As the auditor of Komsu Air Limited (KAL) that manufactures and installs large commercial airconditioning systems. KAL typically has two or three large contracts (ranging from $6 million to $10
million each) in progress at any one time. The contracts usually take up to six months to complete,
although unexpected on-site difficulties can result in lengthy delays in completion (of up to 12
months). KAL finances its operations with a mixture of equity, long-term debt (secured by fixed assets)
and short-term bank loans.
It is now May 2017 and your planning of the audit of KAL for the year ended 30 June 2017 is nearing
completion. You have met with the management of KAL and, from those discussions and a review of
the preliminary information provided by KAL, you have identified several issues that may have
implications for the company’s ability to continue as a going concern. The relevant issues are as
follows:
? Competition in the industry is becoming more intense, with some customers now installing their
own systems.
? KAL’s bank has requested cash flow forecasts for the coming year to support the short-term loans.
It has indicated that it may need to withdraw funding or restructure debt if the forecasts are not
adequate. The review of work-in-progress indicates that all the contracts in progress at year end
are due for completion within six months of the balance date. There are no new contracts in place
for the coming year, although management has indicated that there are orders currently being
negotiated. The nature of the business is such that sales will fluctuate considerably from year to
year depending on the timing of one or two large contracts.
? Assets consist chiefly of plant and equipment, some of which is specialised to the industry. Debtors
are significant, but recoverability is not considered an issue as the ongoing projects are with
reputable customers and management is not aware of any problems. Creditor balances are at
normal levels, and the company is in a positive working capital position.
? Included in provisions is a large provision for warranty for one of KAL’s jobs completed at a hotel
two years ago. It appears that the air-conditioning system is still not working and the hotel is now
requesting a substantial refund of the contract price.
Required:
Explain whether you believe the area of going concern should be assessed as high risk and mitigating
factors for KAL’s audit for the year ended 30 June 2017. (10 marks, maximum 300 words)