You are planning the external audit of Steady Eddy Ltd (Steady Eddy) whose principal activity is the provision of road haulage services. You have been provided with the following information in respect of the year ended 31 May 2X11.

The company made a loss for the year to 31 May 2X11. This is mainly due to the loss of a major customer to a competitor and exceptional costs incurred in relocating to new premises. In previous years the company has been profitable but has recently experienced reduced margins due to the high cost of fuel.

Despite its poor trading results, the company has managed to stay within its overdraft limit of £500 000. This was achieved by the managing director temporarily lending the company £200 000 and delaying payments to creditors. The overdraft facility is to be reviewed by the bank in September 2X11 after the audited financial statements are available.

The company has a loan instalment falling due in October 2X11 which it plans to repay with the proceeds from the recently vacated premises which are currently for sale.

The company has fallen behind with its payments to HM Revenue & Customs, but the directors have successfully negotiated a scheme for settling the arrears over a period of four months. A condition of this concession granted by HM Revenue & Customs is that the company pays all its future monthly tax liabilities on the due dates.

The finance director is optimistic about the future and his profit forecasts indicate a return to profitability for the year ending 31 May 2X12. The company has recently negotiated a substantial contract with a national supermarket chain, which will generate at least £2 million in annual revenue for the next three years. In order to service the contract, the company will need to enlarge its fleet of refrigerated trailers and the finance director is negotiating with leasing companies to fund the acquisitions.

Required:

(a) Explain what is meant by the going concern concept and why the auditor should consider whether a company is a going concern.

(b) Explain the circumstances particular to Steady Eddy which may indicate that it is not a going concern.

(c) Identify the matters to which you would direct your attention during the subsequent events review, in the audit of Steady Eddy.