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Negative Working Capital

Suraj S (Audit Executive) (335 Points)

12 July 2011

What are the implications of negative working capital for a public limited company, i mean is there any reporting requirement that has to be complied with by the auditor??????

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CA P KARTHIKA (Chartered Accountant) (715 Points)
Replied 12 July 2011

Hi Mr. Suraj,

A negative working capital is a sign of managerial efficiency in a business with low inventory and accounts receivable (which means they operate on an almost strictly cash basis). In any other situation, it is a sign a company may be facing bankruptcy or serious financial trouble.

No idea exactly! But it wont be reflected in auditor's report!!! Its standard with 21 points in annexure to auditor's report!

It well be disclosed only in financial statements as an annexure!!!

U S Sharma (glidor@gmail.com) (21056 Points)
Replied 12 July 2011

situation in which the current liabilities of a firm exceed its current assets. For example, if the total of cash, marketable securities, accounts receivable and notes receivable, inventory, and other current assets is less than the total of accounts payable, short-term notes payable, long-term debt due in one year, and other current liabilities, the firm has a negative Working Capital. Unless the condition is corrected, the firm will not be able to pay debts when due, threatening its ability to keep operating and possibly resulting in bankruptcy.
To remedy a negative working capital position, a firm has these alternatives: (1) it can convert a long-term asset into a current asset— for example, by selling a piece of equipment or a building, by liquidating a long-term investment, or by renegotiating a long-term loan receivable; (2) it can convert short-term liabilities into long-term liabilities—for example, by negotiating the substitution of a current account payable with a long-term note payable; (3) it can borrow long term; (4) it can obtain additional equity through a stock issue or other sources of paid-in capital; (5) it can retain or “plow back” profits.

Read more: https://www.answers.com/topic/negative-working-capital#ixzz1Rugpbjv8

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(Guest)

Any Reporting requirement for an Auditor is either mandated in :-

1) The Companies Act, 1956

2) CARO, 2003

3) The Standards on Auditing

Checking all the cases one-by-one.

1) The Companies Act, 1956 : - The Matters of inquiry as given u/s 227(1A) does not require an Auditor to report in case he finds Working Capital to be Negative.

2) CARO, 2003 :- CARO reporting is mandatory for all Public Limited Companies. Auditors have to report on each paragraph of CARO even if the finding is positive.bUT, None of the paras of CARO deal with the case of Negative Working Capital, To put it differently, under None of the paras, an auditor is required to report, if the firm is having Negative Working Capital.

3) Standards on Auditing :- The Case of Negative Working Capital is not common, therefore the Auditor must extend his audit procedures to ensure, if the reason for such Negative Wroking capital, requires reporting or communicating with Those Charged With Governance and Management. (SA 265)

Further if there are signs of Fraud, he will need to extend his procedures to confirm or dispel the doubt. (SA 240)

Further, If it renders the Gong Concern Assumption to be inappropriate, the auditor will need to report it specifically as per SA 570

In any case, if he finds any information/finding of his audit working to be as important to be brought to the notice of Shareholders, he may include it in the Report as "Emphasis of Matter". Remember Emphasis of Matter does not mean the report is Negative or Qualified. It only means that the Matter was found by auditor to be important to be brought to Shareholder's notice.

Conclusion :- Mere instance of Negative working capital is not reportable, But, the reasons for and Implicaitons of, such Negative Working Capital may render the case be Reportable under various Standards on Auditing. The objective of Auditing as derived from reading all the SA's is, to report on all the issues that may be important to the 'users of Account' / Shareholders, to gain understanding of the Firm's Financial Status and performance. Therefore, if the Negative Working Capital, in the view of Auditor is found to be important so as to require reporiting, he may report it as Emphasis of Matter.

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