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ERG - Fact or Fiction (Volume 2)

  1. 99 Posts.
    The Auditor's Responsibility with respect to the Going Concern Basis

    The auditor should obtain sufficient appropriate audit evidence that it is appropriate, based on all reasonably foreseeable circumstances facing the entity, for management to prepare the financial report on the going concern basis. It is implicit in assessing the reasonably foreseeable circumstances facing the entity, that a judgement be made about uncertain future events. No certainty exists, nor can any guarantee be given, that any entity will continue as a going concern. Hence the auditor's judgement will always involve an assessment, made at the time the audit report is signed, of the risk that the going concern basis is inappropriate.

    In considering what is reasonably foreseeable, it is necessary to draw a distinction between the circumstances that may face an entity during the relevant period and events that may occur after that time. As possible events become more distant, there is likely to be less evidence available about them, and what evidence is available is likely to be less reliable. Accordingly, while the auditor needs to be alert to the possibility that a going concern problem might arise at any time in the future, the auditor's work will ordinarily be focussed primarily on anticipated events during the relevant period.

    This listing is not all-inclusive. Further, the existence of one or more of these indications does not necessarily signify that the going concern basis needs to be questioned.

    Operating indications (including management attributes)
    (a) lack of strategic direction including appropriately documented policies, plans and forecasts such as forward budgets and cash flow projections;
    (b) deficiencies in the governing body e.g. lack of independent members, low level of involvement in key decisions, poor documentation and communication of decisions, imbalance or lack of expertise amongst members;
    (c) lack of management expertise or loss of key management personnel;
    (d) concentration of risk in a limited number of products or projects;
    (e) loss of a major market, franchise or licence;
    (f) prolonged industrial relations difficulties;
    (g) shortages of important supplies or loss of a principal supplier;
    (h) deficiencies in management information systems, including blockages in information flows, or lack of management action in response to information received;
    (i) rapid or unplanned development of business (particularly in non-core activities) without commensurate developments in information systems, management expertise, financing structures, pricing policies, etc.; and
    (j) uninsured or underinsured disasters such as drought, flood, fire, fraud or sabotage.
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