Evaluating Going Concern

Question 1

What must management disclose in the financial statements if there is substantial doubt about the company’s ability to continue as a going concern?

Answer 1

The principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.
Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations.
Management’s plans to address the adverse conditions or events.

Question 2

What three going concern-related assessments must auditors make while performing an audit?

Answer 2

1. Is it appropriate for management to use the going concern basis of accounting in preparing its financial statements?
2. Does substantial doubt exist about the entity’s ability to continue as a going concern for one year from the date the financial statements are issued?
3. Do the financial statement notes contain adequate disclosures regarding the entity’s ability to continue as a going concern?

Question 3

What adverse conditions are events might raise substantial doubt about a company’s ability to continue as a going concern?

Answer 3

Operating losses.
Working capital deficiencies.
Negative cash flow.
Violation of debt covenants.
Uninsured catastrophes.
Work stoppages.
Loss of key customers or suppliers.
Legal proceedings.

Question 4

Why might auditors be reluctant to issue a report expressing substantial doubt about a client’s ability to continue as a going concern?

Answer 4

Fear of being fired.

Fear of contributing to the client’s financial problems.

Question 5

What arguments have auditors used for claiming they should not be required to express an opinion on their client’s ability to continue as a going concern?

Answer 5

Accountants are historians; they have no special expertise in forecasting the future.
Expressing an opinion about a client’s ability to continue as a going concern can create an adversarial relationship between management and the auditor.

Question 6

When is it NOT appropriate for a client to prepare financial statements using the going concern basis of accounting?

Answer 6

When liquidation is “imminent.”

Question 7

What must the auditor do if circumstances or events indicate the client may have trouble continuing as a going concern?

Answer 7

The auditor must evaluate whether management’s plans to continue operations are (1) feasible and (2) will adequately address the company’s problems.