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

Orion Retail's management has concluded that going concern is appropriate, relying on a cash flow forecast that assumes a new supplier credit facility of $2 million will be secured. The facility is being negotiated but is not signed. Which audit procedure is most appropriate for the auditor to evaluate management's plans?

The auditor should evaluate the reliability of the forecast data, test the key assumptions, and obtain external evidence on the status of the unsigned facility. A management representation or board approval alone is not sufficient evidence of feasibility under ISA 570 (Revised).

  1. AAccept the forecast because it was prepared by management and approved by the board
  2. BEvaluate the reliability of the underlying data, test the assumptions, and obtain evidence of the status of the facility, such as correspondence with the supplierCorrect
  3. CRely solely on a written representation from management that the facility will be secured
  4. DAssume the facility will be signed because negotiations have started

Explanation

ISA 570 (Revised) requires the auditor to evaluate management's plans for future action, including whether the outcome is likely to improve the situation and whether the plans are feasible. This involves assessing the data and assumptions in the forecast and obtaining evidence on the facility. Written representations alone are insufficient and cannot replace other audit evidence.

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