Cosmos Ltd is a listed company that manufactures satellites and other communication equipment. It is now August 20X0, and the audit of Cosmos for the year ended 30 June 20X0 is nearing completion. You are the engagement manager. While reviewing the audit working papers, you identify several issues that may raise doubts about the ability of Cosmos Ltd to continue as a going concern.

You have noted the following:

• The review of work in progress indicates that all the contracts in progress at year-end are due for completion within six months of balance date. There are no new contracts in place for the coming year. Management has indicated that there are orders currently being negotiated.

• Included in provisions is a large redundancy provision for 100 employees who have been informed they may be made redundant in January 20X1 depending on the status of orders at that time. (Note: the total number of employees is 500.)

• Competition in the industry is becoming more intense, with many customers now manufacturing their own equipment.

• The company’s bank has requested cash flow forecasts for the coming year to support the company’s short-term loans.

• Assets consist chiefly of plant and equipment, some of which is specialised to the industry.
Debtors are significant, but recoverability has been reviewed and is not considered an issue. This is because the ongoing projects are with reputable customers and management is not aware of any problems.

Required

(a) What are the indicators that the company may have going-concern problems? What are the mitigating factors?

(b) What additional procedures would you carry out with respect to the application of the going-concern basis?