Going Concern Tips For Auditors During The Pandemic

The auditor is required to consider the evaluation that has been performed by management and then to come to his or her own conclusion on whether the use of the going concern basis is appropriate for preparation of those financial statements. Another requirement is for the auditor to consider the adequacy and the appropriateness of the disclosures around the conditions and events relative to going concern. Those requirements for disclosure are essentially in the accounting framework, so they’re embedded in U.S. 2 The guidance provided in this section applies to audits of financial statements prepared either in accordance with generally accepted accounting principles or in accordance with a comprehensive basis of accounting other than generally accepted accounting principles.

• Consistency PrincipleAccording to the Consistency Principle, all accounting treatments should be followed consistently throughout the current and future periods unless compelled by law to change or the change provides a better accounting presentation.
• If an auditor issues a negative going concern during an audit, this implies that the auditor suspects the company will have to close business for financial reasons within the next 12 months.
• Lenders themselves may be experiencing liquidity issues and may need central bank assistance to be able to continue to provide, or increase, financing.
• If a company acquires assets during a time of restructuring, it may plan to resell them later.
• Lastly, an important aspect of this is that the disclosures are required by the financial accounting framework to be made by management.

The new standard was codified into law as part of the Private Securities Litigation Reform Act of 1995. Under the new standard, auditors are required to look at a company’s management plans, strategies, and financial and business stress. They are responsible for understanding and assessing existing conditions, including those of other companies in the industry and the economy in general. In 1988 a significant change occurred in the auditing standards with the imposition of a new requirement relating to the Going Concern assumption. The new standard was spelled out in Statement of Auditing Standards Number 59 of the Auditing Practices Board. It required auditors, in every audit, to explicitly evaluate whether there is substantial doubt about a company’s ability to continue as a going concern over the coming year.

If it is not alleviated, management’s plans intended to mitigate the substantial doubt shall be disclosed. In that situation, the notes to the financial statements should also include a statement indicating that there is substantial doubt about the entity’s ability to continue as a going concern.

Latest Edition: Our Comprehensive Guide To Managements Going Concern Assessment

The ‘going concern’ concept assumes that the business will remain in existence long enough for all the assets of the business to be fully utilized. Utilized assets means obtaining the complete benefit from their earning potential. Cash flow forecasting is also one of the most important procedures that we should use and perform to assess the going concern problem.

It functions without the threat of liquidation for the foreseeable future, which is usually regarded as at least the next 12 months or the specified accounting period . The presumption of going concern for the business implies the basic declaration of intention to keep operating its activities at least for the next year, which is a basic assumption for preparing financial statements that comprehend the conceptual framework of the IFRS.

What Is The Going Concern Principle?

Are you preparing financial statements and wondering whether you need to include going concern disclosures? Or maybe you’re the auditor, and you’re wondering if a going concern paragraph should be added to the audit opinion. You’ve heard there are new requirements for both management and auditors, but you’re not sure what they are. For this reasonable period of time, management is required to identify whether any conditions or events are present when they’re making this evaluation that may cause significant doubt with respect to the ability to continue as a going concern. And management’s evaluation is made based on the conditions or events that are known at the time they are making that evaluation or are reasonably knowable as of that date. It essentially is, at the date of that evaluation, what do they know and then what is their conclusion around that.

When an external auditor thoroughly scrutinizes the company’s financial statements and determines that the company may no longer be a going concern, they can speculate that its assets may be impaired. This can lead to a reduction in the carrying amount of the assets to their liquidation value, and so the assets will lose the value they once held. In infrequent cases, the auditor may be unable to express an opinion about the company’s ability to remain a going concern and, thus, may issue a disclaimer to that effect. This situation can occur if limitations are imposed on the scope of the audit by the company’s management.

Centre For Financial Reporting

Identifying the going concern status of a company is imperative to determine its position in the market. There is much debate regarding when a company should report its going concern status. According to the norms of the Generally Accepted Auditing Standards , an auditor is expected to verify a company’s ability to continue as a going concern.

Auditors also need to ask whether management’s assumptions are reasonable. That requires a lot of judgment, but I think we have to appreciate that the robustness and the rigor of elaborate cash flow projections, for example, just may not be possible in the environment we’re in. We’re all going to have to recognize that those requirements have to be met the best they can with the information that’s available at the time the evaluation is made. On the other hand, if you’re operating a business in the hospitality industry — restaurants, bars, airlines, cruise ships, things like that — obviously the conditions and events give rise to going concern matters. Certainly, it would be hard to deny that the pandemic and COVID-19 create events and conditions that may cause doubt about an organization’s ability to continue as a going concern.

What Is The Going Concern Accounting Definition?

However, generally accepted auditing standards do instruct an auditor regarding the consideration of an entity’s ability to continue as a going concern. Consideration of an entity’s ability to continue as a going concern also falls within an auditor’s jurisdiction under US GAAS . Therefore, it’s important management keeps in mind that a going concern conclusion where substantial doubt exists will absolutely impact the audit report.

If negligence is found, then the auditor might have a legal case against it. However, audits are responsible for reviewing the management assessment and considering if those assessments are in the line with their understanding or not. Related to the going concern of the company, auditors are not responsible for assessing the going concern of the company. This question is asked mainly when we talk about the roles and responsibilities of management and auditor related to going concern of the company, and to answer this question, we should refer to the audit standard ISA 570. If the entity’s Financial Statements are prepared in accordance with IFRS, the standard dealing with going concerned is IAS 1. The standard requires the Financial Statements to properly disclose the basis of preparation of Financial Statements.

Communications With Audit Committees

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• A company might risk losing its going concern status after a natural catastrophe, such as drought, earthquake or flood, if its operations are impacted, resulting in heavy losses and the business was uninsured or underinsured.
• To give you a heads-up on potentially serious issues you should immediately address?
• FASB’s Codification 842, Leases, requires companies to make significant changes in the way they report operating leases.
• The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.
• So, if December 31, 2017, financial statements are available to be issued on March 15, 2017, the preparer looks forward one year from March 15, 2017.
• Another example of the going concern assumption is the prepayment and accrual of expenses.

Liquidation value, on the other hand, is relevant to a situation where the company becomes insolvent and is unable to pay its bills. An insolvent company may choose to sell its assets one by one or all of its assets together. The value received from the sale is usually the asset’s market value, less sale expenses.

It accommodates bifurcation of assets and liabilities as short term, 12-month period, and long term, usually more than 12 months, also ingraining confidence in the company that it will continue to function in the future. See our Guide to annual financial statements – COVID-19 supplement, which illustrates possible examples of going concern and liquidity risk disclosures. However, Generally Accepted Auditing Standards requires an auditor to verify an entity’s ability to continue as a going concern. Before an auditor issues a going concern qualification, company leadership will be given an opportunity to create a plan to take corrective actions that can improve the outlook for the business.

Frc Publishes Review Findings On Companies’ Viability And Going Concern Disclosures

There are many, many businesses out there that have very strong financial statements, for example. I should also just quickly point out that’s the standard issued by FASB for nongovernmental entities. For example, the auditor should consider the adequacy of support regarding the ability to obtain additional financing or the planned disposal of assets. Accordingly, the absence of reference to substantial doubt in an auditor’s report should not be viewed as providing assurance as to an entity’s ability to continue as a going concern.

This frequently puts the auditor in the position, in effect, of deciding whether a company is able to obtain the funds it needs to continue operating. The auditor’s expression of uncertainty about the company’s ability to continue may contribute to making it a certainty. An example of such contrary information is an entity’s inability to meet its obligations as they come due without substantial asset sales or debt restructurings. A firm’s inability to meet its obligations without substantial restructuring or selling of assets may also indicate it is not a https://www.bookstime.com/. If a company acquires assets during a time of restructuring, it may plan to resell them later. Going concern is an accounting term for a company that has the resources needed to continue operating indefinitely until it provides evidence to the contrary.

When Going Concern Disclosures Are Required

To sum it all up, the going concern concept implies that the business will continue for the foreseeable future and thus give a more realistic image of the business from a long-term view. The assets and liabilities are recorded at cost in order to show the security of the company and that it does not operate as a means to liquidate its assets and liabilities but is committed to continuous long-term growth and expansion.