Going Concern Flashcards

1
Q

What are the auditors objectives with respect to going concern?

A

1) Obtain sufficient audit evidence about management’s use of the going concern basis of accounting
2) Evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time
3) Evaluate financial statement effects (including disclosures)
4) Report appropriately in accordance SAS

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2
Q

Define reasonable period of time?

A

Within one year after the date of the financial statements are issued (or within one year when they are available to be issued)

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3
Q

What if management did not evaluate going concern?

A
  • Discuss the intended use of going concern basis of accounting and inquire about management’s “substantial doubt”
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4
Q

F/S should be prepared using the “going concern basis of accounting” UNLESS

A

The liquidation basis of accounting is more applicable

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5
Q

What are the routine audit procedures that detect issues with going concern?

A
  • Substantive analytical procedures
  • Read minutes
  • Obtain “lawyer’s letter”
  • Review debt agreements for compliance with debt covenants (noncompliance could push forward the due date)
  • Review for subsequent events
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6
Q

What are indicators of going concern (red flags)

A

Negative trends: Recurring losses, negative cash flow (especially from operations)

Internal matters: Labor problems, dependent on single project or customer

External matters: Lawsuits, casualty losses, impending harmful legislation

Other indicators: Already in default (or not in compliance with covenants), disposing of major blocks of assets

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7
Q

When the auditor has “substantial doubt” what needs to be done?

A
  • Evaluate managements plans are likely going to mitigate financial threats
  • Look to supporting parties- obtain written evidence about INTENT and ABILITY to provide financial support (letter of confirmation) … Review bank statement, review listing of assets with appraisal
  • Written Representation from management: Management plan and adequacy of disclosure related to going concern
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8
Q

What communication is required to those charged with governance?

A

1) Whether conditions or events constitute substantial doubt for a reasonable period of time
2) Auditor’s consideration of management’s plan about whether they feel the plans provided by management are sufficient to mitigate substantial doubt
3) Whether use of going concern basis of accounting is appropriate or liquidation method is more appropriate
4) Adequacy of F/S disclosures
5) Implications of these issues to the auditor auditor report

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9
Q

What are the documented requirements?

A

1) Conditions/events causing that substantial doubt
2) Significant element of management plans
3) Procedures performed to evaluate the significant elements of management plans
4) Conclusions whether substantial doubt remains/alleviated

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10
Q

How would going concern affect audit report?

A
  • If F/S disclosure is inadequate: Express qualified or adverse opinion
  • If use of the going concern basis of accounting is appropriate- Express adverse opinion
  • If F/S disclosure is adequate (and use of going concern basis of accounting is appropriate)- Add “emphasis-of-matter” paragraph (after the unmodified opinion) in the auditor report
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