Evaluate the going concern of your client

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Reference no: EM133973844

Problem

Your Group as an Audit firm is working on the audit of Sankwan Plc, a book and magazine publisher. Sankwan Plc has a financial year ended 31 March 2025 and you are reviewing the work performed on going concern.

Your discoveries indicate that there are significant operating and financial problems facing the company.

Operating problems noted during the audit of going concern

Sankwan Plc's business is significantly impacted by an industry-wide deterioration in demand for printed books and magazines. The company has recently acquired a digital publishing business at a cost of ?25 million, and management is confident that Sankwan Plc will soon be able to offer a broad range of digital books and magazines. However, authors of printed books will need to give consent for their books to be converted to a digital format. This consent must be obtained prior to the books being made available for sale on digital platforms.

Authors are paid royalties based on sales of their books, typically around 5% of the revenue generated from their titles. There is concern that due to the company's cash position, there may be delays in making royalty payments to some authors.

In addition, the rapid growth of online retailers has impacted negatively on the company's sales, as Sankwan Plc has not, until recently, devoted marketing resources to engagement with online retailers. Analytical procedures show that revenue has declined by 20% this year, accelerating the trend seen in previous years. In the financial years ended 31 March 2023 and 31 March 2024, revenue fell by 10% and 12% respectively.

The company has recently contracted a very popular author to write a series of three children's books. The author, Kwame Tawiah, who has sold millions of books worldwide, has delivered the first book in the series, which was published in January 2025. Sales of the book since its publication have been disappointing, at only ?135,000. Management explains that this is due to a rival company publishing a similar book in December 2024. Kwame Tawiah's second book is due to be published in August 2025, and the third in January 2026.

Financial issues

Sankwan Plc faces a liquidity problem, having only ?78,000 of cash at 31 March 2025. The company has an overdraft facility of ?250,000 and in addition, agreed undrawn borrowing facilities of ?1 million. There is also an existing ?5 million unsecured bank loan which is due for repayment on 30 September 2025. Get the instant assignment help.

Disclosure relating to going concern

Management has confirmed that they will provide full details of the going concern issues facing Sankwan Plc in the notes to the financial statements.

Happy Travels publishing range

Sankwan Plc has made the decision to sell its popular Happy Travels range. This is a range of books aimed at the student traveller and include maps as well as suggested hostels and activities. Sankwan Plc anticipates significant interest in the range, with a sale expected in January 2026.

Task I

1. Evaluate the Going Concern of your client and discuss the Audit procedures appropriate enough in exhibiting Professional Skepticism.

2. You have not been able to obtain sufficient, appropriate audit evidence to support the cash flow forecast Geller provided you as a means of dealing with their going concern issues. One of your team members proposes to issue an unmodified audit opinion but to include a Material

Uncertainty Related to Going Concern section within the auditor's report to highlight the problems facing the company.

Task II

1. Discuss the appropriateness of the audit assistant's proposal for the auditor's report.

Reference no: EM133973844

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