Mercury Motoring Co （Mercury) specialises in manufacturing engine parts for motor cars and

Mercury Motoring Co (Mercury) specialises in manufacturing engine parts for motor cars and the company has a diverse customer base but seven significant customers. The company’s year end was 30 September 2015.

During the year, a number of the company’s significant customers have experienced a fall in sales, and consequently they have purchased fewer items from Mercury. As a result, Mercury has paid a number of its suppliers later than usual and some of them have withdrawn credit terms meaning the company must pay cash on delivery. One of Mercury’s main suppliers is threatening legal action to recover the sums owing. As a result of the increased level of payables, the company’s current ratio has fallen below 1 to 0·9 for the first time.

Mercury has produced a cash flow forecast to 30 June 2016 and this shows net cash outflows until May 2016. Mercury has a loan of $2·3 million which is due for repayment in full by 30 September 2016.

The finance director has just informed the audit manager that there is a possible change in legislation which will result in one of Mercury’s top product lines becoming obsolete as it will not comply with the proposed law. The prepared cash flow forecasts do not reflect this possible event.

Required:

(a) Explain FIVE potential indicators that Mercury Motoring Co is NOT a going concern. (5 marks)

(b) Describe the audit procedures which you should perform. in assessing whether or not Mercury Motoring Co is a going concern. (5 marks)