8. Going Concern

Question 1

🟢 LEVEL 1 – FOUNDATION

What is the going concern assumption?

Answer 1

F/S are prepared assuming the entity will continue operating for the foreseeable future.

This assumption is fundamental for the preparation of financial statements.

Question 2

🟢 LEVEL 1 – FOUNDATION

Who is responsible for assessing going concern?

Answer 2

Management.

Management must evaluate the entity’s ability to continue as a going concern.

Question 3

🟢 LEVEL 1 – FOUNDATION

What is the minimum assessment period for going concern?

Answer 3

At least 12 months from reporting date.

This period is crucial for evaluating the entity’s future viability.

Question 4

🟢 LEVEL 1 – FOUNDATION

What standard covers auditor’s responsibility regarding going concern?

Answer 4

CAS 570.

This standard outlines the auditor’s responsibilities in relation to the going concern assumption.

Question 5

🟢 LEVEL 1 – FOUNDATION

What must management do if the business shows distress?

Answer 5

Document assumptions and supporting evidence.

This documentation is essential for transparency and accountability.

Question 6

🟢 LEVEL 1 – FOUNDATION

What is the auditor’s role in assessing going concern?

Answer 6

Evaluate management’s assessment and supporting evidence.

The auditor must ensure that management’s assessment is reasonable.

Question 7

🟢 LEVEL 1 – FOUNDATION

What happens if management does not perform a going concern assessment?

Answer 7

Auditor must request one.

The auditor has a responsibility to ensure that an assessment is conducted.

Question 8

🟡 LEVEL 2 – MODERATE APPLICATION

Give 3 financial indicators of going concern issues.

Answer 8

• Net liability position
• Negative cash flows
• Substantial operating losses

These indicators can signal potential financial distress.

Question 9

🟡 LEVEL 2 – MODERATE APPLICATION

Give 3 operating indicators of going concern issues.

Answer 9

• Loss of key management
• Loss of key customer
• Inability to obtain supplies

These indicators reflect operational challenges that may threaten viability.

Question 10

🟡 LEVEL 2 – MODERATE APPLICATION

Give 3 other indicators of going concern issues.

Answer 10

• Material lawsuits
• Regulatory changes
• Uninsured events

These factors can significantly impact the entity’s future operations.

Question 11

🟡 LEVEL 2 – MODERATE APPLICATION

If loan covenants are breached, what risk arises?

Answer 11

Going concern risk increases.

Breaching covenants can indicate financial instability.

Question 12

🟡 LEVEL 2 – MODERATE APPLICATION

If a company plans to liquidate, can F/S use going concern basis?

Answer 12

No.

Liquidation indicates that the entity will not continue operating.

Question 13

🟡 LEVEL 2 – MODERATE APPLICATION

What should the auditor review when doubt exists about going concern?

Answer 13

• Cash flow projections
• Financial agreements
• Loan covenants

These reviews help assess the entity’s financial health.

Question 14

🟡 LEVEL 2 – MODERATE APPLICATION

If management assessment only covers 6 months, what must the auditor do?

Answer 14

Request extension to 12 months.

A longer assessment period is necessary for a thorough evaluation.

Question 15

🔵 LEVEL 3 – CPA-LEVEL THINKING (Case Depth)

How should you structure going concern in a case?

Answer 15

• Identify indicators
• Assess management’s projections
• Evaluate assumptions
• Conclude if material uncertainty exists
• Determine reporting impact

This structured approach ensures a comprehensive analysis.

Question 16

🔵 LEVEL 3 – CPA-LEVEL THINKING (Case Depth)

If management’s projections rely on unrealistic sales growth, what should the auditor conclude?

Answer 16

Assumptions unreasonable → going concern doubt remains.

Unrealistic projections can undermine the going concern assumption.

Question 17

🔵 LEVEL 3 – CPA-LEVEL THINKING (Case Depth)

If material uncertainty exists but is properly disclosed, what report modification is required?

Answer 17

Unmodified opinion + Material Uncertainty Related to Going Concern paragraph.

Proper disclosure allows for an unmodified opinion despite uncertainty.

Question 18

🔵 LEVEL 3 – CPA-LEVEL THINKING (Case Depth)

If material uncertainty exists and is not disclosed, what opinion is required?

Answer 18

Qualified or adverse opinion.

Lack of disclosure can lead to a negative assessment of the financial statements.

Question 19

🔵 LEVEL 3 – CPA-LEVEL THINKING (Case Depth)

If going concern basis is inappropriate, what opinion should be issued?

Answer 19

Adverse opinion.

An adverse opinion indicates significant issues with the financial statements.

Question 20

🔵 LEVEL 3 – CPA-LEVEL THINKING (Case Depth)

Why does going concern impact OFSL risk?

Answer 20

Because it affects F/S as a whole.

The overall financial stability of the entity is crucial for assessing risk.

Question 21

🔵 LEVEL 3 – CPA-LEVEL THINKING (Case Depth)

If a refinancing agreement is signed after year-end, how does it affect risk?

Answer 21

May mitigate going concern risk if reliable.

A reliable refinancing agreement can improve financial stability.

Question 22

🔵 LEVEL 3 – CPA-LEVEL THINKING (Case Depth)

If a company is dependent on one major customer and that customer leaves, what is the significance?

Answer 22

Significant operating indicator → high IR.

Dependence on a single customer increases operational risk.

Question 23

🔵 LEVEL 3 – CPA-LEVEL THINKING (Case Depth)

If litigation threatens company survival, what type of indicator is this?

Answer 23

Legal indicator → increased OFSL risk.

Legal challenges can severely impact financial stability.

Question 24

🔴 LEVEL 4 – TRAP / EXAMINER TRICKS

Is the auditor responsible for predicting bankruptcy?

Answer 24

No — must assess reasonable assumptions.

The auditor evaluates the reasonableness of management’s assumptions.

Question 25

# 🔴 LEVEL 4 – TRAP / EXAMINER TRICKS If a company is profitable this year, can **going concern risk** still exist?

Answer 25

Yes — liquidity issues may exist. ## Footnote Profitability does not guarantee financial stability.

Question 26

# 🔴 LEVEL 4 – TRAP / EXAMINER TRICKS Is going concern assessment only required when **losses exist**?

Answer 26

No — always required. ## Footnote Assessing going concern is a continuous requirement.

Question 27

# 🔴 LEVEL 4 – TRAP / EXAMINER TRICKS If management refuses to disclose **material uncertainty**, what is required?

Answer 27

Modified opinion required. ## Footnote Non-disclosure of material uncertainty necessitates a modification.

Question 28

# 🔴 LEVEL 4 – TRAP / EXAMINER TRICKS Does strong past performance eliminate future **going concern risk**?

Answer 28

No — assess forward-looking information. ## Footnote Future risks must be evaluated regardless of past performance.

Question 29

# 🔴 LEVEL 4 – TRAP / EXAMINER TRICKS If management assessment is reasonable but the business is risky, must the auditor modify?

Answer 29

No — only if material uncertainty exists. ## Footnote Reasonable assessments do not automatically require modifications.