Q2 Guava Co (Guava) 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 2017.

Guava has experienced significant growth in previous years; however, in the current year a new competitor, Penza Design Co (Penza), has entered the market and through competitive pricing has gained considerable market share from Guava. One of Guavas larger customers has stopped trading with them and has moved its business to Penza. In addition, several of Guavas specialist developers have left the company and joined Penza.

Guava has found it difficult to replace these employees due to the level of their skills and knowledge. Guava has just received notification that its main supplier who provides the company with specialist electrical equipment has ceased to trade.

Guava is looking to develop new products 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 Guava. Guavas loan is long term and it has met all repayments on time. The overdraft has increased significantly over the year and the directors have informed you that the overdraft facility is due for renewal next month, and they are confident it will be renewed.

The directors have produced a cash flow forecast, which shows a significantly worsening position over the coming 12 months. They are confident with 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, Guava received notification from one of its customers that the hardware installed by Guava for the customers online ordering system has not been operating correctly. As a result, the customer has lost significant revenue and has informed Guava that they intend to take legal action against them for loss of earnings. Guava has investigated the problem post year-end and discovered that other work-in[1]progress is similarly affected and inventory should be written down. The finance director believes that as this misstatement was identified after the year-end, it can be amended in the 2016 financial statements.

Required:

1. Explain FIVE potential indicators that Guava Co is not a going concern.
2. Describe the audit procedures, which you should perform in assessing whether or not Guava Co is a going concern.