Bromy Ltd is a manufacturer of parts for trucks based in Birmingham. The company supplies to...

 

Transcribed Image Text:

Bromy Ltd is a manufacturer of parts for trucks based in Birmingham. The company supplies to a wide range of retailers in the Midlands although a small number of these customers account for a significant portion of the company's annual sales. Due to a significant fall in sales during the year ending 31st April 2017, the company fell behind its payments to its trade creditors which resulted in those suppliers to stop supplying Bromy Ltd on credit. To make the situation worse, one of the creditors has threatened legal action for unpaid invoices. The lack of cash and high short term liabilities have resulted in the reduction of current ratio to 0.8 and acid test ratio to 0.34. The company's cash flow forecast for the year to 30th April 2018 shows a net cash outflow in most months and a total shortfall of nearly 2 million for the year mainly due to a 3.1 million loan which must be repaid by January of 2018. Also, due to a recent EU legislation, one of the company's best-selling products will become illegal to use and hence its production and sales will have to stop next in 2018. The forecast cash flow for the year to 31 April 2018 does not include any negative effect of this situation. Required: a) In general terms, explain the duties and responsibilities of directors and of the auditors in relation to an audit client's going concern status. b) Identify FOUR potential indicators that Bromy Ltd may not be a going concern. c) Describe the audit procedures which you should perform in assessing whether the company is a going concern. Bromy Ltd is a manufacturer of parts for trucks based in Birmingham. The company supplies to a wide range of retailers in the Midlands although a small number of these customers account for a significant portion of the company's annual sales. Due to a significant fall in sales during the year ending 31st April 2017, the company fell behind its payments to its trade creditors which resulted in those suppliers to stop supplying Bromy Ltd on credit. To make the situation worse, one of the creditors has threatened legal action for unpaid invoices. The lack of cash and high short term liabilities have resulted in the reduction of current ratio to 0.8 and acid test ratio to 0.34. The company's cash flow forecast for the year to 30th April 2018 shows a net cash outflow in most months and a total shortfall of nearly 2 million for the year mainly due to a 3.1 million loan which must be repaid by January of 2018. Also, due to a recent EU legislation, one of the company's best-selling products will become illegal to use and hence its production and sales will have to stop next in 2018. The forecast cash flow for the year to 31 April 2018 does not include any negative effect of this situation. Required: a) In general terms, explain the duties and responsibilities of directors and of the auditors in relation to an audit client's going concern status. b) Identify FOUR potential indicators that Bromy Ltd may not be a going concern. c) Describe the audit procedures which you should perform in assessing whether the company is a going concern.

Answer rating: 100% (QA)

a Duties and Responsibilities of Directors and Auditors in relation to an audit clients going concern status Directors Responsibilities 1 Duty of Care Directors have a duty to act with reasonable care ... View the full answer