Sir as per suggested ans this ques relates to SA 570 going concern
How can we relate directly to going concern , while solving this ques I relate it to AS 29 and SA 705 i.e., modification and give qualified report.
Means the main issue is How it is prima facie relates to SA 570
Below is text of answer —
Reference of AS 29 is perfect
Yes reference of SA 570 is little odd — but they are considering this case as event which create significant doubt and further it MAY be material uncertainty, conclusion is as per AS 29
Existence of Contingent Liability: As per AS 29 “Provisions, Contingent liabilities and Contingent Assets”, a contingent liability is a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non -occurrence of one or more uncertain future events not wholly within the control of the enterprise.
Further, future events that may affect the amount required to settle an obligation should be reflected in the amount of a provision where there is sufficient objective evidence that the event will occur.
As per SA 570 “Going Concern”, there are certain examples of events or conditions that, individually or collectively, may cast significant doubt about the going concern assumption. Pending legal or regulatory proceedings against the ent ity that may, if successful, result in claims that the entity is unlikely to be able to satisfy is one of the example of such event.
When the auditor concludes that the use of the going concern assumption is appropriate in the circumstances but a material uncertainty exists, the auditor shall determine whether the financial statements adequately describe the principal events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern and management’s plans to deal with these events or conditions; and disclose clearly that there is a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern and, therefore, that it may be unable to realize its assets and discharge its liabilities in the normal course of business.
In the instant case, ABC Company has filed a law suit against Unlucky Company for Rs 5 crores. Though, the attorney of Unlucky Company feels that the suit is without merit so the company merely discloses the existence of law suit in the notes accompanying its financial statements. But the auditor may evaluate the source data on which basis the opinion is formed. If the auditor finds the uncertainty, he may request the management to adjust the sum of Rs 5 crore by making provision for expenses as per AS 29. If the management does not accept the request the auditor should qualify the audit report.