Chapter 8
Going concern
Possible questions:
. What is going concern?
. Auditors and management responsibilities in going concern?
. Events that cast a doubt on going concern or potential indicators of going concern?
. Audit procedures in going concern?
. Reporting issues in going concern?
What is a going concern?
Going concern is an assumption which states that the entity will be able to continue its
operations for the foreseeable future. Financial statements should be prepared on the going
concern basis if the entity believes that it will be able to continue its operations for the
foreseeable future. If the entity believes that it will not be able to continue its operations for
the foreseeable future then the going concern assumption is not valid and the financial
statements should be prepared on a breakup basis.
Management responsibilities in going concern:
. Management needs to carefully asses weather the company will be able to continue its
operations for the foreseeable future as financial statements will be prepared accordingly.
. If management becomes aware of any event that casts doubt on going concern, they need
to disclose it in their financial statements.
. If the going concern assumption is not valid the management needs to prepare their
financial statements on a breakup basis.
Auditor responsibilities in Going concern:
. Auditor needs to be alert throughout the course of the audit for any sort of events that can
potentially cast a doubt on the client’s going concern status.
. He must cover an assessment period of at least 12 months.
. He must carefully asses the assumptions made by the management.
Audit procedures in going concern:
. Analyse and discuss cash flows and other forecasts with management.
. Review terms of debentures and loan agreements to see if any condition has been
breached.
, . Enquire from the entity’s lawyer about any possible litigation or claims.
.Obtain and review reports of any regulatory actions.
. Read minutes of board meetings, shareholder meetings and director meetings for details of
any sort of financial difficulties.
Reporting issues of going concern :
CASE 1 : If the auditor concludes that the going concern assumption is valid but material
uncertainty exists. As per the standards the management is required to disclose this in their
financial statements.
If the management has adequately disclosed it in their financial statements give an
unmodified opinion but mention this uncertainty in material uncertainty with respect to
going concern paragraph in audit report.
However if the management has not adequately disclosed this in their financial statements
or the management has not disclosed it at all then a modified opinion should be given in
case of the uncertainty being material but not persuasive and an adverse opinion in case of a
material and persuasive level of uncertainty.
CASE 2 : Auditor concludes that the going concern assumption is not valid. As per the
standards the management must prepare their financial statements on a breakup basis.
If the management has prepared the financial statements on a breakup basis then an
unmodified opinion will be given along with a mention in the other information paragraph.
However if the management have not prepared the financial statements on a breakup basis
then an adverse opinion will be given.
CASE 3 : If the management is unwilling to give or extent its assessment. This creates an
inability to obtain S.A.A.E.
If the inability is of a material but not persuasive nature then a modified opinion is to be
given.
However if the inability is of a material and persuasive nature then a disclaimer of opinion is
to be given.
Going concern
Possible questions:
. What is going concern?
. Auditors and management responsibilities in going concern?
. Events that cast a doubt on going concern or potential indicators of going concern?
. Audit procedures in going concern?
. Reporting issues in going concern?
What is a going concern?
Going concern is an assumption which states that the entity will be able to continue its
operations for the foreseeable future. Financial statements should be prepared on the going
concern basis if the entity believes that it will be able to continue its operations for the
foreseeable future. If the entity believes that it will not be able to continue its operations for
the foreseeable future then the going concern assumption is not valid and the financial
statements should be prepared on a breakup basis.
Management responsibilities in going concern:
. Management needs to carefully asses weather the company will be able to continue its
operations for the foreseeable future as financial statements will be prepared accordingly.
. If management becomes aware of any event that casts doubt on going concern, they need
to disclose it in their financial statements.
. If the going concern assumption is not valid the management needs to prepare their
financial statements on a breakup basis.
Auditor responsibilities in Going concern:
. Auditor needs to be alert throughout the course of the audit for any sort of events that can
potentially cast a doubt on the client’s going concern status.
. He must cover an assessment period of at least 12 months.
. He must carefully asses the assumptions made by the management.
Audit procedures in going concern:
. Analyse and discuss cash flows and other forecasts with management.
. Review terms of debentures and loan agreements to see if any condition has been
breached.
, . Enquire from the entity’s lawyer about any possible litigation or claims.
.Obtain and review reports of any regulatory actions.
. Read minutes of board meetings, shareholder meetings and director meetings for details of
any sort of financial difficulties.
Reporting issues of going concern :
CASE 1 : If the auditor concludes that the going concern assumption is valid but material
uncertainty exists. As per the standards the management is required to disclose this in their
financial statements.
If the management has adequately disclosed it in their financial statements give an
unmodified opinion but mention this uncertainty in material uncertainty with respect to
going concern paragraph in audit report.
However if the management has not adequately disclosed this in their financial statements
or the management has not disclosed it at all then a modified opinion should be given in
case of the uncertainty being material but not persuasive and an adverse opinion in case of a
material and persuasive level of uncertainty.
CASE 2 : Auditor concludes that the going concern assumption is not valid. As per the
standards the management must prepare their financial statements on a breakup basis.
If the management has prepared the financial statements on a breakup basis then an
unmodified opinion will be given along with a mention in the other information paragraph.
However if the management have not prepared the financial statements on a breakup basis
then an adverse opinion will be given.
CASE 3 : If the management is unwilling to give or extent its assessment. This creates an
inability to obtain S.A.A.E.
If the inability is of a material but not persuasive nature then a modified opinion is to be
given.
However if the inability is of a material and persuasive nature then a disclaimer of opinion is
to be given.
