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Review and reportingGoing ConcernAudit ProceduresISA 570

ACCA · Question 12 · Review and reporting

CASE 3: AQUAGRID UTILITIES PLC
AquaGrid Utilities PLC is a listed public water utility company. The audit for the year ended 31 March 2026 is nearing completion. In April 2026, a major water main burst, causing significant flooding and resulting in a pending lawsuit against AquaGrid. Furthermore, the company is struggling to meet its debt covenants due to a regulatory cap on water tariffs. The audit partner is reviewing the draft financial statements and considering the implications for the auditor's report.

Given the struggle to meet debt covenants, which of the following procedures should the auditor perform to assess AquaGrid's ability to continue as a going concern? (Select ALL that apply)

Answer options:

A.

Review management's cash flow forecasts for at least 12 months from the reporting date and challenge the assumptions used.

B.

Read the loan agreements to determine the exact terms of the covenants and the penalties for breach.

C.

Confirm with the regulatory body that the tariff cap will definitely be lifted next year.

D.

Review correspondence with the bank to assess the likelihood of the bank calling in the loan due to covenant breaches.

How to approach this question

Select procedures that provide evidence about the company's future cash flows and the reality of the threat posed by the debt covenants.

Full Answer

To assess going concern, the auditor must look forward. Reviewing cash flow forecasts (A) is essential. Reading loan agreements (B) and bank correspondence (D) provides evidence on the severity of the covenant breach and the bank's intentions. Option C is incorrect because regulatory bodies do not provide such definitive future guarantees to auditors.

Common mistakes

Failing to select bank correspondence, which is vital when covenants are breached.
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