CA Kanishka is auditor of a company engaged in poultry farming and egg production. The company has performed very well since its incorporation in…

CA Final · Advanced Auditing, Assurance and Professional Ethics · RTP · May 2026
CA Kanishka is auditor of a company engaged in poultry farming and egg production. The company has performed very well since its incorporation in 2015. Its sales had also grown and the company had expanded its operations from its home state in North India to eastern regions of the country. However, over the past two years, the company's financial performance has deteriorated significantly due to: The impact of the pandemic; andThree consecutive outbreaks of bird flu within a span of two years, resulting in substantial loss of livestock. Consequently, the company's turnover declined sharply from 80 crores to 18 crores. The management now wants to start with new batches of birds. The earlier working capital facilities of the company granted by bank have also been restructured to support the business. She was informed that the repayments of restructured working capital term loans are to begin from ensuing year. No fresh credit facilities have been granted by the bank. The company also plans longer credits from animal feed suppliers. The company plans to take additional measures to prevent the safety of live stocks, including aggressive vaccination, preventive health check-ups, and more frequent visits of veterinary staff. Further, the company is facing allegations from nearby villagers regarding environmental pollution. The management has prepared a cash flow forecast for her examination. Discuss the approach to be adopted by her in examining the "going concern" assumption keeping in view above with specific reference to cash flow forecast.

Suggested Answer and Working Notes:

In accordance with SA 570,"Going Concern” if events or conditions have been identified that may cast significant doubt on the entity's ability to continue as a going concern, the auditor shall obtain sufficient appropriate audit evidence to determine whether or not a material uncertainty exists related to events or conditions that may cast significant doubt on the entity's ability to continue as a going concern by performing additional audit procedures, including consideration of mitigating factors. Where the entity has prepared a cash flow forecast, and analysis of forecast is a significant factor in considering the future outcome of events or conditions in the evaluation of management's plans for future actions, it includes (i) Evaluating the reliability of the underlying data generated to prepare the forecast and (ii) Determining whether there is adequate support for the assumptions underlying the forecast. In the above situation, cash flow forecast has been prepared by management. Therefore, the auditor should carefully evaluate assumptions underlying forecast and also reliability of data to prepare the forecast. For example: She should verify assumption regarding new batch of livestock. The bankers have not provided fresh credit facilities. How funds from the same would be arranged? The reasonability of assumption in cash flow forecast needs to be looked into.She needs to check loan sanction letters/agreement to verify when repayments are beginning to see their accuracy in cash flow forecasts.The company plans to avail longer credits from animal feed suppliers. In the downturn situation of the company, how would suppliers extend longer credits? This is going to have effect on the cash flow forecast.Whether company has accounted for increased expenditure on preventive health check-up, vaccination and more frequent visits of veterinary staff in cash flow forecast.Since villagers have alleged the company of spreading air pollution, how does the company plan to deal with the same? Whether any proposed expenditure in this regard is accounted for in the cash flow statement. She may also consider other implications of this issue and possible effect on cash flows.

Topics: Standard on Auditing (SA)

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