partner. These include
• Harmonium’s product range hasn’t changed in five years and newer products are appearing in the market in direct competition
• The management of Harmonium have not replaced their Head of Marketing who has left the company to join a competitor
• The bank has refused to increase Harmonium’s overdraft and turned down an application for as loan for new equipment
• Orders from two key customers have declined steadily over the year and turnover volume is dropping. The directors point out that revenues are equivalent to those of the previous year but the auditors point out that this is due to price rises not to volumes of goods sold
• The audit team reviewed the future budgets and cash flows of Harmonium prepared by the directors and stated that, whilst some of the assumptions were optimistic the projections were not completely unreasonable
There are no other points which give any indication that the financial statements are incorrectly stated and the audit process was satisfactory.
You have to decide whether any of these issues affect your audit opinion for the year and which of these courses of action is the most appropriate
a) The company is likely to be in trouble so issue a qualified auditors’ report on the financial statements on the basis that it is not a going concern
b) None of these points are of significance to the financial report for the current year and it is not for the auditors to tell the directors what to do so no action is required
c) None of these points are of significance to the financial report for the current financial year. However they indicate a worrying trend which it might be appropriate to discuss with the directors after the audit is finalised.
d) The audit team should go back to the company and try to discover further evidence that the company is not a going concern so the audit report can be modified