Going Concern

Question 1

How do auditors obtain evidence in relation to management’s assessment of going concern?

Answer 1

• Risk assessment procedures to understand the entity and its environment
• The entity’s system of internal control; how it defines and addresses business risks which have a bearing on going concern
• Specific consideration over risk of management bias

Question 2

What are some possible financial indications of going concern problems?

Answer 2

• Net liability position
• Borrowing reaching maturity without viable repayment options
• Excessive reliance on short term borrowing
• Negative cash flows
• Substantial operating losses
• Inability to pay creditors on due dates
• Inability to comply with loan agreement terms
• Change from credit to cash on delivery terms with suppliers

Question 3

What are some possible operating indications of going concern problems?

Answer 3

• Loss of key management without replacement
• Loss of major customer/supplier
• Supply shortages
• Highly successful competitor

Question 4

What are some possible general indications of going concern problems?

Answer 4

• Non compliance with regulations
• Legal proceedings
• Uninsured or underinsured
• Decrease in share price

Question 5

What do the auditors have to do to test Going Concern?

Answer 5

• Obtain written representations of management about their assessment of the going concern status
• Test the assumptions made
• Review disclosures made in relation to going concern to ensure the financial statements are true and fair

Question 6

What should the auditor do if they have specific doubts over going concern?

Answer 6

Additional analytical procedures that should be performed:
* Discuss cash flows and profit forecasts
* Read terms of debentures and loan agreements to determine if any are breached
* Board minute review
* Enquire of legal claims and assessment of potential outcome

Question 7

How do auditors test management override?

Answer 7

• Journals testing
• Review of accounting estimates
• Scrutinising significant and unusual transactions

Question 8

What are some risk factors to look for when analysing journals?

Answer 8

• Entries made to unusual accounts
• Journals posted by unauthorised individuals
• Journals posted out of hours
• Journals posted without sequential numbers
• Round number entries

Question 9

What are some audit procedures that respond to the risks relating to revenue recognition?

Answer 9

• Analytical procedures of revenue by month
• Customer confirmations
• Cut off testing
• Review any unusual terms
• Test controls over sales recording

Question 10

Why are audits planned?

Answer 10

To ensure the right work is carried out and the right conclusions drawn