Casanova Ltd works on contracts to design and manufacture large items of medical

equipment such as radiotherapy and X$-$ray machines. The company specialises in the

design, production and installation of bespoke machines under contract with individual

customers, which are usually private medical companies.

The draft financial statements recognise profit before tax of US$ $1$ million and total

assets of US$ $8$ million.

The audit senior has left the following note for your attention:

'One of Casanova Ltd$\text{'}$s major customers is the MEDICARE, a private hospital. In

January $2020,$ a contract was entered into, under the terms of which Casanova Ltd

would design a new radiotherapy machine for MEDICARE. The machine is based on

a new innovation, and is being developed for the specific requirements of MEDICARE.

It was estimated that the design and production of the machine would take $18$ months

with estimated installation in June $2021.$ As at $31$ May $2021,$ Casanova Ltd had

invested heavily in the contract, and design costs totalling US$ $500,000$ have been

recognised as work in progress in the draft statement of financial position. Deferred

income of US$ $200,000$ is also recognised as a current liability, representing a payment

made by MEDICARE to finance part of the design costs. No other accounting entries

have been made in respect of the contract with MEDICARE.

As part of our subsequent events review, inspection of correspondence between

Casanova Ltd and MEDICARE indicates that the contract has been cancelled by

MEDICARE as it is unable to pay for its completion. It appears that MEDICARE lost a

significant amount of funding towards the end of $2020,$ impacting significantly on the

financial position of the company. The manager responsible for the MEDICARE

contract confirms that MEDICARE contacted him about the company's financial

difficulties in January $2021.$

The matter has been discussed with the Finance Director of Casanova Ltd$\text{'}$s$,$ who has

stated that he is satisfied with the current accounting treatment and is not proposing to

make any adjustments in light of the cancellation of the contract by MEDICARE. The

Page $4$ of $10$

Finance Director has also advised that the loss of MEDICARE as a customer will not

be mentioned in the company's integrated report, as the finance director does not

consider it significant enough to warrant discussion.

Casanova Ltd is currently working on six contracts for customers other than

MEDICARE. Our audit evidence concludes that Casanova Ltd does not face a threat

to its going concern status due to the loss of MEDICARE as a customer.$\text{'}$

Your review of the audit work performed on going concern supports this conclusion.

REQUIRED

$($i$)$ Comment on the matters to be considered, and recommend the actions to be

taken by the auditor