Question:
Banksia Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Australia. During the 2022 year, Banksia gained a new client, Sydney Dental (SD), which owns 100 per cent of the following entities:
All Smiles Dapto Limited, a private dental clinic that specialises in the orthodontic treatment.
Wollongong Private Dental Hospital
Nowra Dental Pty Ltd, a dental clinic
Year-end for all SD entities is 30 June.
You are the audit partner reviewing the audit work papers for SD for the year ended 30 June 2022. Today is 13 July 2022 and the audit report is due to be signed in three weeks’ time.
During your review you note that the fixed-term borrowings of SD totalling $150 million are approaching maturity and SD does not seem to have renegotiated any terms of refinancing. You are aware, from your experience with other clients, that banks are reluctant to extend financing on the same terms in the current market. The financing of SD was historically managed by the group’s treasurer who left the group six months ago and has not been replaced.
SD’s financial controller, who has been with the group for nine months, has advised you that she has been busy renegotiating with some of SD’s key suppliers who recently requested cash on delivery for all orders rather than extending the normal credit terms.
You are also aware that a fire that occurred in the hospital cafeteria last week was not adequately covered by insurance. Fortunately, no one was seriously injured in the fire, but the cafeteria was so badly damaged it had to be closed.
While discussing this matter with SD’s law firm, they reveal that the hospital is unlikely to have adequate professional indemnity insurance to meet the current demands of several malpractice cases that have been brought against the hospital in the last 12 months.
REQUIRED
(a) Explain your responsibilities with respect to the cafeteria fire.
(b) How should this fire event be handled in the financial report and the audit report?
(c) Suggest three possible going concern issues for SD? Explain. If so, suggest two mitigating circumstances?
(d) How will you recommend any going concern issue be handled in the financial report and the audit report?
