You have been conducting an audit of the financial reports of Rainbow Forest Ltd (Rainbow Forest). Rainbow Forest Ltd is a publishing company, specialising in books and other promotional material for special industry sectors and professional bodies. Over the last three years Rainbow Forest has been experiencing difficult trading conditions resulting in operating losses and deferred dividends.

In particular, Rainbow Forest has had difficulty managing its cash flow. Book sales are down on the prior year and longstanding customers are no longer making bulk purchases, but instead they are producing e-books which are emailed to members on the mailing list.

Whilst Rainbow Forest can still provide online technical support services and web design advice, they have lost a major source of revenue and 20% of employees have been made redundant.

You have been told by different sources that Senior Management is under a lot of pressure to turn this difficult situation around and improve both sales and profitability. You note that some of the reports you have been provided are either incomplete or are not consistent with what you have been told. Based on your initial understanding of the entity and its environment, you have concluded that Rainbow Forest Ltd is a going concern risk.

Required:

1. Based on the concept of professional scepticism, what indicators are most relevant when evaluating Rainbow Forests ability to continue as a going concern? (5 Marks)
2. Assume Rainbow Forest Ltd is a subsidiary of a parent company based in London, UK, what steps should be taken by the auditor to confirm the appropriateness of the going concern assumption when an entity is dependent on its parent entity for financial support? (5 Marks)
3. Assuming that the financial statements of Rainbow Forest Ltd were prepared on a going concern basis, discuss the effect on the audit opinion, if this assumption was now in dispute? (5 marks)