Skyblue Pty Ltd is a large private company that manufactures special reinforced concrete and other products used in the construction of airport runways and heavy use motor vehicle freeways. During the course of the audit for the year ended 30 June 20X5, the government announced that it intends to scrap its proposed third runway project. You know that Skyblue Pty Ltd’s projections include a major share of the work expected to flow from this project.

The company has been experiencing some cash flow difficulties, although this is not unusual in the industry. Management has recently fully extended their overdraft facility in order to pay day-to-day expenses such as wages and salaries. The audit partner is concerned that the company may be facing going concern problems, but the managing director maintains that future capital expenditure can be cut back to alleviate the going concern issue. In addition, surplus assets can be sold to the growing Asian market and long-term debt can be rescheduled if necessary.

Required:

1. (a)  Give examples of three other possible mitigating factors that have not yet been mentioned by the managing director which will alleviate the company going concern problems.
2. (b)  What evidence should you obtain with respect to management’s representation about the various mitigating factors presented in the case above and identified in part (a) above?
3. (c)  The engagement partner has decided to qualify the financial report on the basis of uncertainty as to going concern. However, the managing director argues that, as the company is privately held and all the shareholders are involved in the business, going concern problems should not be viewed as seriously as if the company was publicly listed and, therefore, an unqualified report should be signed. How would you respond to the managing director’s comments?
4. (d)  What would be the impact on the audit of a comfort letter from a related company promising to provide financial support in the event that Skyblue Pty Ltd was unable to meet its debts?