Fly-By-Night Ltd is a listed public company that manufactures highly sophisticated navigation equipment for defence force aircraft and Navy ships. The company has a 30 June 20X0 year-end, and the statutory accounts are due to be signed one week after the board of directors meeting on 5 August 20X0. During the course of the audit, you become aware that the government has reviewed its budget in an effort to reduce its growing deficit. As a result, defence expenditure has been cut.

One of the major projects to be scrapped as a result of these cuts is the planned upgrading of the navigation equipment for the Navy’s submarine fleet. You are aware that the company’s budget for this year includes a major subcontract to the Department of Defence and the Navy for this project.

The company has been experiencing cash flow difficulties and has recently applied for a significant increase to a borrowing facility that is already fully utilised. Management is adamant that the company will continue to be viable. If necessary, it claims it can resort to cutbacks in its future capital expenditure programme, seek additional off-balance sheet financing, and/or reschedule existing debt arrangements.

Required

(a) What does the going-concern concept mean? Discuss the reporting options open to an auditor when going-concern issues arise.

(b) Discuss the potential auditors’ report options in relation to Fly-By-Night Ltd.