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If you were auditing the 2009 Financial Statements of a pharmaceutical company, and found out that its major product is losing its exclusivity license in August of 2010 (potentially losing 80% of its Revenue to generics within a year after that date). You talk to the director about it, and he says that he is confident that the company would remain solvent in the coming year even after the loss of exclusivity.
What would be your recommendation as the auditor?
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obtain written represntation from management
and give emphasize paragraph in audit reportI would also ask to see the cash flow forecast and look critically at the assumptions behind that.
An EoM is required only it the directors feel that there is a going concern problem and disclose that in the FS, then the EoM would draw attention ot that disclosure.
If both directors and auditor are happy there is no going concern issue, no disclosure is needed (nothing to disclose).
If auditor thinks there is a going concern issue and directors don’t then the audit report should be qualified (material misstatement)
thank you for your response…very helpful! I was just trying to consider some real life examples in my revision.
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First, I will give a kick on the arse of the Director as he is giving a bullshit based on his personal subjective opinion.
In terms of practicality, it is worthwhile to look into a few factors which might affect the going concern of the company. 1. Sustainable revenue for overheads 2. Outlook of the market going forward and how the product might be affected. 3. Managment view and actions on the reduction of the profit, i.e restructuring or etc, and either note these down or instruct them to issue a letter of representation. 4. Look carefully into the financial statements, and highlight possible areas for fraud for further investigation.
The lost of being the monopoly of the industry certainly indicates something, you need to look into why it happens and how has it affect the profitability and operations of the company. It does not necessary means that the company is not able to continue its operations.
Following that, you either need to do the steps as gromit instructed as above or vice versa.
Hope this helps from a practical perspective. 🙂
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