Evaluating the Going Concern Status of Bayview Steel Ltd Assessment

Assignment Overview

QUESTIONS

1.1 Identify and discuss five (5) potential going concern indicators.

1.2 Describe the going concern procedures that should be carried out during the audit.

1.3 Provide two (2) reasons that could reduce the going concern risk.

1.4 Discuss the implications for the auditor’s reporting and conclusion.

Ndlovu Holdings (Pty) Ltd – Group Audit Scenario

2.1 Identify and discuss the major risks related to the group audit engagement and dependence on component auditors.

2.2 Explain the issues that should be considered before approving Mkhize & Co. as component auditors.

2.3 Discuss how reliance can be placed on the work of the internal auditor.

2.4 Describe the significant procedures that must be undertaken before using an auditor expert.

Revenue Cycle – Paws & Whiskers Pet Supplies (Pty) Ltd

3.1.1, 3.1.2, and 3.1.3 (Combined):
Prepare a structured table showing:

• Key controls identified

• Risk lowered to an acceptable level

• Tests of control

Purchases Cycle – Paws & Whiskers Pet Supplies (Pty) Ltd

4.1.1, 4.1.2, and 4.1.3 (Combined):
Prepare a structured table showing:

• Key controls identified

• Risk lowered to an acceptable level

• Tests of control

Inventory Cycle – Paws & Whiskers Pet Supplies (Pty) Ltd

5.1.1, 5.1.2, and 5.1.3 (Combined):
Prepare a structured table showing:

• Key controls identified

• Risk lowered to an acceptable level

• Tests of control

Brief of Assessment Requirements (summary + key pointers)

Purpose: Evaluate the student’s understanding of going-concern audit procedures, group audit risks and reliance on component/internal auditors and experts, and control testing across revenue, purchases and inventory cycles for a retail/pet-supply business.

Assessment components & key pointers to cover

1. Going-concern (Q1)

   • Identify 5 potential indicators that cast doubt on going concern (liquidity, cash flows, customer loss, supplier/creditor actions, operational disruption).

   • Describe audit procedures to obtain evidence about going concern (review cash flow forecasts, examine financing terms, assess subsequent events, management representations).

   • Explain mitigating factors (e.g., new funding, cost reductions).

   • Discuss auditor reporting implications (disclosure, modified opinions per ISA 570/705).

2. Group audit & component/internal auditors (Q2)

   • Identify major risks when relying on component auditors (inconsistent methodologies, insufficient evidence, differing materiality, communication gaps).

   • State pre-engagement checks for approving a component auditor (competence, quality control, ethics/independence).

   • Explain when/how to rely on internal audit work (objectivity, scope, competence, audit committee reporting).

   • Describe procedures before using experts (assess expert competence/independence, understand methods, document terms of engagement, evaluate sufficiency of expert work — ISA 620).

3. Revenue, Purchases, Inventory cycles (Q3–Q5)

   • For each cycle produce a structured table with: Key controls, the risk lowered to acceptable level, and Tests of control.

   • Focus on practical retail controls (POS pricing, manager approvals, three-way matching, AVL, cycle counts, quarantine for live animals, FIFO, CCTV, dual EFT authorization).

How the assessment was approached by the Academic Mentor — step-by-step process (brief explanation of each step)

Step 1 — Scope & planning (mentor + student)

• Mentor clarified learning outcomes and marking rubric with the student: going-concern reasoning, ISA application, group audit considerations, control testing design and test selection.

• Student identified the facts in the scenario and mapped them to the questions. Mentor guided prioritisation — start with high-risk / high-impact items (going concern & group audit).

Step 2 — Research & framework alignment

• Mentor reminded the student to align answers to the relevant ISAs (ISA 570, ISA 705, ISA 610, ISA 620) and to reference typical audit practice.

• Student collected scenario evidence (cash flow notes, overdraft, major customer loss, component auditor notes, internal audit structure, system controls). Mentor checked that each point directly answered the question prompt.

Step 3 — Drafting Q1 (Going concern)

• Mentor coached the student to structure Q1: list indicators first (clear bullets), then procedures, then mitigating factors, then reporting implications.

• For procedures, mentor insisted on linking each procedure to the specific indicator (e.g., stress testing if cash flow is weak).

• Student produced concise paragraphs and bullet lists; mentor reviewed for ISA terminology and completeness.

Step 4 — Drafting Q2 (Group audit & component/internal audit)

• Mentor walked through the group auditor’s responsibilities: assessing component auditor competence, communication, materiality alignment.

• Student created a risk list and a checklist of pre-engagement queries for component auditors (licenses, recent quality reviews, methodology).

• For internal audit reliance and expert use, mentor required the student to state evaluation criteria and give practical examples (what to ask an expert; what to document).

Step 5 — Drafting Q3–Q5 (Control tables for cycles)

• Mentor taught the student how to produce the structured tables: each control → what risk it mitigates → the exact tests of control to perform.

• Mentor emphasised using specific, testable control evidence (system configuration files, authorization logs, reconciliation records, CCTV logs, cycle-count reconciliations).

• Student built the tables for Revenue, Purchases, Inventory with sample controls tailored to a pet supplies retailer (live animals considerations included).

Step 6 — Review, polish and compliance check

• Mentor reviewed the draft for clarity, consistency, and adherence to the assessment brief. Checks included: direct answers to each sub-question, use of audit standards where required, and practical test descriptions.

• Mentor suggested tightening language, adding references to ISA numbers (where relevant), and ensuring each table had all three columns populated.

Step 7 — Finalisation and submission

• Student incorporated mentor feedback, formatted sections and tables, and created a final file. Mentor performed a final read for grammar, structure and alignment with marking criteria.

How the Outcome was Achieved 

• Method: Structured approach: interpret scenario → align to ISAs & rubric → draft answers → mentor feedback → revise → finalise.

• Deliverables produced:

  • Answers to Q1: going-concern indicators, required audit procedures, mitigations, reporting implications.

  • Answers to Q2: group audit risks, component auditor checks, internal audit reliance guidance, procedures for using experts.

  • Q3–Q5: three structured tables (Revenue, Purchases, Inventory) listing key controls, risks mitigated and tests of control.

• Quality controls applied: Mentor-led reviews ensured ISA references, practical test steps, clear linkage between risks and procedures, and professional presentation.

Learning objectives covered

1. Apply audit standards to going-concern evaluation (ISA 570/705) — identify indicators, design procedures, and communicate implications.

2. Understand group audit responsibilities and reliance on component auditors (group audit principles) — assess component auditor competence and design supervisory actions.

3. Assess and rely on internal audit work (ISA 610) — evaluate objectivity, scope and competence before placing reliance.

4. Engage and evaluate auditor’s experts (ISA 620) — set terms, understand methodology, and assess sufficiency.

5. Design and test internal controls for transaction cycles — translate control objectives into testable controls and tests of control for revenue, purchases and inventory.

6. Scenario analysis and professional judgement — use evidence to form conclusions and recommend appropriate auditor responses and reporting.

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