GOING CONCERN Flashcards
What is going concern?
going concern is the assumption that entity will continue to operate in the foreseeable future (12 months from reporting date- or in some jurisdictions 12 months from the date the FS are approved)
what is the significance of the going concern concept?
Going concern affects how the FS are prepared.
FS are to be prepared on a going concern basis unless:
-management intends to stop trading/ liquidate
-has no realistic alternative but to do so.
when its assumed that company will stop trading, the FS are prepared using the breakup or liquidation basis under which:
-basis of preparation and reason why co is not regarded as going concern is disclosed
-assets are recorded at likely sale values
-inventory and recievables may need to be written down as inventory may be scrapped, and rec may not pay.
-additional liabilities may arise (redundancy costs if staff, costs of closing down facilities)
what are the responsiblities of director/management related to going concern?
-it’s the managements responsibility to assess the company’s ability to continue as a going concern when they are preparing their FS
-in order to do this they shud prepare forecasts to help assess if they are likely to continue trading for next 12 months
-when performing going concen assessment they should take into account a number of relevant factors such as :
-current and expected profitability
-debt repayment
-sources of financing
what is the auditor’s responsibility regarding going concern?
-obtain SAE regarding appropriateness of managements use of going concern basis
-conclude whether a material possibility exists bt the co’s ability to continue as a going concern
-report in accordance with IAS 570
what are potential indicators that a company is not a going concern?
-liabilities are not being paid when due
-loan agreement is abt to end and not sure of renewal
-defaulted loan agreements (breach of contract)
-unplanned sale of NCA
-failure to pay tax
-staff salaries
-suppliers not giving credit
-major tech changes and u cant keep up
-legal claims
-loss of key staff
-over reliance on a small number of client,staff,supplier etc
-customers ceasing to trade or having cash difficulties
-emerging competitor
-uninsured/underinsured catastrophes
-changes in laws , cost of compliance may be more than co can afford.
what disclosures are required in FS regarding going concern?
1- when there is a material uncertainty of going concern, disclosure is required.
a material uncertainty exists when the impact of it is such that it is imp to disclose to give a fair representation and not mislead.
‘
the disclosure should explain:
-the main event or condition that cast significnt doubt on entity’s ability to continue as a going concern, and mangement’s plans to deal with these events
-that the co may be unable to realise its assets and discharge its liabilties in the normal course of business
2- where the directors have been unable to assess going concern in the usual way, this fact shud be disclosed
3- when the FS are prepared on any other basis except GC basis, this shud be disclosed
what are the reporting implications of going concern?
auditor shud modify opinion if adequate disclosure has not been made by directors of any material uncertainty related to GC.
or if directors have not prepared FS on the appropriate basis
if the directors have disclosed it apptly, auditor shud issue unmodified opinion with additional communication
audit procedures regarding GOING CONCERN
to assess managements evaluation of going concern:
-evaluate mgmnt assessment of GC
-assess the period used by management, if less than 12 months ask them to extend assessment
-consider wether management assessment includes all relevant info
procedures when there is doubt over going concern:
-analyse and discuss CF forecasts, discuss with management and assess reasonableness of assumptions used.
-perform sensitivity analysis to understand margin of safety the company has in terms of its net cash in/outflow
-analyse latest available interim financial statements
-review terms of loan and check if breached
-read minutes of meetings
-enquire lawyer about legal cases and assess reasonableness of management assumptions regarding these
-review post yr end events to identify any events relating to GC
-check correspondence with customers for evidence that might effect payment, or future sales
-review correspondence with suppliers for evidence of anyting that might affect supplies/credit
-with bank for indication that bank loan or overdraft may be recalled
-obtain written representation from mgmgnt for plans of future and how it plans to address GC issues
audit procedures shud focus on cash flows rather than profit, co can continue to trade as long as it can pay its debts when due
