ISA 570 - GOING CONCERN Flashcards
ISA 570
GOING CONCERN
The Going Concern Assumption… IAS 1 - Revision
An entity preparing IFRS financial statements is PRESUMED to be a GOING CONCERN.
The going concern assumption means that an entity is viewed as CONTINUING IN BUSINESS for the FORESEEABLE FUTURE with NO INTENTION OF LIQUIDATING OR CEASING TRADE or is NOT in a situation where they have NO REALISTIC ALTERNATIVE but to do so.
The foreseeable future is referred to as the relevant period in auditing standards (ISA 570)
Per IAS 1, “Foreseeable future” is a MINIMUM of 12 months after the year end (they have a budget what they will be buying, selling, etc.)
ISA 570
GOING CONCERN
Entity IS a going concern
- F/S prepared using: The Going Concern Basis (use IFRS)
- Assets: Valued @ historical cost, NRV or FV
- Liabilities: Classified under CL & Non CL
Entity is NOT a going concern
- F/S prepared using: The NON Going Concern Basis (Break Up Basis)
- Assets: Valued @ Liquidation value / Forced Sale
- Liabilities: Classified under CL only
ISA 570
RESPONSIBILITY for assessment of the Entity’s Ability to Continue as a Going Concern
MANAGEMENT - as per IAS 1
❑ To assess whether company will remain a GC for a minimum period of 12 months after the year end
❑ To disclose MATERIAL UNCERTAINTIES in F/S
❑ To determine whether or not the entity can prepare the financial statements on a GC basis.
❑ If F/S are prepared on a non GC basis… to disclose change in basis in Notes to the Financial Statements
AUDITOR
❑ To consider the appropriateness of management’s assumption that company is a GC.
❑ Remain alert throughout the audit for events or conditions which may cast significant doubt on the entity’s ability to continue as a going concern.
❑ Obtain evidence to determine whether a Material Uncertainty (MU) exists if events are identified which may cast doubt on the entity’s ability to continue as a going concern
❑ To consider the IMPLICATIONS for the auditor’s report (MY, Close Call, MMU (Multiple Material Uncertainty), GC)
ISA 570
Audit procedures - Step 1 @ INTERIM
Look out for events or conditions (INDICATORS) which may cast SIGNIFICANT DOUBT on the entity’s ability to continue as a going concern.
1/ READ minutes of the meetings of BODs
2/ Key ratios to assess client’s financial position
3/ REVIEW financial, operational & other INDICATORS (PALS - Profitability, Activity, Liquidity, Solvency).
FINANCIAL INDICATORS
Profits
▪ Continuous losses
Funds
▪ No cash balance, excessive reliance on overdraft (OD)
▪ Current & Acid ratios <1 (Negative working cap)
▪ Inability to pay suppliers on due dates, suppliers withdraw credit.
▪ Rely on OD to finance the purchase of NCA
Access to Funds
▪ Unlikely that overdraft be renewed
▪ Unlikely to find replacement loan
Able to settle debts as and when they fall due
▪ Inability to make loan repayments on time
▪ Inability to comply with loan covenants
OPERATIONAL INDICATORS
▪ Loss of key management
▪ Loss of a major market, franchise, license, or principal supplier.
▪ Shortages of labor, important supplies.
▪ Emergence of a highly successful competitor
OTHER INDICATORS
▪ NOCLAR – with loss of license
▪ Pending legal proceedings that have huge impacts.
▪ New regulation adversely affecting the entity.
▪ Uninsured or underinsured catastrophes
ISA 570
Audit Procedures - Step 2 @ FINAL
(Can indicators be resolved?)
If there are events or conditions (INDICATORS) which may cast significant doubt on the entity’s ability to continue as a going concern, carry out FURTHER PROCEDURES to determine whether a Material Uncertainty (MU) exists
PROFITS
INSPECT profit forecasts - improving? / realistic?
REVIEW interim F/S - improving? / does it follow forecast?
FUNDS
INSPECT cash flow forecasts = shortfall? / realistic?
ACCESS TO FUNDS
REVIEW letters from bank to client to assess the likelihood of obtaining replacement loans / renewing the overdraft facility (are there assets available as collateral? / what are past results?).
ABILITY TO SETTLE DEBTS
REVIEW loan contracts for repayment dates
PROBLEMS RESOLVED?
READ minutes of the meetings of BODs
DISCUSS with client & lawyers for updates of legal or regulatory proceedings against client entity.
REVIEW subsequent events
MITIGATING FACTORS
Reduce / delay cash outflows
- Extend loan period to reduce monthly repayment
- The ability to postpone certain costs
- Possibility of reducing overheads
Increase / expedite cash inflows
- a letter of continuing financial support from parent
- Issue shares, borrow
- sell and leaseback assets
- sale of non-core assets
- sale of unprofitable segment of the business.
ISA 570
3 GOING CONCERN - Implications for the auditor’s report
1/ MU / No MU
Are there EVENTS & CONDITIONS that may cst significatn doubt on the entity’s ablity to continue as a GC? (GS indicators must be assessed annually to see if management have made a correct assessment)
NO - End
YES - Can the INDICATORS be resloved?
YES (therefore, no MU) - Close Call
NO (meaning, there is MU) - Adequate disclosure of MU?
YES - Unqualified opinion PLUS MURGC paragraph
NO - MU - Qualified
NO - Significant MU - Adverse
If management does not disclose MU, the auditor will disclose it in the report!
Basis for Qualified Opinion Paragraph
Basis for Adverse Opinion Paragraph
2/ Mgt unwilling to Make / Extend Assessment
LIMITATION OF SCOPE
* Material but not Pervasive - Qualified Opinion
* Material and Pervasive - Adverse Opinion
3/ No realistic alternative but to cease trading
FS prepared using BREAK UP BASIS (NON GC basis)
NO - Adverse Opinion
YES - Adequate disclosure of CHANGE in basis of preparation of FS?
NO - Qualified Opinion
YES - Unqualified Opinion PLUS Emphasis of Matter paragraph
4/ MULTIPLE material uncertainties
* Adequate disclosure of MU - Disclaimer of Opinion
* Inadequate disclosure of MU - Disclaimer of Opinion
WORDING in Q - meaning:
1/ “Significant doubt on the company’s ability to continue as a GC” > look for INDICATORS (financial, operationa, other)
2/ “Management is seriously conisdering filling for bankruptcy” > Significant MU
3/ “Management plan to shut down the company 8 months after the year end” > Non going concern
4/ “Company has NOT REALISTIC ALTERNATIVE but to cease trading” > Non going concern
MURGC Paragraph
1/ ADEQUATE DISCLOSURE - MURGC para
We draw attention to Note 6 in the FS, which indicates that the Company incurred a net loss of ZZZ during the year ended December 31, 20X5 &, as of that date, the Company’s total liabilities exceeded its total assets by YYY.
As stated in Note 6, these events or conditions, along with other matters as set forth in Note 6, indicate that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern.
Our opinion is not modified in respect of THIS matter.
2/ INADEQUATE DISCLOSURE – (Material Uncertainty) NO MURGC para
Qualified Opinion
In our opinion, EXCEPT FOR the incomplete disclosure of the information referred to in the Basis for Qualified Opinion para, the accompanying F/S gives a true and fair view of …
Basis for Qualified Opinion
The Company’s financing arrangements expire and amounts outstanding are payable on March 19, 20X2.
The Company has been unable to conclude re-negotiations or obtain replacement financing.
This situation indicates that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern.
The financial statements do not adequately disclose this fact.
3/ INADEQUATE DISCLOSURE - (Significant Material Uncertainty) NO MURGC para
Adverse Opinion
In our opinion, BECAUSE OF the omission of the information mentioned in the Basis for Adverse Opinion para, the accompanying F/S does not give a true & fair view of…
Basis for Adverse Opinion
The Company’s financing arrangements expired, and the amount outstanding was payable on December 31, 20X1.
The Company has been unable to conclude re-negotiations or obtain replacement financing & is considering filing for bankruptcy.
This situation indicates that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern.
The financial statements do not adequately disclose this fact.
ISA 570
Communication with Those Charged with Governance (TCWG)
When there is a MU
Unless all TCWG are involved in managing the entity, the auditor shall communicate with TCWG events or conditions identified that may cast significant doubt on the entity’s ability to continue as a going concern.
Such communication with those charged with governance shall include the following:
a) Whether the events or conditions constitute a Material Uncertainty;
b) Whether management’s use of the going concern basis of accounting is appropriate in the preparation of the F/S;
c) The adequacy of related disclosures in the financial statements; and
d) Where applicable, the implications for the auditor’s report.
ISA 570
Close call situation
“Close call” situation is when the use of the going concern basis of accounting is appropriate BUT events or conditions were identified that may cast doubt on the entity’s ability to continue as a going concern BUT, after considering management’s plans to deal with these events or conditions (audit evidence), management AND the auditor conclude that no material uncertainty exists (after significant management & auditor judgement)
Information on “close calls” in the auditor’s report is in response to investors’ and others’ requests for EARLIER WARNING of any POTENTIAL ISSUES that may exist with respect to an entity’s ability to continue as a going concern.
A “close call” over going concern may be fundamental to the understanding of the entity and can be considered and reported as a Key Audit Matter (KAM).
ISA 570
Contents of the KAM paragraph
CRITERIA FOR KAM
* Matter was communicated with TCWG
* Matter required significant auditor attention (Auditor judgement needed because there were so many areas involving management judgement).
* Matter is material
CONTENTS of the KAM paragraph:
▪ A description of the matter.
That principal events or conditions occurring during the year that had cast doubt on the entity’s ability to continue as a going concern.
But management’s plans mitigate the effect of these events or conditions.
As such, there is no longer a material uncertainty.
▪ Reference to the NOTE in the F/S that contains management’s detailed explanations of the above.
▪ Why this matter is considered a KEY Audit Matter.
That significant judgments were made by management
as part of its assessment of the entity’s ability to continue as a going concern.
▪ How the matter was audited by the auditor.
To explain the procedures the auditor used to came to the conclusion that the material uncertainty no longer exists.
ISA 570
Going concern - Ethical matters
In the current economic climate, auditors may be asked by audit clients to perform non-audit services which may create THREATS to objectivity and independence.
The audit firm should carefully consider the appropriateness of providing such non-audit services in these circumstances.
ISA 570
THREATS
- Perform a review of the business including advising on restructuring options.
- Advising on corporate finance options or negotiating such options.
Both these services fall under the category of Corporate Finance Services. Potential advocacy threat IN THAT the firm may be seen to be promoting the company’s position to bank & giving the impression that the firm is negotiating on behalf of the entity.
- Provide advice on preparing profit / cash flow forecasts.
Potential management decision making threat IN THAT management use ALL the advice given by the firm with very little of own input. Then, the firm may be seen as making decisions on behalf of management.
Potential self-review threat in the following year IN THAT the firm is unlikely to question the client when the actual results fails to achieve its forecast target.
- A review of prospective financial information, possibly for presentation to potential providers of finance - assurance in PFI
Potential self-review threat in the following year IN THAT the firm is unlikely to question the client when the actual results fails to achieve its forecast target.
- Attend meeting with bankers to request funding
Potential advocacy threat IN THAT the firm may be seen to be promoting the company’s position to bank &
giving the impression that the firm is negotiating on behalf of the entity.
Attending the meeting may also give the bank the impression that the firm is guaranteeing the future existence of the company. This could create legal ‘proximity’, which increases the risk of legal action against the auditor in the event client defaults on the loan. Threats are always GREATER when client is having financial trouble!!!
Best not to attend the meeting with the client.
ISA 570
SAFEGUARDS
SAFEGUARDS may include:
- a review of the going concern assessment and conclusion reached by a partner who is not a member of the audit team
- additional procedures as part of an Engagement Quality Control Review
- confirmation from the audit client that they remain responsible for any decisions or actions taken as a result of the non-audit service provided.
ISA 570
IAS 1 disclosures REQUIRED when there is a material uncertainty
IAS 1 disclosures REQUIRED when there is a material uncertainty
− Describe ADEQUATELY the principal events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern
− Management need to describe ADEQUATELY plans to deal with these events or conditions
− State CLEARLY that there is a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern &, therefore, may be unable to realize its assets & discharge its liabilities in the normal course of business
