DEF InfraTech Ltd. is a capital-intensive infrastructure company engaged in construction and leasing of transport assets. The company has recently…

DEF InfraTech Ltd. is a capital-intensive infrastructure company engaged in construction and leasing of transport assets. The company has recently faced liquidity stress due to delayed government payments and cost overruns in ongoing projects. CA R has been appointed as the statutory auditor for the financial year 2024–25, which is also the first year of audit engagement. During the course of audit, the auditor observed that the company has incurred continuous losses for the last two years and has also breached major loan covenants. The management has prepared the financial statements on going concern basis supported by projected cash flows and expected restructuring of loans. However, these projections are based on assumptions of future government contracts which are yet to be finalised. During discussions with management regarding the financial statements, the audit team raised concerns about the adequacy of disclosures relating to the company's ability to continue as a going concern, particularly in light of recurring losses, breach of loan covenants, and dependence on uncertain future cash inflows. However, the management strongly asserted that preparation of financial statements on a going concern basis was appropriate and that no additional disclosures were necessary. They argued that since the company had not initiated any formal insolvency proceedings, nor had any lender formally recalled loans or initiated recovery actions, there was no explicit requirement under the applicable financial reporting framework to disclose uncertainties relating to going concern. Management further supported its position by referring to internally prepared cash flow projections and ongoing negotiations with lenders for restructuring of borrowings, expressing confidence that the company would be able to meet its obligations in the normal course of business. They also indicated that making such disclosures in the financial statements could adversely affect stakeholder confidence, lender relationships and future business prospects. Accordingly, management advised the audit team to rely on their assessment and avoid insisting on additional disclosures, emphasising that the absence of a specific rule mandating disclosure in such circumstances justified their position. Being the first year of audit, the auditor noted that opening balances include capitalised project costs from prior years. No prior period auditor's working papers were available. Further, certain accounting policies relating to capitalisation of borrowing costs appeared to have been changed during the current year without adequate disclosure. The engagement team assessed inherent risk as high considering financial stress and complexity of estimates. However, management representations appeared overly optimistic, leading to internal debate within the audit team regarding reliance on measurable indicators versus professional judgment. Further examination revealed that the company owns aircraft used for leasing, which are depreciated as a single unit instead of separating significant components such as engines and airframe. Residual values have not been deducted while computing depreciation. Additionally, the method of depreciation was changed during the year without proper disclosure.