AC2104: Seminar 6

Mini Presentation
Seminar 1, Group 7
Cherilyn Loi, Damien Koh, Kwang
Yi Juin, Tan Chek Lin, Timotty Neo

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a) What major categories of events or conditions may indicate
going-concern problems? Give two examples of each category.

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 DEFINITION OF GOING CONCERN
Financial statements are prepared on the assumption that the entity is a going
concern and will continue its operations for the foreseeable future. ... When
the use of the going concern basis of accounting is appropriate, assets and
liabilities are recorded on the basis that the entity will be able to realise its
assets and discharge its liabilities in the normal course of business.
[SSA 570.2]

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CATEGORIES OF EVENTS/CONDITIONS THAT INDICATE
GOING-CONCERN PROBLEMS

1. Financial Indications
2. Operating Indications
3. Other Indications

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(a) Financial indications - Noble Group

Source: Noble Group Annual Report 2017 5

(a) Financial indications - Noble Group
- Net Liability Position of US $ 800.9 million in 2017

Source: Noble Group Annual Report 2017 6

(a) Financial indications - Noble Group
- Substantial operating losses of US$4,939.4 million in 2017

Source: Noble Group Annual Report 2017 7

(b) Operating indications - Toys "R" Us, Inc.
- In 2017 Management intention to liquidate or cease operations

Source: CNBC 8
(b) Operating indications - Toys "R" Us, Inc.
- Emergence of highly successful competitors

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Source: Ecommercedb.com
(c) Other indications - ZTE Corporation

- Potential legal and compliance issue that cause substantial doubt in

company ability to continue its operations.

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(c) Other indications - ZTE Corporation
- ZTE: In May 2018, ZTE the fourth largest telecommunication company in
China was convicted by Us government for violating UN sanctions for
selling equipment to Iran and North Korea.

- Subsequently Us commerce department imposed a ban on ZTE on buying

all Us origin chips mainly supplied from Intel.

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(c) Other indications - ZTE Corporation
- Most of ZTE finished products require use of Us made chips as
component parts. The chips are unable to be substituted by other country
suppliers.

- Hence this will affect ZTE ability to continue production and cast
substantial doubt on going concern.

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(c) Other indications - NL Industries
- NL Industries is Us lead smelting company listed in Us stocks exchange
with a market capitalisation of 340 million.

- It was being sued for damages caused by use of its paints containing
toxic lead and asbestos.

- In 2014 court issue judgment finding it and two other companies jointly
liable for 1.14 billion of total compensation

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(c) Other indications - NL Industries
- It estimates it liability to be 409 million while defendants are asking 709
million. Currently they are still in midst of negotiation.

- This huge amount of payment post going concern to its ability to be

financially viable in the future.

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b) Describe the three conditions that are generally present when
fraud occurs. Provide two examples for each condition.

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 DEFINITION OF FRAUD

An intentional act by one or more individuals among management,

those charged with governance, employees, or third parties,
involving the use of deception to obtain an unjust or illegal
advantage.
[SSA 240 Para 11(a)]

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 FRAUD vs ERROR
International Standard on Auditing 240:

The distinguishing factor between fraud and error is whether the

underlying action that results in the misstatement of the financial
statements is intentional or unintentional.

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 FRAUD

Fraudulent Financial Reporting Misappropriation of Assets

Intentional misstatements/ omissions of amounts/
Theft of an entity’s assets
disclosure to deceive financial report users

Example: Example:
Manipulation, falsification, or alteration of Stealing physical assets or intellectual property
accounting records or supporting documentation (e.g. stealing inventory for personal use or sale)
from which the financial statements are prepared.

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 CHARACTERISTICS OF FRAUD
SSA 240 para A1:

(1) Pressure / Incentive: (3) Rationalisation:

A reason to misrepresent Reasoning to justify misrepresentation

(2) A Perceived Opportunity:

Circumstances that allow a misrepresentation to occur
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(1) Pressure - Fraudulent Financial Reporting
Excessive pressure exists for management to meet the requirements or
expectations of third parties due to the:

● Profitability or trend level expectations of investment analysts, institutional

investors,significant creditors etc.

● Need to obtain additional debt/equity financing to stay competition - financing

of major research & development etc.

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(1) Incentive - Fraudulent Financial Reporting
Personal financial situation of management or those charged with governance is
threatened by the entity’s financial performance :

● Significant financial interest in entity

● Significant portion of compensation contingent upon achieving aggressive

targets for stock price etc.

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(2) Opportunity - Fraudulent Financial Reporting
Monitoring of management not effective as a result of:

● Domination of management by a single person or small group without

compensating controls

● Oversight by those charged with governance over the financial reporting

process and internal control is not effective

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(2) Opportunity - Misappropriation of Assets
Internal control components over assets are deficient:

● Inadequate segregation of duties or independent checks

● Inadequate system of authorization and approval of transactions (e.g. in

purchasing)

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(3) Rationalisation - Fraudulent Financial Reporting
● Communication, implementation, support, or enforcement of the entity’s values
or ethical standards by management, or the communication of inappropriate
values or ethical standards, that are not effective

● Known history of violations of securities laws or other laws and regulations, or

claims against the entity, its senior management, or those charged with
governance alleging fraud or violations of laws and regulations

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(3) Rationalisation - Misappropriation of Assets
Relationship between management and auditor is strained, as exhibited by :

● Restrictions on the auditor that inappropriately limit access to people or

information.

● Domineering management behavior in dealing with the auditor, especially

involving attempts to influence the scope of the auditor’s work or the selection
or continuance of personnel assigned to or consulted on the audit engagement.

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c) Why do auditors determine and apply performance materiality?

Source: GS Chapter 4.6 Fig 4.9 26

c) Why do auditors determine and apply performance materiality?

Source: GS Chapter 4.6 Fig 4.9 27

 DEFINITION OF PERFORMANCE MATERIALITY

The amount or amounts set by the auditor at less than

materiality for the financial report as a whole to reduce to an
appropriately low level the probability that the aggregate of
uncorrected and undetected misstatements exceed materiality
for the financial report as a whole

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(c) Why do auditors determine and apply performance materiality?
ASA 320.11:
Auditor to set performance materiality for the purposes of assessing the
risks of material misstatement and determine the nature, timing and
extent of further audit procedures that needs to be performed.

SSA 320 A13:

Planning the audit solely to detect individually material misstatements
overlooks the fact that the aggregate of individually immaterial
misstatements may cause the financial statements to be materially
misstated, and leaves no margin for possible undetected misstatements.

Therefore, PM is set so as to reduce such a probability to an

appropriately low level.
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 DETERMINANTS OF PERFORMANCE MATERIALITY

In practice, performance materiality commonly ranges from

approx. 60% (high risk) to 85% (low risk) for the figure established
for materiality for the financial report as a whole but it varies
considerably between audit firms.

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References
- Hirsch, L. (2017, September 06). Toys R Us hires law firm as it explores possible bankruptcy filing. Retrieved
September 16, 2018, from https://www.cnbc.com/2017/09/06/toys-r-us-weighs-possible-bankruptcy-filing.html
- Hirsch, L. (2017, September 19). Toys R Us files for Chapter 11 bankruptcy protection. Retrieved September 16, 2018,
from https://www.cnbc.com/2017/09/18/toys-r-us-files-for-chapter-11-bankruptcy.html
- Financial Times Amazon, CNBC, pricey leases: Toys R Us on why it filed for bankruptcy. (n.d.). Retrieved
September 16, 2018, from https://www.ft.com/content/118024b9-6e09-3056-ae29-dbd863371a19
- Toys R Us Bankruptcy: A Cautionary eCommerce Tale. (2017, September 20). Retrieved September 16, 2018, from
https://www.eshopworld.com/toys-r-us-bankruptcy/
- Noble Group 2017 Annual Report and AGM Notice. (2018, April 7). Retrieved September 16, 2018, from
http://www.thisisnoble.com/newsroom/1245-noble-group-2017-annual-report-and-agm-notice-2018.html
- Singapore Standards on Auditing (SSAs). (n.d.). Retrieved September 16, 2018, from
https://isca.org.sg/tkc/aa/standards/standards/ssas/
-

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 Thank you!
Any Questions?
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