Auditing assignment - Essay Example

Auditing assignment Table of Contents Table of Contents 2 Factors that triggered an issuance of going-concern opinion per ASA 570 3 Application of factors to Forest Enterprises Australia Limited 4Mitigating factors proposed by management 4Factors that triggered an issuance of going-concern opinion per ASA 570The four factors relating to the issuance of going concern opinion (ASA570) include-FinancialArrears in dividends or their discontinuance.Negative “operating cash flows” reported in the prospective or historical financial reports.

Adverse financial ratios.Indication of financial assistance withdrawal by creditors and debtors.OperatingLoss of important management personnel without replacement. Labor problems or any shortage of supplies. Unavailability of properly documented plans, policies and forecasts like projections on cash flows and forward budgets. Underinsurance or uninsurance against disasters like flood, drought, fraud, fire or sabotage. OtherFailure of entities in the industry.Pending regulatory or legal proceedings against the organization that can result in unfulfilled claims.

Changes in government policy or legislation that can adversely affect the company. An entity not complying with the statutory or capital requirements (Auditing and Assurance Standards Board, 2007). Application of factors to Forest Enterprises Australia LimitedThe company did not declare any dividend for the financial year 2009 (Forest Enterprises Australia Limited, 2009, p.11). This can be identified as one of the financial factors for the issuance of going concern opinion. In this year the company reported a negative cash flow from operating activities.

In 2009 the Net Cash Flow from operating activities has been reported at $16.722 million (Forest Enterprises Australia Limited, 2009, p.55). For 2009 the company reported a net loss figure of $14.13 million. Based on this the net profit margin and the return on equity of the company are unfavorable. Given the Current Asset of $178 million and Current Liabilities of $277 million the current ratio of the company is less than one highlighting the weakness in the liquidity position (Forest Enterprises Australia Limited, 2009, p.51-52). Industry players like Great Southern and Timbercorp have already collapsed.

The fall of entities in the industry is a factor for the issuance of going concern opinion (Kachor, 2010). The investors of the company have sought legal advice in the matter relating to the repayment of loan by FEA. The company did not make significant financial disclosures to its investors for the fiscal year 2009 and 2010. These being crucial information should have been disclosed to the potential investors; failure to do so is a non-compliance of statutory requirement (Kachor, 2010).Mitigating factors proposed by managementIn order to lower the debt component the management has planned for an asset sale; and is also in the process of discussion with the financiers regarding financing arrangements and restructuring plans.

The company also undertook a successful capital raising program last year (FEA Group of Companies, 2010). FEA is planning of selling its non-core assets (Forest Enterprises Australia Limited, 2009, p.95). Over the last 12 months the company is trying to reduce its debt, manage capital, increase productivity and exercise control over costs (Forest Enterprises Australia Limited, 2009, p.4). The company is working towards increasing the production volume together with quality and reducing the operational expenditure (Forest Enterprises Australia Limited, 2009, p.7). Reference Auditing and Assurance Standards Board. 2007. Auditing Standard ASA 570 Going Concern.

Available at: http://www.auasb.gov.au/admin/file/content102/c3/Compiled_ASA_570_-_27_June_2007.pdf[Accessed on October 28, 2010]. FEA Group of Companies. 2010. Statement by the Chief Executive of FEA, Mr Andrew White. Available at: http://www.fealtd.com/Home/News/tabid/61/EntryId/13/-Statement-by-the-Chief-Executive-of-FEA-Mr-Andrew-White.aspx[Accessed on October 28, 2010]. Forest Enterprises Australia Limited. 2009. ANNUAL REPORT. 2009. [pdf]. Kachor, K. 2010. FEA investors seek legal advice.

Morningstar Australasia Pty Limited. Available at: http://www.investordaily.com.au/cps/rde/xchg/id/style/9745.htm?rdeCOQ=SID-0A3D9632-DE6DFC57[Accessed on October 28, 2010].