Reference no: EM132677413

Question - You are the auditor of Corona Milkshakes Bottles (Pty) Ltd for its financial year ending 30 September 2020.

The company bottles spring flavored water for distribution to wholesalers. All sales to customers are on credit. In recent years the company has been facing increasing competition and tightening liquidity problems.

The directors have advised you as follows concerning the company's financial position:

The draft financials as at 30 September show that the company's total liabilities exceed its total assets as well as current liabilities exceed current assets by N$150 000. Their only creditor (supplier of the empty bottles) is only willing to supply the company with empty bottles on cash on delivery basis. Debtors have increased substantially and they have become slow payers. The company has a loan of N$500 000 from its majority shareholder, which half of it is due to be repaid in February 2019.

The majority shareholder has agreed to subordinate his loan in favour of other creditors (i.e. he has entered into a back ranking agreement in respect of the loan). The company has reached its overdraft limit of N$500 000. The bank overdraft is secured by the property which is owned by the company. The bankers are unwilling to advance further overdraft facilities as they believe the valuation of the property is fully bonded. Even though the former sales director left the company during the current financial year due to ill health, the directors are of the opinion that given time the company will return to profits.

REQUIRED -

1. Discuss the indicators you would consider in analyzing the going concern basis of the Financial Statements at 30 September 2020.

2. Discuss the audit procedures you will carry out in respect of the subordination agreement to determine whether the going concern basis of the Financial Statements at 30 September 2020.