Going Concern

Question 1

What is Going Concern?

Answer 1

entity is viewed as continuing in business for the foreseeable future. General purpose financial statements are prepared on a going-concern basis unless management intends to cease operations or has no other alternative but to do so.

Question 2

What is the Management’s responsibility with making the going concern assessment?

Answer 2

IAS 1 and ASPE 1400 required mgmt to make a 12-month assessment of the company’s ability to continue as a going concern

To be able to assess whether an entity is a going concern, management must use its judgment about future events.

Question 3

What Types of indicators exist to indicate there is a risk of not being a going concern?

Answer 3

1. Financial
2. Operational
3. Other

Question 4

What are financial indicators of the risk of not being a going concern?

Answer 4

A working capital deficit or a current ratio below
Adverse key financial ratios
Long-term debt that is maturing and cannot be repaid or refinanced
Reliance on excessive short-term financing
Inability to secure supplier credit or pay bills on time
Negative operating cash flows
Poor profitability and return ratios
Substantial operating losses
Negative retained earnings

Question 5

What are operational indicators of the risk of not being a going concern?

Answer 5

• Plans to liquidate the company or cease operations
• Departures of key management who cannot be replaced
• Loss of market share
• Loss of a key customer
• Inability to obtain key supplies
• Loss of operating license
• Labour issues

Question 6

What are other indicators of the risk of not being a going concern?

Answer 6

• Non-compliance with the law
• Material lawsuits against the company that the company will not be able to pay if it loses
• Changes in laws or regulations that will negatively impact the company

Question 7

What are auditor objectives with respect to going concern assumption?

Answer 7

a) To obtain sufficient appropriate audit evidence regarding the appropriateness of management’s use of the going concern assumption;
b) To conclude, based on the audit evidence obtained, 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; and
c) To report in accordance with this CAS [that is, determine the implications for the auditor’s report].

Question 8

What to do if the auditor believes the mgmt going concern assessment is inappropriate?

Answer 8

Request management to provide its going-concern assessment. ( need projections up to min 12 months from YE)

The auditor must assess it for reasonableness through discussions with management and review of supporting documents

Include procedures that address the existence, completeness, and accuracy of any assessment made

Ask management if it knows of any events or conditions beyond the initial period “that may cast significant doubt on the entity’s ability to continue as a going concern

Question 9

What are the potential conclusions from the evaluation of risks of not being a going concern?

Answer 9

• The going-concern assumption is appropriate.
• The going-concern assumption is appropriate but a material uncertainty exists.
• The going-concern assumption is not appropriate.

Question 10

What to do if the conclusion is that the going-concern assumption is appropriate but a material uncertainty exists?

Answer 10

the auditor must determine whether the financial statements adequately disclose the events or conditions that have led to the material uncertainty and that a material uncertainty exists.

If the disclosure is adequate, the auditor will issue an unqualified opinion and include a section under the heading “Material Uncertainty Related to Going Concern” in the audit report to:

• highlight the existence of a material uncertainty relating to the going-concern assumption
• draw attention to the note in the financial statements that set out the going-concern disclosure

Question 11

What to do if the conclusion is that the going-concern assumption is not appropriate?

Answer 11

the auditor must determine whether the financial statements are presented on a liquidation basis and whether there is adequate disclosure for the users of the financial statements.

If the statements are presented appropriately, the auditor will issue an unqualified opinion and include a section under the heading “Material Uncertainty Related to Going Concern” in the audit report to:

• highlight the lack of the going-concern assumption
• highlight that the financial statements are prepared on a liquidation basis

If the disclosure is inadequate, the auditor will issue an adverse opinion.

Question 12

When should the indicators be searched for?

Answer 12

during the RMM stage of the audit