Ch.8 Going Concern Flashcards
What is a going-concern assumption?
This assumption assumes that the entity will continue to operate as a business for the foreseeable future.
Financial statements are prepared on a going-concern basis unless management intends to crease operations or has no other alternative to do so.
What does CAS 570 Going Concern entail?
Dilemma: What happens if we think that they may not be able to continue within a 12-month period.
If there are indicators that the entity could be at risk of not being a going concern, management needs to increase documentation related to its assessment.
Some of these indicators may include:
Financial:
- Working capital deficit or a curent ratio below 1
- adverse key financial ratios
- long-term debt that is maturing and cannot be repaid or refinanced
- reliance on excessive short-term financing
- inability to secure supplier credit or pay bills on time
- negative operating cash flows
- poor profitability and return ratios
- substantial operating losses
- negative retained earnings
Operating indicators:
- plans to liquidate the company or cease operations
- departures of key management who cannot be replaced
- loss of market share
- loss of a key customer
- inability to obtain key supplies
- loss of operating license
- labour issues
Other indicators:
- non-compliance with the law
- material lawsuits against the company that the company will not be able to pay if it loses
- changes in laws or regulators that will negatvely impact the company
What are the Auditor Responsibility in accordance to CAS 570.09
a) To obtain sufficient appropriate audit evidence regarding the appropriateness of management’s uses of the going concern assumption
b) to conclude, based on the evidence, whether a material uncertainty exists related to events or conditions that may cast signfiicant doubt on the entity’s ability to continue as a going concern
c) to report in accordance with CAS
What is required as part of the Risk Assessment phase of the audit
The auditor must consider itself whether any events or conditions exist that may cast on sigificant doubt on the entity’s ability to continue as a going concern, they also need to determine whether management has completed their own assessment of the going-concern assumption.
If one has been done, auditor needs to discuss the assessment with management and determine whether mangement has identified any events or conditions that could cast significant doubt, and their plans to address them
if one has not been performed, the auditor shall discuss with management the basis for the intended use of the going-concern assumption, and inquire of management whether events or conditions exists that may cast doubt on the entity’s ability to continue as a going-concern.
What happens when you’re evaluating management’s assessment and it is inappropriate
Going-concern assessment is inappropriate - request that management provide it’s assessment. It should include a projected cash flow for 12 months from the date of the financial statements. If it is less, the auditor must ask management to extend the assessment.
once if it received, the auditor must also assess it with discussions with management and review of documents.
They will then assess whether there are events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern
What happens when events or conditions are identified that may affect the entities going concern?
CAS 570.16 has specific procedures such as:
- request that management perform an assessment
- evaluate management’s plan of action in relation to the assesment
- when a cash flow forecast has been prepared, evaluate the reliability of that information
- whether additional facts or informatino has come to light since managements asssessment
- request written representation from management regarding its plan for action
