Sir, I understood the answer with regards to SA701, SA570 but, I am not able to understand why it shiuld not be reported under SA705 as well (examiner commnets specifically said that this is incorrect), the company has definite plan to close down (so it is not a going comcern) and the entity has prepared its FS same as that of previous year (ie going concern basis) so they have not complied with the FRF viz AS1 or IndAS1 as applicable

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Toddle Limited had definite plan of its business being closed within a short period from the
close of the accounting year ended on 31st March, 2017. The Financial Statements for the
year ended 31/03/2017 had been prepared on the same basis as it had been in earlier
periods with an additional note that the business of the Company shall cease in near future
and the assets shall be disposed off in accordance with a plan of disposal as decided by
the Management. The Statutory Auditors of the Company indicated this aspect in Key Audit
Matters only by a reference as to a possible cessation of business and making of
adjustments, if any, thereto to be made at the time of cessation only. Comment on the
reporting by the Statutory Auditor as above
 
Solution
Closure of Business: As per SA 570 “Going Concern”, management intentions to liquidate
the entity or to cease operations is one of the event or condition that may cast significant
doubt on the entity’s ability to continue as going concern.
As per SA 570, if events or conditions have been identified that may cast significant doubt
on the entity’s ability to continue as a going concern but, based on the audit evidence
obtained the auditor concludes that no material uncertainty exists, the auditor shall evaluate
whether, in view of the requirements of the applicable financial reporting framework, the
financial statements provide adequate disclosures about these events or conditions
Even when no material uncertainty exists, it requires the auditor to evaluate whether, in
view of the requirements of the applicable financial reporting framework, the financial
statements provide adequate disclosure about events or conditions that may cast
significant doubt on the entity’s ability to continue as a going concern.
Further, as per SA 701 “Communicating Key Audit Matters in the Independent Auditor’s
Report”, when matters relating to going concern may be determined to be key audit
matters, and explains that a material uncertainty related to events or conditions that may
cast significant doubt on the entity’s ability to continue as a going concern is, by its nature,
a key audit matter. SA 701 also emphasises on auditor’s responsibility to communicate key
audit matters in the auditor’s report.
As per the facts given in the case, intention of the Toddle Limited had definite plan of its
business being closed down within short period from 31 March, 2017. However, financial
statements for the year ended 31.03.2017 had been prepared on the same basis as it had
been in earlier periods with an additional note.
Thus, management intentions to liquidate the entity or to cease operations is one of the
event or condition that may cast significant doubt on the entity’s ability to continue as going
concern is a key audit matter. Therefore, the auditor is required to Communicate the Key
Audit Matters in accordance with SA 570 in above stated manner. Simple reference as to
a possible cessation of business and making of adjustments, if any, be made at the time
of cessation only by the auditor in his report is not sufficient.
 
Examiner Comment
Question 1.(a) Closure of Business: Examinees lacked knowledge in applying the relevant
Standards on Auditing. Examinees failed to discuss the requirements of SA 570 that financial
statements provide adequate disclosure about events or conditions that may cast significant doubt
on the entity’s ability to continue as a Going concern. Some examinees answered wrongly that
Toddle limited should prepare the accounts on realization basis and Going concern assumption is
not valid in the given circumstances and hence the auditor should issue adverse opinion instead of
mentioning the same in Key audit matters as per SA 501. Examinees were lacking in exhibit the
knowledge of SA 701 and key audit matters as required in answer

1 answer

Ravi Staff April 8, 2019

As per SA 570 – Separate Section in Audit Report with Heading “Going Concern Not Valid”
As per SA 701 – In KAM reference to above paragraph
As per 705 – Adverse Opinion 
ICAI answer is not appropriate. 
i gave detailed presentation to BOS on changes in Nov 18 exams, from MAy 19 exams, i will send suggested from my side immediately after exams.

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