Pingo Manufacturing Ltd imports electronic components and assembles them in a factory to make consumer gadgets which appeal to a younger market. They have traded have traded successfully for many years because of favourable market conditions and extended their factory in 20x6 with the aid of a very large bank loan because they anticipated a further increase in sales as they brought some new products to the market.

The company has always been short of working capital as it paid for the components before they were delivered, in order to help the cash flow of their overseas suppliers, some of which were in developing countries. They also have a substantial overdraft which frequently exceeds the facility.

Sadly the expected increase in turnover never occurred because the market suddenly declined due to a credit squeeze and the fashion for buying fairly pointless gadgets came to a sudden slowdown.

The directors think they have enough core business selling television monitors and closed circuit TV cameras to see them through until the market turns up again, although they may have to reduce the scale of their operations.

Discussion question

1.  What evidence would the directors have to produce to justify their opinion that the company is a going concern and how might the auditors validate the evidence?