Question 1 Marley Co is a family owned, unlisted company which imports motor cars. The company buys cars from a variety of car manufacturers for sale to car dealerships and vehicle leasing companies within its own domestic market. Marley Co has been a client of your firm for the last three years and you are the newly appointed audit manager on the audit for the year ended 31 August 20X8. The audit for the current reporting period is nearing completion and you are reviewing the working papers of the going concern section of the audit file. Extracts from the draft financial statements and other relevant information are given below. Statement of financial position 31 August 20X8 31 August 20X7 Draft Actual $ million $ million Assets Non-current assets Property, plant and equipment 135 146 135 146 Current assets Inventory 58 37 Trade receivables 37 26 Cash at bank and in hand 06 95 69 Total assets 230 215 Equity and liabilities Equity Share capital 10 10 Retained earnings 13 47 23 57 Non-current liabilities Long-term borrowings 112 124 Provisions 35 05 147 129 Current liabilities Trade payables 42 29 Bank overdraft 18 60 29 Total equity and liabilities 230 215 Statement of profit or loss for the year 31 August 20X8 31 August 20X7 Draft Actual $ million $ million Revenue 113 88 Cost of sales (44) (29) Gross profit 69 59 Other operating expenses (91) (13) Operating profit (22) 46 Finance costs (15) (07) Profit before taxation (37) 39 Taxation 03 (13) Net (loss)/profit for year (34) 26 You have also ascertained the following information during your review: 1. Marley Co has undergone a period of rapid expansion in recent years and is intending to buy new warehousing facilities in January 20X9 at a cost of $43 million. 2. In order to finance the new warehousing facilities, the company is in the process of negotiating new finance from its bankers. The loan application is for an amount of $5 million and is to be repaid over a period of four years. 3. The provision of $35 million in this years statement of financial position relates to legal actions from five of Marley Cos largest customers. The actions relate to the claim that the company has sold cars which did not comply with domestic regulations. 4. A major new competitor has moved in to Marley Cos market in October 20X8. 5. The going concern working papers include a cash flow forecast for the 12 months ending 31 August 20X9. The cash flow forecast assumes that Marley Cos revenue will increase by 25% next year and that following the re-organisation of its credit control facility, its customers will pay on average after 60 days. The forecast also assumes that the bank will provide the new finance in January 20X9 and that the company will have a positive cash balance of $17 million by 31 August 20X9. 6. The financial statements have been prepared on a going concern basis and make no reference to any significant uncertainties in relation to going concern. Required: (a) Using analytical review where appropriate, evaluate the matters which may cast doubt on Marley Cos ability to continue as a going concern. (20 marks) (b) Explain the audit evidence in respect of the cash flow forecast which you would expect to find in your review of the audit working papers on going concern. (10 marks) You have established through discussions with Marley Cos directors that they do not wish to disclose uncertainties over the going concern status of the company in the notes to the financial statements. (c) Explain the possible reasons why the directors may wish to exclude these disclosures and evaluate the possible implications for the auditors report. (20 marks)