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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Subsequent events and going concern

Brindle Co is a manufacturer with a 30 June 20X5 year end. During the audit, the auditor notes that a major loan of $8 million is repayable in September 20X5, and management's cash flow forecast assumes the bank will roll the loan over, although no written confirmation exists. Which audit procedure is MOST appropriate to address this?

The auditor should examine the loan agreement and bank correspondence and seek evidence of renewal or alternative finance, because management's plans must be assessed for feasibility and a representation alone is not sufficient evidence.

  1. ARely on management's representation letter stating the bank will renew the facility
  2. BReview the loan agreement and correspondence with the bank, and obtain evidence on the likelihood of renewal or alternative financingCorrect
  3. CRecalculate the depreciation charge on the factory to test the forecast
  4. DReclassify the loan as non-current without further work because management intends to renew it

Explanation

The auditor must evaluate management's plans for future actions and whether they are feasible. Evidence about the bank's willingness to renew, from the loan terms and correspondence, is needed. A representation alone is insufficient, and reclassifying on intent alone would be inappropriate when no agreement exists.

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