Going Concern

Question 1

The objectives of the auditor for going concern are:

Answer 1

(a) To obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management’s use of the going-concern basis of accounting in the preparation of the financial statements;
(b) To conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern; and
(c) To report in accordance with this CAS.

Question 2

Indicators of potential going concern issues

Answer 2

•	Financial indicators
o	Working capital below 1
o	Adverse key financial ratios
o	Long-term debt that is maturing and cannot be paid – no cash?
o	Reliance on short-term financing – bank overdraft of 432K
o	Inability to secure supplier credit
o	Negative operating cash flows
o	Poor profitability
o	Substantial operating losses
o	Negative retained earnings – yes

•	Operating indicators
o	Plans to liquidate
o	Departures of key management 
o	Loss of market share – yes
o	Inability to obtain key suppliers
o	Inability to maintain key customers

• Other indicators
o Non-compliance
o Material lawsuits that they would not be able to pay
o Changes in laws or regulations that will negatively impact the company

Question 3

Going concern steps

Answer 3

1. assess auditor’s objectives in relation to going concern
2. Request mgmt to perform assessment of going concern if they have not completed.
3. Evaluate mgmt’s plans for future actions in relation to gong concern and whether they will improve the outcome
4. Where the entity has prepared a cash flow forecast is a significant factor in assessing going concern
5. Consider any additional facts that have become available since mgmt made their assessment.