Scope and objectives
The responsibilities of auditors in relation to the “going concern” basis of accounting, which is the assumption that a company will continue to operate for the foreseeable future.
The first point made is that this Auditing standards deals with the auditor’s responsibilities in the audit of financial statements relating to going concern and the implications for the auditor’s report.
The financial statements are typically prepared on the going concern basis of accounting, unless management intends to liquidate the entity or has no realistic alternative but to do so. If the going concern basis is appropriate, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business.
SA 570 also notes that management’s use of the going concern basis of accounting is relevant to public sector entities, where going concern risks may arise due to situations such as government support being reduced or withdrawn, or in the case of privatization.
The responsibility of management to assess the entity’s ability to continue as a going concern, either explicitly as required by some financial reporting frameworks, or implicitly when the going concern basis of accounting is fundamental in the preparation of financial statements. Management’s assessment of the entity’s ability to continue as a going concern involves making a judgment, based on factors such as the degree of uncertainty associated with future events or conditions and the size and complexity of the entity.
Finally, the responsibilities of auditors, which are to obtain sufficient appropriate audit evidence regarding management’s use of the going concern basis of accounting, to conclude 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 to report in accordance with the SA. However, the text notes that the absence of any reference to a material uncertainty about the entity’s ability to continue as a going concern in an auditor’s report cannot be viewed as a guarantee as to the entity’s ability to continue as a going concern.
Risk Assessment Procedures and Related Activities
The procedures and activities related to risk assessment in the context of an audit. Specifically, it discusses the auditor’s responsibility to consider events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern, as required by SA 315. The auditor needs to determine whether management has already performed a preliminary assessment of the entity’s ability to continue as a going concern and identify any events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern.
SA 570 provides examples of such events or conditions, including financial, operating, and other factors. However, the significance of such events or conditions can often be mitigated by other factors, such as management’s plans to maintain adequate cash flows by alternative means, rescheduling loan repayments, or obtaining additional capital.
SA 570 also discusses the considerations specific to smaller entities, including the risk that banks and other lenders may cease to support the entity and the possible loss of a principal supplier, major customer, key employee, or the right to operate under a license, franchise, or other legal agreement.
In addition SA 570 t highlights that the auditor shall remain alert throughout the audit for audit evidence of events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. If such events or conditions are identified, the auditor’s assessment of the risks of material misstatement may need to be revised, and the nature, timing, and extent of the auditor’s further procedures in response to the assessed risks may also be affected.
Overall, SA 570 emphasizes the importance of considering the entity’s ability to continue as a going concern during the audit, identifying events or conditions that may cast significant doubt on it, and responding to such risks accordingly.
Evaluating Management’s Assessment
The requirements and considerations related to the auditor’s evaluation of management’s assessment of an entity’s ability to continue as a going concern.
The auditor has a responsibility to evaluate management’s assessment, which is a key part of their consideration of management’s use of the going concern basis of accounting. The auditor should evaluate the process management followed to make its assessment, the assumptions on which the assessment is based, and management’s plans for future action, and determine whether management’s plans are feasible.
The auditor is not responsible for rectifying the lack of analysis by management. However, in some circumstances, the lack of detailed analysis by management to support its assessment may not prevent the auditor from concluding whether management’s use of the going concern basis of accounting is appropriate in the circumstances. For instance, when there is a history of profitable operations and a ready access to financial resources, management may make its assessment without detailed analysis.
The auditor should cover the same period as that used by management to make its assessment. If management’s assessment of the entity’s ability to continue as a going concern covers less than twelve months from the date of the financial statements, the auditor should request management to extend its assessment period to at least twelve months from that date.
For smaller entities, it may be appropriate to discuss the medium and long-term financing of the entity with management, provided that management’s contentions can be corroborated by sufficient documentary evidence and are not inconsistent with the auditor’s understanding of the entity.
Finally, the auditor should consider whether management’s assessment includes all relevant information of which the auditor is aware as a result of the audit.
Period beyond Management’s Assessment
The auditor’s responsibilities regarding the assessment of a company’s ability to continue operating as a going concern. The auditor is required to inquire with management about any events or conditions beyond the period of management’s assessment that may impact the company’s ability to continue operating as a going concern. The auditor should remain alert to any known events or conditions that may occur beyond the period assessed by management that may call into question the appropriateness of management’s use of the going concern basis of accounting.
If events or conditions are identified, the auditor may request that management evaluate the potential significance of these events or conditions on their assessment of the company’s ability to continue as a going concern. However, beyond inquiry of management, the auditor does not have a responsibility to perform any other audit procedures to identify events or conditions that may impact the company’s ability to continue as a going concern beyond the period assessed by management. The period assessed by management would typically be at least twelve months from the date of the financial statements.
Additional Audit Procedures When Events or Conditions Are Identified
The additional audit procedures that an auditor should perform if events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a going concern. The auditor should obtain sufficient audit evidence to determine whether or not 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.
The additional audit procedures to be performed by the auditor include analysing and discussing cash flow, profit and other relevant forecasts with management, analysing the entity’s latest available interim financial statements, reading the terms of debentures and loan agreements, and determining whether any have been breached, reading minutes of the meetings of shareholders, those charged with governance and relevant committees for reference to financing difficulties, inquiring of the entity’s legal counsel regarding the existence of litigation and claims and the reasonableness of management’s assessments of their outcome and the estimate of their financial implications, confirming the existence, legality, and enforceability of arrangements to provide or maintain financial support with related and third parties, and evaluating the entity’s plans to deal with unfilled customer orders.
In addition to these procedures, the auditor should also perform audit procedures regarding subsequent events to identify those that either mitigate or otherwise affect the entity’s ability to continue as a going concern, confirm the existence, terms, and adequacy of borrowing facilities, obtain and review reports of regulatory actions, determine the adequacy of support for any planned disposals of assets, and evaluate management’s plans for future actions in relation to its going concern assessment, whether the outcome of these plans is likely to improve the situation and whether management’s plans are feasible in the circumstances.
If the entity has prepared a cash flow forecast, the auditor may compare the prospective financial information for recent prior periods with historical results and the prospective financial information for the current period with results achieved to date. If management’s assumptions include continued support by third parties, the auditor may need to consider requesting written confirmation (including of terms and conditions) from those third parties and to obtain evidence of their ability to provide such support.
Finally, the auditor should consider whether any additional facts or information have become available since the date on which management made its assessment and may request written representations from management and, where appropriate, those charged with governance, regarding their plans for future actions and the feasibility of these plans.
Auditor Conclusions
The auditor’s responsibilities and requirements when evaluating a company’s use of the going concern basis of accounting in preparing their financial statements. The auditor is required to assess whether sufficient appropriate audit evidence has been obtained and conclude on the appropriateness of the management’s use of the going concern basis of accounting. If the auditor determines that 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, the auditor must ensure that the financial statements adequately disclose these uncertainties.
The auditor is also required to determine whether financial statement disclosures address the matters set forth and assess whether the financial statements provide adequate disclosure about events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern, even when no material uncertainty exists.
In addition, SA 570 explains that some financial reporting frameworks may require additional disclosures, such as management’s evaluation of the significance of events or conditions relating to the entity’s ability to meet its obligations, or significant judgments made by management as part of its assessment of the entity’s ability to continue as a going concern. The auditor must evaluate whether the financial statements achieve fair presentation, including the overall presentation, structure, and content of the financial statements.
Implications for the Auditor’s Report
The implications for an auditor’s report when an entity uses the going concern basis of accounting. The going concern basis of accounting assumes that an entity will continue to operate in the foreseeable future and is able to meet its financial obligations. If, in the auditor’s judgment, management’s use of the going concern basis of accounting is inappropriate, the auditor must express an adverse opinion. In other words, the auditor is stating that they do not agree with management’s assessment of the entity’s ability to continue operating in the foreseeable future.
If there is a material uncertainty related to the entity’s ability to continue as a going concern, but the financial statements include adequate disclosure of this uncertainty, the auditor should express an unmodified opinion. The auditor’s report should include a separate section under the heading “Material Uncertainty Related to Going Concern” to alert users to the existence of this uncertainty.
If there is a material uncertainty related to the entity’s ability to continue as a going concern, but the financial statements do not include adequate disclosure of this uncertainty, the auditor may need to express a qualified or adverse opinion. If the auditor is unable to obtain sufficient appropriate audit evidence to support management’s assessment of the entity’s ability to continue as a going concern, they may also need to express a qualified or adverse opinion.
SA 570 also discusses the communication requirements with regulators when there is a going concern issue, and what the auditor should do if management is unwilling to make or extend their assessment.
SA 570 highlights the importance of the going concern concept and its impact on the auditor’s report. It provides guidance on what the auditor should do in various situations related to going concern, and how they should communicate these issues to users and regulators.
Communication with Those Charged with Governance
The requirements for auditors to communicate with those charged with governance (which may include the board of directors or other senior management) if they become aware of events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. The auditor must communicate the following information:
(a) Whether the events or conditions identified constitute a material uncertainty,
(b) Whether management’s use of the going concern basis of accounting is appropriate in the preparation of the financial statements,
(c) The adequacy of related disclosures in the financial statements, and
(d) If applicable, the implications for the auditor’s report.
Overall, SA 570 emphasizes the importance of communication between the auditor and those charged with governance to ensure that any significant issues affecting the entity’s ability to continue operating are identified and addressed in a timely manner.
Significant Delay in the Approval of Financial Statements
The responsibilities of an auditor when there is a significant delay in the approval of financial statements by management or those charged with governance. The auditor is required to inquire about the reasons for the delay and determine if it could be related to events or conditions affecting the entity’s ability to continue as a going concern. If the auditor suspects that the delay is related to a going concern issue, they must perform additional audit procedures and consider the effect on their conclusion regarding the existence of a material uncertainty. This is important as a delay in financial statement approval could indicate that there are significant issues that need to be addressed, including potential going concern issues. By performing additional procedures and considering the impact of the delay, the auditor can provide a more accurate assessment of the entity’s financial position and reduce the risk of providing an unqualified audit opinion that may be misleading to stakeholders
Quiz: “Going Concern” and Audit Responsibilities
1. Which of the following best defines the “going concern” basis of accounting?
a) A company’s ability to generate profits
b) The assumption that a company will continue to operate for the foreseeable future
c) The assessment of an entity’s financial stability
d) The evaluation of an entity’s risk management practices
Answer: b)
2. What are the primary responsibilities of auditors in relation to the going concern basis of accounting?
a) Determining the entity’s profitability
b) Assessing the entity’s liquidity position
c) Evaluating the entity’s ability to continue operating
d) Verifying the entity’s compliance with tax regulations
Answer: c)
3. When are financial statements typically prepared on the going concern basis of accounting?
a) When the entity intends to liquidate
b) When there is a material uncertainty about the entity’s ability to continue as a going concern
c) When the entity has a profitable history
d) When the entity has significant debt obligations
Answer: a)
4. How does management assess the entity’s ability to continue as a going concern?
a) By analyzing past financial performance
b) By considering the uncertainty associated with future events or conditions
c) By obtaining additional capital from lenders
d) By liquidating the entity’s assets
Answer: b)
5. What additional audit procedures should auditors perform if events or conditions are identified that may cast significant doubt on the entity’s ability to continue as a going concern?
a) Analyzing and discussing cash flow forecasts with management
b) Reading the terms of debentures and loan agreements
c) Evaluating management’s plans for future actions
d) All of the above
Answer: d)
6. What is the auditor’s responsibility when evaluating management’s assessment of an entity’s ability to continue as a going concern?
a) Rectifying any lack of analysis by management
b) Determining the feasibility of management’s plans
c) Performing additional audit procedures to identify going concern risks
d) Overruling management’s assessment if deemed inappropriate
Answer: b)
7. What are the implications for an auditor’s report if management’s use of the going concern basis of accounting is inappropriate?
a) Adverse opinion
b) Qualified opinion
c) Unmodified opinion
d) Disclaimer of opinion
Answer: a)
8. What should the auditor do if there is a material uncertainty related to the entity’s ability to continue as a going concern?
a) Request management to extend the assessment period
b) Express an unmodified opinion with appropriate disclosure
c) Express an adverse opinion
d) Perform additional audit procedures to obtain more evidence
Answer: b)
9. When should the auditor communicate with those charged with governance about events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern?
a) Only if an adverse opinion is expected to be issued
b) If management’s use of the going concern basis is inappropriate
c) If events or conditions constitute a material uncertainty
d) At the discretion of the auditor
Answer: c)
10. What should the auditor do if there is a significant delay in the approval of financial statements?
a) Proceed with the audit without considering the delay
b) Inquire about the reasons for the delay and perform additional audit procedures
c) Express a qualified opinion due to the delay
d) Report the delay to regulatory authorities
Answer: b)
Additional questions:
11. What is the purpose of SA 570 in relation to the going concern basis of accounting?
a) To determine the entity’s profitability
b) To assess the entity’s liquidity position
c) To guide auditors’ responsibilities and procedures
d) To analyse the entity’s financial stability
Answer: c)
12. When does the auditor’s assessment of the risks of material misstatement need to be revised in relation to going concern?
a) When management’s plans for future actions are feasible
b) When significant events or conditions impacting going concern are identified
c) When there is a material uncertainty related to the entity’s ability to continue as a going concern
d) When the entity has a history of profitable operations
Answer: b)
13. What additional procedures should auditors perform regarding subsequent events in relation to going concern assessment?
a) Analyze and discuss cash flow forecasts with management
b) Review reports of regulatory actions
c) Confirm the existence, terms, and adequacy of borrowing facilities
d) Inquire of the entity’s legal counsel regarding litigation and claims
Answer: b)
14. What is the auditor’s responsibility if events or conditions beyond the period of management’s assessment are identified?
a) Perform additional audit procedures to identify going concern risks
b) Request management to extend their assessment period
c) Express an adverse opinion on the financial statements
d) Evaluate the potential significance of these events or conditions on the entity’s ability to continue as a going concern
Answer: d).
15. When should the auditor express an adverse opinion in relation to going concern?
a) When the entity has a profitable history
b) When there is a material uncertainty related to the entity’s ability to continue as a going concern
c) When management’s assessment is based on detailed analysis
d) When there is a significant delay in the approval of financial statements
Answer: b)
16. What should the auditor do if management is unwilling to make or extend their assessment of the entity’s ability to continue as a going concern?
a) Proceed with the audit without considering going concern issues
b) Request written representations from management regarding their plans for future actions
c) Express a qualified opinion on the financial statements
d) Communicate the issue to regulatory authorities
Answer: b)
17. What is the auditor’s responsibility regarding the assessment of a company’s ability to continue operating as a going concern?
a) Inquire about the reasons for a significant delay in the approval of financial statements
b) Perform additional audit procedures to identify going concern risks
c) Evaluate management’s assessment of the entity’s ability to continue as a going concern
d) Determine the feasibility of management’s plans for future actions
Answer: c)
18. How should the auditor evaluate whether financial statement disclosures address going concern matters?
a) By comparing the entity’s financial performance with industry benchmarks
b) By assessing the overall presentation, structure, and content of the financial statements
c) By reviewing management’s evaluation of the significance of events or conditions
d) By analysing the entity’s cash flow and profit forecasts
Answer: b)
19. What is the auditor’s responsibility if there is a material uncertainty related to going concern but the financial statements do not include adequate disclosure?
a) Express a qualified opinion on the financial statements
b) Express an unmodified opinion with a separate section on “Material Uncertainty Related to Going Concern”
c) Express an adverse opinion on the financial statements
d) Request management to extend their assessment period
Answer: a)
20. How should the auditor communicate with those charged with governance regarding events or conditions that may cast significant doubt on going concern?
a) Communicate only if management’s use of going concern is inappropriate
b) Communicate if events or conditions identified constitute a material uncertainty
c) Communicate after expressing an adverse opinion on the financial statements
d) Communicate at the discretion of the auditor
Answer: b)
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