feature

the audit of going concern

Andrew Teague explains what steps you can take to On many of the files inspected during audit
monitoring visits, the record of audit work on

ensure your next audit monitoring visit is free of any going concern is limited to ticks on a standard
checklist, and a comment that the entity had

going concern issues. net current assets at the balance sheet date.
Does this sound like your audit files? If so, do
they meet the requirements of International
Standard on Auditing (UK and Ireland) 570
Going Concern (ISA 570)?

14 in practice ireland June 2008

 feature
‘It is a common misconception that going concern is simply a solvency test
at the balance sheet date. The occurrence of certain events since the year
end, for instance major losses, cash flow problems and an inability to meet
liabilities as they fall due, must be considered’

Some firms do not realise the need to perform may cast doubt on its use. Armed with
any audit procedures at all on going concern. this information, the auditor can then plan
However, ISA 570 specifically requires the the necessary further audit work.
auditor, when planning and performing audit
procedures and in evaluating the results, to evaluating management’s assessment
consider the appropriateness of management’s The auditor should make enquiries of
use of the going concern assumption in the management and examine appropriate
preparation of the financial statements and available financial information. The
the adequacy of any relevant disclosures in the auditor should also plan and perform
financial statements. procedures specifically designed to
identify any material matters which could
the planning stage indicate uncertainty about the entity’s
ISA 570.11 states that, in obtaining an ability to continue as a going concern.
understanding of the entity, the auditor should Because it forms the basis of the
consider whether there are events or conditions audit work, it is important that there is a
and related business risks which may cast clear record on the working papers of the
significant doubt on the entity’s ability to information upon which management’s
continue as a going concern. assessment is based and their reasoning.
This is an important consideration when The extent of the information available
the responsibility of management and assessing the risks of material misstatement, depends on the nature, size and
of the auditor because the existence of such events or complexity of the entity and, if the
When preparing financial statements in the UK conditions may affect the nature, timing and information relates to future events, how
and Ireland, an entity’s management should extent of the procedures which the auditor far into the future they lie. Although
satisfy themselves as to whether the going carries out in response to those risks. formal cash flow forecasts and budgets
concern basis is appropriate. This assessment Despite this, many audit plans do not provide the most persuasive evidence,
involves making a judgment, at a particular take account of going concern issues, with in smaller entities other evidence may
point in time and taking account of all relevant the result that the firm does not gather the be acceptable, such as discussing
information of which they are aware, about necessary information during the audit where management’s outline plans in the light of
the future outcome of events or conditions the client is suffering difficulties. The auditor other information available.
which are inherently uncertain. Even if the should therefore either review management’s ISA 570.8 lists examples of possible
going concern basis is appropriate, it may still preliminary assessment of the appropriateness events and conditions which may affect
be necessary for the financial statements to of the going concern assumption, or hold going concern. This list begins with
contain additional disclosures in order to give a discussions with management in order to financial factors and the ISA recognises
true and fair view. identify any relevant events or conditions which that the excess of an entity’s available

in practice ireland June 2008 15

feature

the audit of going concern (continued)

‘If the auditor considers that the entity will not be able to continue as a
going concern but the financial statements have been prepared on a going
concern basis, the auditor should express an adverse opinion’

financial resources over those required is entity, and then assess the financial ability of Lastly, if the auditor considers that the entity
the primary influence on the extent of the such parties to provide the necessary funds. will not be able to continue as a going concern
auditor’s procedures. However, it is a common but the financial statements have been
misconception that going concern is simply a concluding and reporting prepared on a going concern basis, the auditor
solvency test at the balance sheet date. The If the auditor adjudges that a material should express an adverse opinion.
occurrence of certain events since the year end, uncertainty exists, they are required to
for instance major losses, cash flow problems document the extent of their concern about the documenting the audit work
and an inability to meet liabilities as they fall entity’s ability to continue as a going concern. Whatever the circumstances of the entity and
due, must be considered. Operating factors, Despite the existence of events or conditions the level of information available, documentation
such as the loss of key markets, suppliers or which may cast doubt on this, the auditor may of the audit work on going concern is often
staff, may also be relevant. still conclude that the level of concern is not weak. The working papers should always record
significant, in which case an unqualified opinion in positive terms the information and evidence
further audit procedures will be appropriate. which the auditor has obtained, including:
What if events or conditions are identified The auditor may conclude that the going a proper consideration at the planning
which do cast doubt on the entity’s ability to concern basis is appropriate but a material stage
continue as a going concern? The auditor will uncertainty exists. They must then consider a record of management’s assessment
need to review management’s plans for future the adequacy of the disclosures in the financial and reasoning
action, which may include liquidating assets, statements, which must describe the events or adequate detail of the information and
borrowing money, reducing expenditure, or conditions giving rise to the significant doubt evidence considered by the auditor
increasing capital, in order to confirm that the and management’s plans to deal with them, adequate notes of discussions with
plans are feasible and that their implementation and include a clear statement that there is a management
will improve the situation. The auditor should material uncertainty. a clear record of any material
also obtain written representations from If the disclosures are considered adequate, uncertainty and details of the further
management regarding those plans. the auditor should express an unqualified audit procedures performed
The auditor should then carry out additional opinion but add an emphasis of matter written representations concerning
procedures to gather sufficient appropriate audit paragraph to the audit report which highlights management’s plans, if appropriate
evidence which confirms or dispels whether or the existence of a material uncertainty and a clear evaluation regarding the
not a material uncertainty exists. For example, which draws attention to the relevant disclosure appropriateness of the going concern
it may be appropriate to analyse cash flow in the financial statements. basis and any related disclosures in the
projections and the underlying assumptions or If, however, the disclosures are not accounts, and any consequent effect on
examine interim financial statements. In some adequate, the auditor should express a qualified the wording of the audit report.
circumstances, it may be necessary to obtain ‘except for’ or adverse opinion, as appropriate,
confirmation of arrangements with other parties and include in the report specific reference to Andrew Teague – Senior Compliance Officer,
to provide or maintain financial support to the the fact that there is a material uncertainty. Professional Standards, ACCA

16 in practice ireland June 2008