Problem:

Complex Runway 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 2010, the government announces it intends to scrap its proposed third runway project. You know that Runway 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 rescheduled if necessary.

Required:

(1) Give examples of and discuss other possible mitigating factors that have not yet been mentioned.

(2) What evidence should you obtain with respect to management's representation about the various mitigating factors presented in the problem and identified in part (1) above?

(3) Assume that 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 it were a publicly listed company and therefore an unqualified report should be signed. How would you respond to the managing director's comments?

(4) What would be the impact on the audit if there was a letter of comfort from a related company promising to provide financial support in the event that Runway Pty Ltd was unable to meet its debt commitments.

Additional Information:

This question is from Accounting as well as it is about a construction company which is facing problems about cash mobilization. While the auditors are concerned about this, the directors of company say that it isn't a big concern. The impact of this upon audit has been discussed in the solution comprehensively.