Going concern, Auditors liability & Final Considerations Flashcards
What is the going concern assumption?
That the business will continue operating for the foreseeable future (at least 12 months), without the need to liquidate
When is going concern not appropriate?
When management intends or is forced to liquidate or cease operations
What are financial indicators of going concern problems?
- Negative operating cash flows
- Breach of loan covenants
- Inability to pay creditors
- Large operating losses
What audit procedures are used to assess going concern?
- review managements forecasts
- Analyse cash flows
- read board minutes
- Review loan agreements
- Evaluate mitigating plans
What are the sources of auditor legal responsibility?
- Contract law
- Common law
- Statute law
What is the duty of care test?
- Proximity (relationship)
- Foreseeability (could third party rely?)
- Fairness (is it reasonable)
What actions can auditors take to limit liability?
- Proper client acceptance procedures
- Document audit work thoroughly
- Obtain engagement letters
- Follow professional standards
- Maintain professional indemnity insurance
What is the purpose of a management letter?
To communicate internal control weaknesses and provide recommendations for improvement
What is the purpose of communication with those charged with governance?
To share audit responsibilities, scope, timing and significant audit findings with the board/audit committee
