ACCA AAA · Chapter 32
Auditing aspects of insolvency
Your chapter at a glance. Open any section, or keep the whole map in view.
Financial distress, formal processes and trading
Insolvency assess position, options and reporting
Two indicators
- Cash-flow: debts cannot be paid as they fall due
- Balance-sheet: assets worth less than liabilities
- Include contingent/prospective liabilities in assessment
Management responsibilities
- Monitor current financial position and cash forecasts
- Consider creditors’ interests as distress deepens
- Seek timely professional advice and document decisions
Audit implications
- Assess going concern basis and disclosures
- Evaluate forecasts and historic financial information
- Consider subsequent events and reporting effect
Purpose and effect
- Opportunity to rescue company or improve outcome
- Administrator takes control of management
- Moratorium restricts creditor enforcement
Appointment and proposals
- Court order or qualifying out-of-court appointment
- Company insolvent or likely to become so
- Administrator sets out proposals to creditors
Evaluate option
- Assess viability, cash needs and stakeholders
- Successful rescue may preserve jobs and repay creditors
- Do not assume rescue is achievable
Winding up
- Assets realised and proceeds distributed in order
- Directors cease to manage; liquidator takes control
- Company eventually dissolved
Main routes
- Compulsory liquidation by court
- Members’ voluntary: directors’ solvency declaration
- Creditors’ voluntary: insolvent company
Priority matters
- Costs, secured claims and preferential creditors
- Fixed/floating security affects recovery
- Unsecured creditors may receive only part
- Equity shareholders rank last
Fraudulent trading
- Business carried on with intent to defraud creditors
- Knowing parties may face liability
Wrongful trading
- No reasonable prospect of avoiding insolvent liquidation
- Likewise no prospect of avoiding insolvent administration
- Director knew or ought to have concluded this
- Reasonable steps to minimise creditor loss matter
Examine and advise
- Obtain current accounts, forecasts and board minutes
- Test assumptions and prospects of recovery
- Compare outcomes for creditors under available routes
- Distinguish audit findings from legal conclusions
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