The Cancer Drug - Going Concern

Issue: Going concern

The cancer drug is the single product that PPI manufactured and has not yet been approved for sales by the government. Although the drug trial testing is encouraging, the material uncertainty exists to challenge the going concern assumption. If the cancer drug fails the test and cannot get the approval for sales in the near future, PPI would not generate the revenue to pay back the debt and keep the business running. Also, borrowing a large amount of cash from foreign investors is risky for PPI. The big liabilities from borrowing money would increase PPI’s pressure of generating revenue to pay for the debt. The investors have rights to request the call back of loans at any time. If CPI cannot pay back the debt, CPI will be out of business.

According to the CPA Handbook (HBK), the financial statements should be generated on a going concern basis unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so. The management of PPI should make a specific assessment of PPI’s ability to continue as a going concern, which involves making a judgment at a particular point in time about inherently uncertain future outcomes of events or conditions. Also according to CAS 570, as auditors, we are required to obtain sufficient appropriate audit evidence regarding the appropriateness of management's use of the going concern assumption in the preparation of the financial statements, to conclude whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity's ability to continue as a going concern based on the evidence, and to determine the implications for the auditor’s report by evaluating management’s assessment, assessing the risk and considering whether there are events or conditions that may cast significant doubt on the PPI’s ability to continue as a going concern.