Clarinet (6/14) (amended)

Clarinet Co (Clarinet) is a computer hardware specialist and has been trading for over five years. The company is funded partly through overdrafts and loans and also by several large shareholders; the year end is 30 April 20X4.

Clarinet has experienced significant growth in previous years; however, in the current year a new competitor, Drums Design Co (Drums), has entered the market and through competitive pricing has gained considerable market share from Clarinet including one of its largest customers. Clarinet is looking to develop new product to differentiate itself from the rest of its competitors. It has approached its shareholders to finance this development; however, they declined to invest further in Clarinet. Clarinet's loan is long term and it has met all repayment on time. The overdraft is increased significantly over the year and the directors have informed you that the overdraft facility is due for renewal next month and they believe it will be renewed.

The directors have produced a cash flow forecast which shows a significantly strengthening positions over the coming 12 months. They are confident of the new products being developed and, in light of their trading history of significant growth, believe it is unnecessary to make any disclosures in the financial statements regarding going concern.

At the year end, Clarinet received notification from one of its customer that the hardware installed by Clarinet for the customers' online ordering system has not been ordering correctly. As a result, the customer has lost significant revenue and has informed Clarinet that they intend to take legal action against them for loss of earnings. Clarinet has investigated the problem post year end and discovered that other work in progress in similarly affected and inventory should be written down by $375,000. The finance believes that as this misstatement was identified after the year end, it can be amended in the 20X5 financial statements. Draft financial statements for the year ended 30 April 20X4 showed profit after tax of $2.5m.

Required:

(a)Explain 6 potential indicators that Clarinet Co is not going concern.

(b)Described the audit procedures that an auditor would perform in assessing whether or not Clarinet is a going concern.