You are responsible as an auditor of Breville Electricals Limited (BEL) that manufactures and installs large commercial and rental air-conditioning systems. BEL typically has four or five large contracts (ranging from $8 million to $12 million each) in progress at any one time. The contracts usually take up to six to eight months to complete, although unexpected on-site difficulties can result in lengthy delays in completion (of up to 12 months).

BEL finances its operations with a mixture of equity, long-term debt (secured by fixed assets) and short-term bank loans. It is now May 2018 and your planning of the audit of BEL for the year ended 30 June 2018 is nearing completion. You have met with the management of BEL and, from those discussions and a review of the preliminary information provided by BEL, you have identified several issues that may have implications for the companys ability to continue as a going concern.

The relevant issues are as follows:

Competition in the industry is becoming more intense, with some customers now installing their own systems.

BELs bank has requested cash flow forecasts for the coming year to support the short-term loans. It has indicated that it may need to withdraw funding or restructure debt if the forecasts are not adequate. The review of work-in-progress indicates that all the contracts in progress at year end are due for completion within six months of the balance date.

There are no new contracts in place for the coming year, although management has indicated that there are orders currently being negotiated. The nature of the business is such that sales will fluctuate considerably from year to year depending on the timing of one or two large contracts.

Assets consist chiefly of plant and equipment, some of which is specialised to the industry. Debtors are significant, but recoverability is not considered an issue as the ongoing projects are with reputable customers and management is not aware of any problems. Creditor balances are at normal levels, and the company is in a positive working capital position.

Included in provisions is a large provision for warranty for one of BELs jobs completed at a hotel two years ago. It appears that the air-conditioning system is still not working and the hotel is now requesting a substantial refund of the agreement price.

Required: Explain whether you believe the area of going concern (4 marks) and mitigating factors (3 marks) should be assessed for BELs audit for the year ended 30 June 2018.