Going concern means that the enterprise will continue in operational existence for the foreseeable future without the intention or necessity of liquidation or otherwise ceasing trade. It is one of fundamental accounting concepts used by auditors and is stated in IAS 1 presentation of financial statements.
The auditors responsibilities in respect of going concern is explained in ISA 570 going concern. The ISA states when ‘when planning and performing audit procedures and in evaluating results thereof, the auditor should consider the appropriateness of management use of the going concern assumption in the preparation of the financial statements.
The auditors responsibilities therefore falls into three areas:
- To carry out appropriate audit procedures that will identify whether or not an organization can continue as going concern
- To ensure that organization management have been realistic in their use of going concern assumption when preparing financial statements
- To report to the members where they consider that the going concern assumption has been used inappropriately, for instance, when the financial statements indicate that the organization is a going concern, but audit procedures indicate that this may not be the case.
In evaluating the going concern status the organization during audit, the auditor will performing the following procedures
- Obtain copy of cash flow forecast and discuss the result of this with the directors
- Discuss with the directors their view on whether the organization can continue as going concern. Ask for their reasons and try and determine whether these are accurate.
- Inquire of the directors whether they have considered any other form of finance for the organization to make up any shortfall identified in cash forecast.
- Obtain copy of any interim financial statements of the organization to determine the level of sales or income after the year end and whether this matches cash flow forecasts
- inquire about the possible lack of capital investment within the organization. review the level of non current asset in the organization compared to similar companies and review purchase policy with the directors
- Review other events after the end of the financial year and determine if they have an going concern status of the organization
- If there are any senior employee left, consider the extent to which the organization relied on them. Ask the human resource department whether the employees will be replaced and if so how soon.
- Review organization correspondence with bank to determine the extent of any bank loans and whether the repayments due in next 12 months can be made without further borrowing
- Obtain latter of representation confirming the directors opinion that the organization is going concern
If the organization is not considered to be going concern the auditor will apply the following procedures:
- Discuss the situation with the directors. the auditor should consider whether additional disclosures are required in the financial statements or whether the financial statements should be prepared on the breakup basis.
- Explain to the directors that if additional disclosure or restatement of financial statement is not made then the auditor will have to modify the audit report
- Consider how the audit report should be modified. Where the directors provide the adequate disclosures of the going concern situation of the organization, then the emphasis of matter paragraph is likely to appropriate to draw attention to the going concern disclosures
- Where the directors do not make adequate disclosures of the going concern situation then the auditor should qualify the audit report making reference to the going concern problem. the qualification can be either except for opinion or adverse opinion depending on auditors assessment of the situation.