ISA 560 Subsequent events gives guidance to the auditor with regards to events after the reporting period. The audit of one of your audit clients has just been concluded and the audit report signed and the financial statements issued.

The following matters came to the attention of your firm of Chartered Accountants after the issue of the financial statements. Included in the accounts receivables figure at the period end is an amount of K300,000.00 which is an amount due from a customer. No allowance for receivables was made at the period end and soon after the issue of the financial statements the liquidator of this company issued a press statement that all creditors would only get K0.45 per kwacha in full settlement of the amounts owed.

At the period end there was a pending court case. Management was of the view that the outcome of the case would be in favour of the company. The auditors also concluded that the case was strong in favour of the company and so managements view that no provision should be made was supported. Before the audit report was issued the Supreme Court passed judgment against the company and the company was fined K500,000.00 and the amount is material to the financial statements.

You are concerned about the going concern assumption of the company. Management in their report of the directors has stated that in their opinion the company is a going concern and will be able to meet its debts in the foreseeable future. Your firm decides to obtain a management representation with regards to the going concern assumption. The senior managers have all taken leave after the audit and the only person available is the financial accountant who has only been with the company for less than six months and this will be the first time that he will be making representations to the auditors.

Required:

1. Discuss the reliability of the written representation that your firm has obtained from the Financial Accountant. (5 marks)
2. Evaluate the above events and where relevant, state the effect on your audit opinion.(6 marks)
3. Outline what is meant by the term going concern and mention problems that can lead to the sale of a business as a going concern (9 Marks)