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Frank Walsh is an audit senior with Williams & Associates. Frank is involved in planning the audit of Outboard Ltd (Outboard), a manufacturer of engines
Frank Walsh is an audit senior with Williams & Associates. Frank is involved in planning the audit of Outboard Ltd (Outboard), a manufacturer of engines for luxury leisure boats. Outboard's operations are financed by a combination of long-term debt and short-term loans from a financial institution, Big Bank Ltd.
As part of the planning process, Frank has noted the following matters:
- Outboard has been profitable for several years and has recently successfully expanded its operations to manufacture a new type of engine for export to New Zealand.
- One of Outboard's major customers (Leisure Boats), which represents 30 per cent of Outboard's annual sales, has indicated that it has started to manufacture its own engines.
- The strength of the Australian dollar against foreign currencies has had an adverse effect on demand for locally produced engines. Competition in the industry is becoming more intense, with some other customers of Outboard indicating they may now purchase their engines from Korean suppliers at a much lower cost.
- Big Bank Ltd has requested cash flow forecasts for the coming year to support the financing arrangements that are currently in place. Outboard's level of debt has remained constant in recent years and it had a positive working cash flow position to 30 June 2019.
Required
- Identify and explain three events or conditions that may indicate material going concern uncertainties faced by Outboard Ltd.
- Identify and explain two mitigating factors that may exist to assist Outboard Ltd with addressing this going concern uncertainty.
- Briefly outline the evidence that you would need in relation to each mitigating factor identified in (b)
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