Celtel is a large telecommunications company that is listed on a
Stock Exchange. It is highly geared because, like many such companies, it
borrowed a large sum to pay for a license to operate a mobile phone
network with technology that has not proved popular. The company’s
share price has dropped by 50% during the last three years and there have
been several changes of senior management during that period. There has
been considerable speculation in the press over the last six months about
whether the company can survive without being taken over by a rival.
There have been three approaches made to the company by other
companies regarding a possible takeover but all have failed, mainly because
the bidders pulled out of the deal as a result of the drop in share prices
generally.
The company has net assets, but has found it necessary to severely curtail
its capital investment program. Some commentators consider this to be
fundamental to the future growth of the business, others consider that the
existing business is fundamentally sound. It has also been necessary for the
company to restructure its finances. Detailed disclosures of all of these
matters have always been made in the financial statements. No reference
has been made to the going concern status of the company in previous
auditor’s reports on financial statements and the deterioration in
circumstances in the current year is no worse than it has been in previous
years.
Required:
a) On the basis of the information provided above, describe the audit
report that you consider is likely to be issued in the case of Celtel, giving
reasons. (4 marks)
b) Explain the difficulties that would be faced by Celtel and its auditors if
Celtel’s audit report made reference to going concern issues.
(6 marks)