Going concern issues

Question 1

Describe the auditor’s reporting responsibilities when the auditor has substantial doubt about an entity’s ability to continue as a going concern.

Answer 1

1. )Consider the adequacy of disclosure about these issues relative to generally accepted accounting principles or other applicable financial reporting framework (is there a misstatement?).
2. )If the financial statements (including disclosure) are consistent with the requirements of the applicable framework, the auditor should add an emphasis-of-matter paragraph after the unmodified opinion.

Question 2

What is meant by the term “reasonable period of time” when the auditor is assessing an entity’s going concern issues?

Answer 2

A period of time not to exceed one year beyond the date of the financial statements being audited

Question 3

List routine audit procedures that should identify whether there is “substantial doubt about an entity’s ability to continue as a going concern.”

Answer 3

1. )Review annalytical procedures.
2. )Review for subsequent events.
3. )Review loan agreements for compliance with restrictive debt covenants.
4. )Read minutes of meetings of board or of those charged with governance.
5. )Inquire of management about legal liability issues, and obtain lawyers’ letters.

Question 4

What is meant by the term “mitigating factors” when the auditor is evaluating an entity’s going concern issues?

Answer 4

Those aspects of management’s strategy that might be expected to improve the entity’s cash flows (i.e., generate cash inflows or reduce cash outflows)

Question 5

What communication is required with those charged with governance when there is “substantial doubt regarding an entity’s ability to continue as a going concern”?

Answer 5

1. )Nature of conditions identified
2. )The possible effect on financial statements and disclosures
3. )The effect on the auditor’s report

Question 6

When the auditor has substantial doubt about an entity’s ability to continue as a going concern, what further evidence-gathering responsibilities does the auditor have?

Answer 6

1. )Inquire about management’s strategy to overcome the entity’s financial difficulties.
2. )Evaluate the feasibility of the “key” elements of management’s plans with emphasis on “mitigating factors.”

Question 7

List some indicators that might suggest to an auditor substantial doubt about the entity’s ability to continue as a going concern.

Answer 7

1. )Negative trends (recurring losses, negative cash flows from operating activities, etc.)
2. )Internal matters (labor problems, dependence on a single project or customer)
3. )External matters (litigation, general decline in the economy or industry, etc.)
4. )Other indicators (e.g., defaults on debt, violations of debt covenants, etc.)