Set 1 - AU Chapter 8 - Going Concern

Question 1

What is the going concern assumption?

Answer 1

The assumption is that the entity will continue operating for the foreseeable future.

Question 2

What are some financial, operating and other indicators that a company may not be a going concern?

Answer 2

Financial - working capital deficit or ratio below 1
adverse key financial ratios
long-term debt that is maturing that cannot be repaid
reliance on excessive short-term financing
inability to secure supplier credit or pay bills on time
negative operating cash flows
poor profitability and return ratios
substantial operating losses
negative retained earnings

Operating - plans to liquidate the company or cease operations
departures of key management who cannot be replaced
loss of market share
loss of a key customer
inability to obtain key supplies
loss of operating licence
labour issues

Other - non-compliance with the law
material lawsuits against the company that it will not be able to pay should it lose
changes in laws or regulations that will negatively affect the company

Question 3

What is management responsibility?

Answer 3

They must document that the company is a going-concern for the next 12 months, including projected cash flows / revenue forecasts etc.

Question 4

What is the auditor responsibility? What are the 3 key objectives?

Answer 4

To evaluate management’s assumptions about going-concern are correct.
3 objectives:
- to obtain sufficient audit evidence regarding the appropriateness of management’s going concern assumption
- to conclude, based upon audit evidence, if there is a material uncertainty as to whether the company can continue to operate as a going-concern
- to report in accordance with CAS - determine the implications for the auditors report.

Question 5

If events impacting going-concern assumption are identified, what procedures should auditor undertake?

Answer 5

• request management perform assessment, if not already done.
• evaluate management’s plan of action in relation to assessment
• where cash flow forecast has been prepared, analyze underlying assumptions
• consider any additional facts come to light after the assessment
• request written representation from management regarding its plans to action
• analyzing the latest financial statements
• reading terms of loans and debentures to determine if any breaches have occurred
• reading minutes of board meetings for reference to financial difficulties
• inquiring of legal counsel for any lawsuits
• ## performing audit procedures regarding subsequent events to identify those that may impact

Question 6

What are the three conclusions auditors will make based upon their investigation? What happens to the audit opinion in all 3 scenarios?

Answer 6

#1 going-concern assumption is appropriate - no modification to financial statements necessary
#2 going-concern assumption is appropriate but material uncertainty exists - auditor must determine if the FS adequately represent the uncertainty and that it has been disclosed. If yes, can offer an unqualified opinion and disclose in the 'material uncertainty related to going concern' section of the report. If no, can only offer a qualified or adverse opinion
#3 going-concern assumption not appropriate - if FS are presented in liquidation format and lack of going-concern appropriately disclosed, can offer an unqualified opinion and disclose in the 'material uncertainty related to going concern' section of the report. If no, can only offer an adverse opinion.