Procedures for considering if a client is not a going concern
Consideration of all areas of the FS to see where there are indicators that the going concern concept may be inappropriate eg significant receivables, inventory
Review of future plans of the business such as forecasts
Review of the company’s borrowing facilities
Review of board minutes
If the going concern basis is appropriate but there are doubts about a company’s going concern status and the uncertainty is disclosed in the fs, the auditor should express an
Unqualified opinion but modify the auditor ps report by adding a materiality uncertainty relating to going concern status
Major indicators that a company is no longer a going concern
Net liabilities
Adverse key financial ratios
Inability to pay creditors
Major losses or cash flow problems
Change from credit to cash on delivery transactions with supplier
Procedures to ensure that the company can meet its debts as they fall due
Obtain written representation from managing director, confirming their considered view that the company is a going concern
Review management profit and cash flow forecasts for next financial year to ascertain company’s working capital requirements
Confirm the appropriateness if relevant assumptions
Request a statement of borrowing facilities to be included in the bank confirmation letter
Review days to day use of overdrafts facility and proximity to the current limit
Review level of payables incurred
Procedures to ensure that the company can otherwise continue in business
Review terms of existing contracts and correspondence with customer
Discuss with managing director any possible new sources of finance for expansion
Obtain written confirmation from the company’s legal advisor as to whether there any any pending claims
Importance of considering an entity’s ability to continue as a going concern
The going concern basis is an accounting concept which is presumed to apply to any fincanil statement, unless contrary disclosure is given
The amount at which assets and liabilities are included in the statement of financial position may be significantly different where the company is not a going concern eg assets will be valued on a break up basis
Classification of assets will differ where fs reflect a break up basis eg non current recognised as current
The risk of failure of a business is a real threat send the failure of the auditor to give any warning may result in litigation
Audit work regarding going concern
Obtain a written statement from managing director confirming their considered review that the company is a going concern
Review managements profit and cash flow forecasts for the next financial year to ascertain company’s working capital requirements
Confirm the appropriateness of relevant assumptions by comparison with ratios obtained from analytical procedures
Request a statement of borrowing facilities to be included in the bank confirmation letter
Review the days to day utilisation of the bank overdraft and consider proximity to limit
Review level of trade payables
Review renewal or cancellation of contracts
