You are the manager responsible for the audit of Burford Co, a company which designs and manufactures engine parts. The audit of the financial statements for the year ended 31 July 2013 is nearing completion and you are reviewing the working papers of the going concern section of the audit file. The draft financial statements recognise a loss of $500,000 (2012 – profit of $760,000), and total assets of $13•8 million (2012 – $14•4 million).

The audit senior has left the following note for your attention:

‘I have performed analytical review on Burford Co’s year-end financial statements. The current ratio is 0•8 (2012 – 1•2), the quick ratio is 0•5 (2012 – 1•6). The latest management accounts show that ratios have deteriorated further since the year end, and the company now has a cash balance of only $25,000.

Burford Co has a long-term loan outstanding of $80,000 with a covenant attached, which states that if the current ratio falls below 0•75, the loan can be immediately recalled by the lender.’
You are also aware that one of Burford Co’s best-selling products, the QuickFire, has become technically obsolete during 2013 as customers now prefer more environmentally friendly engine parts.

Historically, the QuickFire has generated 45% of the company’s revenue. In response to customers’ preference, $1•3 million has been spent on designing a new product, the GreenFire, due for launch in February 2014, which will be marketed as an environmentally friendly product.

A cash flow forecast has been prepared for the year to 31 July 2014, indicating that based on certain assumptions, the company’s cash balance is predicted to increase to $220,000 by the end of the forecast period.

Assumptions include:

1. The successful launch of the GreenFire product,
2. The sale of plant and machinery which was used to manufacture the QuickFire, generating cash proceeds of $50,000, forecast to take place in January 2014,
3. A reduction in payroll costs of 15%, caused by redundancies in the QuickFire manufacturing plant, and
4. The receipt of a grant of $30,000 from a government department which encourages innovation in environmentally friendly products, scheduled to be received in February 2014.

Required:

(i) Identify and explain the matters which cast doubt on the going concern status of Burford Co.
(6 marks)

(ii) Explain the audit evidence you should expect to find in your file review in respect of the cash flow forecast. (8 marks)