Question 4. AUDIT AND ASSURANCE Yuka Co (Yuka) is a computer hardware specialist and has been trading
Question:
Question 4. AUDIT AND ASSURANCE
Yuka Co (Yuka) is a computer hardware specialist and has been trading for over five years. The company is funded partly through overdrafts and loans and also by several large shareholders; the year end is 30 April. Yuka has experienced significant growth in previous years; however, in the current year a new competitor, Kita Design Co (Kita), has entered the market and through competitive pricing has gained considerable market share from Yuka. One of Yuka’s larger customers has stopped trading with them and has moved its business to Kita. In addition, a number of Yuka’s specialist developers have left the company and joined Kita. Yuka has found it difficult to replace these employees due to the level of their skills and knowledge. Yuka has just received notification that its main supplier who provides the company with specialist electrical equipment has ceased to trade. Yuka is looking to develop new products to differentiate itself from the rest of its competitors. It has approached its shareholders to finance this development; however, they declined to invest further in Yuka. Yuka’s loan is long term and it has met all repayments on time. The overdraft has increased significantly over the year and the directors have informed you that the overdraft facility is due for renewal next month, and they are confident it will be renewed. The directors have produced a cash flow forecast which shows a significantly worsening position over the coming 12 months. The auditors have been informed that Yuka’s bankers will not make a decision on the overdraft facility until after the audit report is completed. The directors have now agreed to include some going concern disclosures.
Required:
(a) Explain SIX potential indicators that Yuka Co is not a going concern.
(b) Describe the impact on the audit report of Yuka Co if the auditor believes the company is a going concern but that this is subject to a material uncertainty
Modern Advanced Accounting in Canada
ISBN: 978-1259087554
7th edition
Authors: Hilton Murray, Herauf Darrell