City University College Department of Accounting & Finance

4. Completing the Audit

This chapter deals with some of the procedures which happen at the
completion stage of the audit.
The going concern
 The going concern concept is defined as the assumption that the
enterprise will continue in operational existence for the foreseeable
future.
 Considerations involving ‘foreseeable future’ requires judgment
about inherently uncertain future events
 Management and auditors should generally look ahead at least one
year from the date of director’s approval of the financial
statements, in assessing the validity of the going concern basis
Significance of the going concern concept
Whether a company can be classed as a going concern affects how its
financial statements are prepared
 Financial statements are usually prepared on the basis that the
reporting entity is a going concern, unless
o The entity is being liquidated or has ceased trading, or
o The directors have no realistic alternative but to liquidate the
entity or cease trading
 Where the assumption is made the company will cease trading, the
financial statements are prepared using the break-up basis under
which:
o Assets recorded at likely sales value
o Inventory and receivables are likely to require more
provisions
o Additional liabilities may arise (severance costs for staff, the
cost of closing down facilities, and the like)

Auditing Principles II 4. Completing the Audit 1

Asrat Bekele
City University College Department of Accounting & Finance

The auditor’s role in reviewing concern

Auditors are concerned with ensuring that the financial statements give
a true and fair view, which includes which includes being satisfied that
they have been prepared using the correct basis. Auditors, thus,
undertake going concern reviews to obtain this assurance.
Going concern responsibilities
Both directors and auditors of an entity have responsibilities regarding
going concern.
Directors
 Assess the company’s ability to continue as a going concern
 Disclose uncertainties they are aware of
 In performing the assessment take into consideration relevant
factors like:
o Current and expected profitability
o Debt repayment
o Sources and potential sources of financing
Auditors
 Consider the appropriateness of management’s use of the going
concern assumption, assess the risk that the company may not be
a going concern
 Where there are going concern issues, assess adequacy of
disclosures made by directors
Audit procedures
The procedures auditors undertake depend on the risk that the company
may not be a going concern
 In a company where:
o Profits are high
o Cash flows are positive
o Finances are in place
o No obvious exposure to large losses

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Asrat Bekele
City University College Department of Accounting & Finance

 Going procedures are likely to be minimal

 Where any doubts regarding going concern exist, procedures are
more extensive
 When companies go out of business, it is most likely due to lack of
cash than lack of profit
 The auditor should remain alert for evidence of event affecting the
entity’s ability to be a going concern, both in the planning stage
throughout the audit
Indicators of going concern problems
 Net current liabilities or net total liabilities
 Borrowing facilities not agreed
 Default on loan agreements
 Behind with tax payments
 Behind with paying staff
 Major cash outflows
 Major technology changes in the industry
 Loss of key management staff
Disclosure requirements
Where there is doubt over the going concern status of the company, the
directors should disclose the fact in the financial statements
 The doubts
 The possible effect on the company, or
 Their inability to asses going concern
 Where the financial are prepared on a basis other than going
concern, the basis should be disclosed
Reporting implications of going concern reviews
 When the going concern basis is used and it is appropriate, the
auditors do not need to mention this fact in their report

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Asrat Bekele
City University College Department of Accounting & Finance

 If the auditors believe that the going concern basis inappropriate

or the disclosures given by management are inadequate, and
management is not willing to amend, qualify the report
 If the going concern basis is not appropriate and the directors
prepare the financial statements on some other appropriate basis,
refer to this in an emphasis of matter paragraph
Events after the balance sheet or subsequent events
Events after the balance sheet date are those events, both favourable and
unfavourable, that occur between the balance sheet date and the date
when the financial statements are authorised for issue.
There are two types of subsequent events
 Adjusting – events providing additional evidence relating to
conditions existing at the balance sheet date and require
adjustment in the financial statements.

Examples of such events are:

 the resolution of a court case, as the result of which a provision

has to be recognised instead of the disclosure by note of a
contingent liability;
 evidence of impairment of assets:

o bankruptcy of a major customer;

o sale of inventories at prices suggesting the need to reduce

the balance sheet figure to the net value actually realised.

 Non-adjusting – events concerning conditions which arose after the

balance sheet date, but may be of such materiality that their
disclosure is required to ensure that the financial statements are
not misleading

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Asrat Bekele
City University College Department of Accounting & Finance

 Nonadjusting events do not, by definition, require an adjustment to

the financial statements, but if they are of such importance that
non-disclosure would affect the ability of users of the financial
statements to make proper evaluations and decisions, the
enterprise should disclose by note:

o the nature of the event;

o an estimate of its financial effect, or a statement that such

an estimate cannot be made.

Examples of such events are:

 decline in market value of investments;

 announcement of a plan to discontinue part of the enterprise;

 major purchases and sales of assets;

 expropriation of assets by government;

 destruction of a major asset by fire etc;

 a major business combination after the balance sheet date;

 sale of a major subsidiary;

 major dealings in the company's ordinary shares;

 abnormally large changes in asset prices or foreign exchange rates;

 changes in tax rates with a significant effect on current and

deferred tax assets;

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Asrat Bekele
City University College Department of Accounting & Finance

 entering into significant commitments or contingent liabilities; commencing

major litigation arising solely out of events after the balance sheet date.

Procedures
Procedures undertaken in performing subsequent events review might
include:
 Enquiry into management
 Reading minutes of members’ and directors’ meetings
 Reviewing accounting records including budgets, forecasts and
interim information
 Normal post balance sheet work performed to verify year end
balances
 Obtaining letter of representation
The stage of completion of annual financial statements determines the
procedures that the auditors must undertake in performing subsequent
event reviews.
Up to signing of the audit report
 The auditors have an active duty to search for all material events
between the balance sheet date and the date the audit report is
signed.
Between signing the audit report and issuing the financial statements
 The auditors have a passive duty and only have to act if they are
made aware made aware of an event, but once aware, they have a
duty to take the necessary action.

Auditing Principles II 4. Completing the Audit 6

Asrat Bekele
City University College Department of Accounting & Finance

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Asrat Bekele