50 Days –

50 Concepts Day-3
SK Sir AUDITING Lectures
Concept-3:
SA -570: GOING CONCERN
(Applicable for CA Inter & CA Final)
What we Learn in this Concept
1. Background of the Concept by SK Sir
2. SA-570 with Exam Questions
3. SK Sir Suggestions

1. Background of the SA-570 Reporting:

 Management Prepare financial Statements based on Fundamental Accounting assumptions

1. Accrual 2.Consistency 3. Going concern

 Every Company deals with Public Funds directly (Ex: Listed Companies Shares / Deposits) or
Indirectly (Loan from Banks/ FI).

 But Public (“Users of Financial Statements May be Internal / External Users ”) Never have
access to check / verify day to day transactions or verify assets of the company.

 In India Only Chartered Accountant can do such verification (OR) independent examination of
Books of accounts and express an appropriate opinion (i.e., Unqualified / Qualified/ Adverse/
Disclaimer) in the form of Report (as per SA 700 series)

 While Preparing Financials Management may wrongly prepare the financial statements what we
called as mis-statements without properly applying going concern concept to deceive the users.

 It is the harden money of people that is invested in the Company and it is the responsibility of
the management to ensure that they have done justice for the investment like investing funds
appropriately and payment of interest or dividend etc…

 If Company mis-use the funds or management deliberately decided they may liquidate the
company , now ultimate sufferers are Investors.

 Hence SA-570 introduced by the ICAI and given responsibility to auditor to check management
going concern assumption by applying some indicators.

 Now Auditor check the appropriateness of going concern and submit the report accordingly,
if any damage to the going concern then users will be immediately alert and take decision to
withdraw the invested money or sell the share to protect their harden money.

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SK Sir AUDITING Lectures – Day 3
What is Going concern assumption? –
It is an assumption that entity will continue its
Going Concern operations for a foreseeable future.

Mgt responsibility Auditor’s responsibility Auditor’s procedures

Where AFRF Where AFRF gives no To obtain To conclude

SAAE about whether Determine whether Mgt. has Remain alert to events or conditions
expressly require explicit requirement performed preliminary assessment
aptness of material that cast doubt about entity’s ability
mgt’s use of uncertainty to continue as GC
Irrespective of this, Mgt. has to assess the GC exist about
Yes No
entity ability Financial indicators Operating indicators Other
entity’s ability to continue as a GC tocontinue as
GC Discuss with mgt about Discuss basis of using • Changes in laws
• Adverse key financial • Loss of key Mgt.
Mgt. assessment should cover a period of at such assessment and GC assumption and
ratios • Loss of major • Non-compliance
any events/ conditions inquire whether
least 12 months from last date of FY market with capital or
identified in it events/conditions exist • -ve operating
cashflows other stat. req.
• Labor difficulties
If not, auditor should request mgt. to extend it
Evaluate Mgt. • LT borrowings • Pending legal or
• Emergence of regulatory
to at least 12 months assessment for GC approaching maturity highly successful
assumption without prospects of proceedings
competitors
renewal • Uninsured or
If mgt. refuses, auditor may consider its • Shortage of
Inquire the mgt. of its Auditor has no • Substantial operating under-insured
implication on his opinion. knowledge for events/ supplies catastrophes
other duty for losses
conditions beyond mgt. period beyond
Auditor shall even ask the mgt. of its knowledge assessment period. Mgt. assessment • Inability to pay
creditors on time
of any events or conditions beyondthe period of
• Discontinuance of
mgt. assessment dividends

Additional procedures when events/ conditions identified

Where mgt. has Check if any Analysis of Analysis of Read the Evaluate Request WR
not done any additional facts cash flow Interim FS minutes of the action for the plan
assessment  available since forecast of of entity meeting of SH, plan of the of action and
request them to mgt. assessment entity. TCWG etc. entity its feasibility
assess
SK Sir AUDITING Lectures – Day 3

Going Concern

Level 1
Events/ conditions Events/ Conditions WHAT IF
identified identified
Management
Unwilling to Make
Level 2
Yes No or Extend Its
Material uncertainty
Assessment
exists
Material uncertainty
Level 3 exists Auditor should
Going concern consider its
assumption is not apt. implications on
Yes No auditor’s
report

Check whether
He may or
& Going Applicable FRF
But Going may not
concern require disclosure
concern modify his
assumption is about such events
assumption is opinion
not apt.
apt.

Mgt Mgt prepared But Mgt

Mgt doesn’t
adequately FS without GC prepared FS
discloses
discloses basis on GC basis
material
material
uncertainty
uncertainty
inFS
inFS
Modified Give adverse Give
Unmodified opinion opinion opinion unmodified
but
opinion but
include separate disclose it in
section under the report
heading “Material
uncertainty related to
Going Concern”
 50 Days –
50 Concepts Day-3
SK Sir AUDITING Lectures

SK Sir Suggestions to Students

 Exam Questions are based on Going concern Indicators as per SA-570

 Unless Student identify the indicator, one may not able to apply 570 in
examination
 At CA level student are expected identify going concern appropriateness and what
type of Audit Report to be submitted by the auditor
 Students are suggested to remember All 3 types of Indicators
 Students are suggested to understand what type of Audit report to be given by
the auditor after checking going concern.
 Practical Question will be given in the ICAI Exams.

EXAMINATION QUESTION:
Question 1:
M/s ANS & Associates has been appointed as the statutory auditors of MNO Ltd. The company has
been suffering losses due to the emergence of highly successful competitor, thereby leading to
negative networth. Also, the sales head, key management personnel, of the company left the
company due to health issues. When CA Amar, the engagement partner discussed the scenario with
the management of the company, he did not get any satisfactory reply from the management. What
is the responsibility of M/s ANS & Associates with regard to SA 570?
Answer:
As per SA 570, one of the objectives of the auditor regarding going concern is to obtain
sufficient and appropriate audit evidence regarding the same and to conclude on the
appropriateness of the management’s use of the going concern basis of accounting in the
preparation of the financial statements.
 Further it also contains the list of events or conditions that may cast significant doubt on
the entity’s ability to continue as a going concern which are:
o Financial indicator- Negative networth
o Operating indicator- Loss of key management and emergence of highly successful
competitor.
 In the present case, MNO Ltd. has negative networth on account of emergence of highly
successful competitor and the sales head of the company has also left the company.
 Also, CA Amar did not get any satisfactory reply when he discussed the going concern
matter with the management.
Thus, from the above facts, it appears that MNO Ltd. is not going concern.
o If the management of MNO Ltd. has used the going concern basis of accounting,
the auditor should first ask the management to adjust the financial statements.
o If the management of MNO Ltd. does not agree with the same, CA Amar shall
consider the impact on his audit report…

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 50 Days –
50 Concepts Day-3
SK Sir AUDITING Lectures

My best wishes to all of you

Happy Reading & Happy Learning

SK Sir Auditing Classes

e-mail:casureshkumarmaster@gmail.com

SKSirAuditingLectures–CAINTER&FINAL Page4