going concern Flashcards
*what is going concern
management’s assumption that entity will continue to operate for the foreseeable future (next 12 months) and no need or intention to close the organisation
*What are the auditor’s responsibilities in relation to going concern
-Obtain evidence , via performing procedures, on the appropriateness of management’s use of the going concern basis.
-Determine if MUGC exists
-consider impact on audit report based on findings
*how will FS be prepared if org is non GC
-disclosure about why org is non GC
-all assets and liabilities will be in current head
-assets will now be valued at breakup value (in liquidation assumption)
*going concern indicators
financial loss
loss of key customer
loss of key supplier
loss of key employee
reputation loss
license loss
legal case
natural disaster
new laws
When should going concern be considered during an audit?
At all stages of the audit, not just during specific procedures.
Planning Stage: During risk assessment, audit procedures design, and evaluation of results.
Continuous Review -Remain alert to conditions or events casting doubt on going concern.
What types of indicators should auditors look for regarding going concern?
-Financial Indicators: Cash flow problems, debt defaults.
-Operational Indicators: Significant losses, reduced sales.
-Other Indicators: Legal disputes, dependency on uncertain funding.
What should auditors do at the planning stage concerning going concern?
-Gain an understanding of the entity and its environment.
-Identify business risks that could affect the entity’s ability to continue as a going concern.
-Plan additional procedures if significant going concern risks are identified.
What are some specific financial statement risks related to going concern?
-Overstated Non-Current Assets: Unrecognized impairments.
-Overstated Inventory: Falling net realizable value.
-Overstated Receivables: Unprovided irrecoverable debts.
-Incorrect Financial Instruments: Measurement and recognition issues.
-Assets Held for Sale: Incorrect measurement and disclosure.
-Provisions: Incorrect measurement or disclosure.
What procedures should auditors perform to address going concern risks?
-Cash Flow Analysis: Discuss forecasts and reliability with management.
-Loan Agreement Review: Check for breaches.
-Board Minutes Review: Look for discussions on financing difficulties.
Post-Year-End Review: Assess events affecting going concern.
What should auditors pay attention to when evaluating cash flow information?
-Assess the reliability of cash flow systems.
-Challenge assumptions for reasonableness.
What should auditors do regarding borrowing facilities?
-Seek confirmations from bankers.
-Discuss other potential financing options if confirmations are not available.
How should auditors form an opinion on going concern?
-Ensure financial statements use the appropriate basis of accounting.
-Check if material uncertainties are adequately disclosed.
When would an auditor issue an unmodified opinion with an emphasis of matter paragraph?
-Financial statements prepared on a going concern basis with adequate disclosure of material uncertainties.
-Emphasis of Matter: Include a separate section to draw attention to uncertainties without modifying the opinion.
When should an auditor issue a qualified or adverse opinion?
When material uncertainty is inadequately disclosed or the going concern basis is inappropriate.
What ethical considerations arise when providing non-audit services related to going concern?
Non-audit services can threaten objectivity and independence.
Implement safeguards such as reviews by non-audit partners and additional procedures.
