Reference no: EM132997950

Question - Your firm is the external auditor of Dunlec Ltd (Dunlec) for the year ended 31 October 2009. The company is owned by members of the Dunlop family, none of whom is involved in running the business. Dunlec's principal activity is the installation of electrical systems for customers in the retail, construction and industrial sectors in the UK. The company operates from premises in London and six freehold regional depots throughout the UK.

All contracts are fixed-price. Customers pay 95% of the contract price on completion of the work and withhold 5% of the contract price for up to six months from the date of completion in case remedial work is required. The materials and components used by Dunlec are bought from UK suppliers who require payment within 30 days of the invoice date.

Dunlec made an operating loss during the year ended 31 October 2009. This was mainly due to a substantial bad debt in respect of a company which went into liquidation in July 2009, with insufficient funds to pay unsecured creditors. As a result, Dunlec experienced severe cash flow problems. In August 2009, to ease its cash flow problems, Dunlec sold its London freehold premises and leased new premises. Dunlec used the proceeds to:

pay a loan instalment on the due date in September 2009 (final instalment due in September 2010);

pay its overdue tax and related penalties; and

reduce the company's overdraft.

During the year ended 31 October 2009, Dunlec suffered a fall in demand for its services in the construction sector. The directors have undertaken a strategic review of operations and have decided to reduce the company's cost base by:

closing two of the regional depots and putting both premises up for sale. Contracts in those regions will be serviced by the nearest existing depot; and

making 25% of the company's employees redundant.

The closures and redundancies were announced on 12 November 2009 and the premises were immediately put up for sale.

As part of their assessment of the company's ability to continue as a going concern, the directors have prepared cash flow forecasts. These show that the company can operate within its current overdraft facility for the two years ending 31 October 2011.

Requirements -

(a) From the information provided in the scenario, identify the specific matters you would consider when reviewing the assumptions underlying the receipts and payments included in the cash flow forecasts for the two years ending 31 October 2011.

(b) Discuss the implications for your firm's audit report in each of the following two circumstances:

(i) Dunlec is not a going concern;

(ii) there is a significant uncertainty about the going concern status of Dunlec.

(c) Identify the parties to whom your firm may be liable for damages if an inappropriate opinion is provided on the financial statements of Dunlec for the year ended 31 October 2009 and state the circumstances under which those parties may be successful in claiming such damages against your firm.