Going Concern
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Going
Concern
Contents
Introduction to Going Concern
Impact on Financial Statements
Management’s Responsibilities
Auditor’s Responsibilities
Indicators of Going Concern
Planning and Executing Audit Procedures to Evaluate Going Concern
Reaching a Conclusion on the Going Concern Assumption
Impact of Going Concern on Financial Statements
Summary
MOHAMED IBRAHIM
Introduction to Going Concern
The going concern assumption assumes that an entity will
continue operating in the foreseeable future unless
management intends to liquidate it, cease operations, or has
no realistic alternative. Financial statements are prepared on
this assumption, meaning assets and liabilities are recorded
with the expectation that the entity can realize its assets and
settle its liabilities in the normal course of business.
The foreseeable future is typically considered one year from
the balance sheet date. If there is a delay in issuing the audit
report, a later date is considered.
Impact on Financial Statements:
If there is significant doubt about an entity's ability to
continue, this can impact:
Asset and Liability Classification: Assets may need to be
written down to net realizable value, and liabilities may
need to be reclassified.
Audit and Financial Statement Disclosures: The auditor
must assess whether management's going concern
assumption is appropriate and whether adequate
disclosures are made regarding any uncertainties.
Management’s and Auditor’s Responsibilities
Regarding Going Concern:
Management’s Responsibilities:
Management is responsible for preparing a thorough assessment
of the entity’s ability to continue as a going concern, which is a
key requirement under international accounting standards.
This assessment must take into account financial, operational,
and regulatory factors that could affect the entity’s ability to
continue its operations.
The evaluation should cover a period of no less than 12 months
from the balance sheet date.
If management determines that the entity cannot continue as a
going concern, financial statements must be prepared on a
liquidation basis, where assets are recorded at their realizable
value, and liabilities are classified based on their payable
amounts.
Auditor’s Responsibilities:
The auditor is responsible for obtaining sufficient and
appropriate audit evidence regarding the appropriateness of
management’s use of the going concern assumption.
This responsibility requires the auditor to remain vigilant for any
indications of material uncertainties that could cast significant
doubt on the entity’s ability to continue as a going concern.
The auditor must evaluate management’s plans to address any
conditions that may raise concerns about going concern and
assess the feasibility of these plans.
Indicators of Going Concern
Financial Operational Other
Indicators Indicators Indicators
Financial indicators include:
Substantial or recurring operating losses Net liability or current
liability positions Fixed-term borrowings
Excessive reliance on short-term borrowings to finance long-term
assets
Indications of withdrawal of financial support by creditors
Inability to pay accounts payable on the due dates
Negative operating cash flows on historical or prospective financial
statements
Adverse key financial ratios such as low liquidity ratios and high
debt-to-equity ratios
Change from credit to cash on delivery terms with suppliers
Inability to comply with terms of loan agreements
Excessive or obsolete inventory
Under capitalisation
Repeated debt covenant violations.
Operational indicators include:
Management's explicit intentions to liquidate the entity or cease
operations
Departure of key management or staff without suitable replacements
Loss of a significant market, major customer, franchise, or key
supplier
Revocation or expiration of a crucial license or patent
Labor disputes or workforce challenges
Shortages of essential supplies or raw materials
Emergence of a highly successful competitor
Technological advancements or regulatory changes that jeopardize
a key product
Other indicators include:
Uninsured or underinsured catastrophes
Non-compliance with regulations
Changes in legislation
Pending legal proceedings
Changes in law regulation or government policy expected to
adversely affect the entity
Planning and Executing Audit Procedures
to Evaluate Going Concern:
Risk Assessment Phase:
When assessing risks by ISA 315 (Revised), the auditor
should identify events or conditions that may indicate
material uncertainties about going concern.
Perform a preliminary analytical review, which includes
analyzing the following:
Unexplained increases in inventory or receivables.
Rising operational expenses without clear
justification.
Lack of investment in fixed assets.
Inquiries to Management:
Inquire whether management has conducted an initial
going concern assessment.
If management has a plan to address uncertainties,
discuss and evaluate its realism and effectiveness.
Review of Forecasts and Budgets:
Assess the accuracy and reliability of financial forecasts
and budgets prepared by management.
Verify that forecasts consider general economic factors
and market conditions.
Review documents related to financing, such as loan
agreements and terms.
Reaching a Conclusion on the Going
Concern Assumption:
Steps:
1. Assessing Evidence:
After conducting the necessary procedures,
determine whether any conditions or events indicate
material uncertainties.
Evaluate management’s plans to address these
uncertainties, such as securing new financing
arrangements or improving operational performance.
1. Material Uncertainty:
If material uncertainty exists, ensure that the
financial statements include adequate disclosures.
Management should disclose the relevant events,
conditions, and plans in the notes accompanying the
financial statements.
1. Final Reporting:
If the going concern assumption is inappropriate,
issue an audit report with a qualification or a clear
reference indicating that the financial statements
were prepared on an incorrect basis.
Impact of Going Concern on Financial
Statements:
When adopting the going concern assumption, assets
and liabilities are recorded based on the expectation
that the entity will continue operations:
Depreciation of long-term assets continues based on
their useful life.
Long-term liabilities are not reclassified as current
liabilities.
When the going concern assumption is abandoned:
Assets are recorded at their realizable value.
Long-term liabilities are reclassified as current
liabilities.
Summary:
Management is responsible for evaluating the entity’s
ability to continue as a going concern and preparing the
financial statements accordingly.
The auditor is responsible for assessing the
appropriateness of the going concern assumption based
on sufficient audit evidence.
The process involves evaluating going concern
indicators, such as financial and operational
performance, and reviewing management’s plans.
All steps and procedures must be documented clearly,
with the auditor issuing a report aligned with the final
conclusion.
Thank You For Your
Attention
References & Further Reading
Books :
Auditing and Attestation
Principles of Auditing & Other Assurance Services
Standards :
International Standards on Auditing (ISA)
Generally Accepted Auditing Standards (GAAS)
Mohamed Ibrahim
Alasiri
