4.  You are auditing Gazzillion Ltd a facilities management company that has grown swiftly in recent years by submitting very low bids for government contracts. Because of this policy some of the subsequent contracts have been loss making. Management are confident that Gazillion can recover the losses on future contracts and so have prepared the financial statements on a going concern basis with no additional disclosures; you are highly sceptical about this. You have therefore requested a cash flow forecast prepared on the basis that Gazillion’s profit margins on contracts replacing the loss making contracts is more in line with the low profit margins on other contracts. The financial statements showed a profit before tax of £1.2m; the original cash flow forecast showed net cash inflows of £4.8m, however the revised forecast is showing a net cash outflow for the next 12 months of £3.2m.

Required

a) Discuss the issue outlined in the scenario and explain whether it is material.

b) Describe the audit procedures that you will carry out in relation to the issue described.

c) Describe the impact on the audit report if the issue described is not resolved.