Estage Logistics Ltd. has experienced a significant decline in freight volumes during the year. The company is also in breach of a debt covenant…

As per SA 570, “Going Concern”, the auditor is required to evaluate whether management's use of the going concern basis of accounting is appropriate and whether, based on the audit evidence obtained, a material uncertainty related to going concern exists. In the given case, the following matters indicate the existence of events or conditions that may cast significant doubt on the company's ability to continue as a going concern: Sharp decline in freight volumes indicates deterioration in the company's operating performance and may adversely affect its future cash flows. Breach of the debt covenant is a significant financial difficulty. Further, the bankers have reserved the right to recall the facility, which may result in an immediate liquidity pressure if the facility is recalled. The auditor should evaluate management's plans to mitigate these conditions, including the proposed sale of the non-core division and renegotiation of loan terms. Since the sale is not yet contracted and loan renegotiation is only at a preliminary stage, the auditor should critically assess the feasibility, timing and likely effectiveness of these plans and obtain sufficient appropriate audit evidence regarding them. If, after considering management's plans and other relevant evidence, the auditor concludes that a material uncertainty related to going concern exists, the auditor should determine whether the financial statements adequately disclose the nature of the uncertainty and the relevant events or conditions. Where adequate disclosure is made, the auditor should include a separate section in the auditor's report under the heading “Material Uncertainty Related to Going Concern", drawing attention to the relevant disclosure in the financial statements. Thus, the auditor should not rely merely on management's proposed turnaround plan; the uncontracted sale and preliminary loan negotiations require careful evaluation before concluding on the company's ability to continue as a going concern.