The general purpose financial statements of an entity are prepared using the going concern basis of accounting unless the management intends to liquidate or to cease the operations or there is no realistic alternative to do so.
It is the fundamental accounting assumption followed by the enterprise and no specific disclosure is required to be made.
Responsibility for Assessment of the Entity's Ability to continue as Going Concern
The preparation of financial statements requires management to assess the entity's ability to continue as a going concern even if the financial reporting framework does not include an explicit requirement to do so. The following factors are relevant for assessment-
- The degree of uncertainty associated with the outcome of an event or condition and it requires management assessment by taking into account all available information.
- The size and complexity of the entity and the nature and condition of its business which is affected by external factors affect the judgement regarding the outcomes of events.
- Information available at the time at which the judgment is made. Subsequent events may result in outcomes that are inconsistent with judgments that were reasonable at the time they were made.
The following are the responsibilities of the auditor-
- The auditor is required to obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management's use of going concern basis of accounting in the preparation of financial statements
- The auditor is also required to conclude and report on the basis of audit evidence obtained,about whether any material uncertainty exists about the entity's ability to continue as a going concern.
Procedure for Obtaining Sufficient Appropriate Audit Evidence
The auditor can obtain sufficient appropriate audit evidence while performing risk assessment procedures and related activities by evaluating the following indicators-
- Financial Indicators
- Operating Indicators
- Other Indicators
The following are the few examples of financial indicators-
- Net liability or net current liability position.
- Indications of withdrawal of financial support by creditors.
- Negative operating cash flows.
- Adverse key financial ratios.
- Inability to pay creditors and comply with the terms of loan agreements
- Change from credit to cash-on-delivery transactions with suppliers.
- Giving customers material discount for instant cash payment instead of credit payment.
The following are the examples of Operating Indicators-
- Management intentions to liquidate the entity or to cease operations.
- Loss of key management without replacement.
- Shortages of important supplies.
- Emergence of a highly successful competitor.
- Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
The following are the examples of Other Indicators-
- Non-compliance with statutory or regulatory requirements.
- Pending legal or regulatory proceedings against the entity.
- Changes in law or regulation or government policy expected to adversely affect the entity.
Audit Procedures for Evaluating Management's Assessment
The auditor shall consider whether management's assessment includes all relevant information of which the auditor is aware as a result of the audit.
The auditor shall inquire of management as to its knowledge of events or conditions beyond the period of management's assessment that may arouse significant doubt.
Additional Audit Procedures When Events or Conditions are Identified
The auditor is required to perform additional audit procedure when events or conditions which cast a significant doubt on the entity's ability to continue as going concern are identified.The following are the additional audit procedures which are required to be performed by the auditor -
- Requesting management to make its assessment of the entity's ability to continue as going concern, if not made earlier.
- Evaluating management's plans for future actions in terms of feasibility.
- Analysis of the cash flow forecast prepared, if any, i.e. the data used, the assumptions made.
- Determining whether there is adequate support for the assumptions and forecast made.
- Requesting written representations from management and, where appropriate, those charged with governance.
Implications on Audit Report
- If the auditor concludes based on the audit evidence obtained and the audit procedures performed that the going concern basis of accounting followed by the management is inappropriate, then the auditor shall express adverse opinion.
- If the auditor concludes based on the audit evidence obtained and the audit procedures performed that the going concern basis of accounting followed by the management is appropriate and the management has made adequate disclosure about the same, then the auditor shall draw attention to the concerned note in the auditor's report.
- If the auditor concludes based on the audit evidence obtained and the audit procedures performed that the going concern basis of accounting followed by the management is appropriate but the management has not made adequate disclosure about the same, then the auditor shall express qualified or adverse opinion in accordance with SA 705.
- If the auditor is able to identify the events or conditions but there is no material uncertainty, then the Auditor has to evaluate requirements of the applicable financial reporting framework to provide adequate disclosure about the events or conditions that may cast significant doubt on the entity's ability to continue as going concern.