Going Concern

Going concern:-
It is defined under IAS – 1 (presentation of financial statements) as “the assumption that the enterprise
will continue in operational existence for the foreseeable future.” Normally the time period is viewed as
next 12 months.

When the going concern assumption is appropriate, assets and liabilities are recorded on the basis that
the entity will be able to realize its assets and discharge its liabilities in the normal course of business.

 Consideration of foreseeable future involves the judgment about the future

events, which are inherently uncertain.
 Uncertainty increases with time and judgment can only be made on the basis of
information available at any point – subsequent events can be changed.
 There may be circumstances in which it is appropriate to look further ahead.
This depends on the nature of the business and their associated risks.

Management responsibilities regarding going concern and the Financial Statements:-

Going concern 1 By:- Haris Hanif

ISA – 570 (Going Concern):-
ISA – 570 placed guidance for the external auditors to assess the management’s work on going concern
assessment along with monetary values and disclosures and to perform some audit procedures and to
consider the impact on audit report.

Indicators of going concern doubt:-

ISA – 570 includes some examples of events or conditions that may cast doubt about going concern
assumptions.

Indicators Examples
Financial  Net liability or net current liability position.
 Fixed-term borrowings approaching maturity without
realistic prospects of renewal or repayment.
 Indications of withdrawal of financial support by creditors.
 Negative operating cash flows (historical or prospective).
 Adverse key financial ratios.
 Substantial operating losses or significant deterioration in
the value of assets used to generate cash flows.
 Arrears or discontinuance of dividends.
 Inability to pay creditors on due dates.
 Inability to comply with terms of loan agreements.
 Change from credit to cash-on-delivery transactions with
suppliers.
 Inability to obtain financing for essential new product
development or other essential investments.
Operating  Management intentions to liquidate or cease operations.
 Loss of key management without replacement.
 Loss of a major market, key customers, licence, or
principal suppliers.
 Labour difficulties.
 Shortages of important supplies.
 Emergence of a highly successful competitor.
Other  Non-compliance with capital or other statutory
requirements.
 Pending legal or regulatory proceedings against the entity
that may, if successful, result in claims that the entity is
unlikely to be able to satisfy.
 Changes in laws/regulations/government policy expected
to adversely affect the entity.
 Uninsured or underinsured catastrophes when they occur.

Going concern 2 By:- Haris Hanif

Audit procedures – whether or not the company is going concern:-

— Analyze and discuss cash flow, profit and other relevant forecasts with management.
— Analyze and discuss the entity’s latest available interim financial statements (or management
accounts).
— Review the terms of debentures and loan agreements and determine whether they have been
breached.
— Read minutes of the meetings of shareholders, the board of directors and important
committees for reference to financing difficulties.
— Inquire of the entity’s lawyer regarding litigation and claims.
— Confirm the existence, legality and enforceability of arrangements to provide or maintain
financial support with related and third parties.
— Assess the financial ability of such parties to provide additional funds.
— Consider the entity’s position concerning unfulfilled customer orders.
— Review events after the period-end for items affecting the entity’s ability to continue as a going
concern.
— Confirm the existence, terms and adequacy of borrowing facilities.
— Obtaining and reviewing reports of regulatory actions.
— Determining the adequacy of support for any planned disposals of assets.
— Obtain the written representation from the directors regarding their opinion.

Auditors’ responsibility regarding going concern:-

ISA – 570 explained the responsibilities of the auditor in respect of going concern.

 The auditor should remain alert throughout the audit for the evidence of events/conditions that
may cast doubt on company’s ability to continue as going concern and discuss those events with
management.
 Auditors are required to consider the appropriateness of management’s use of going concern
assumptions.
 Auditors need to assess the risk that the company may be or may not be going concern.
 Obtaining sufficient and appropriate evidences that company is a going concern.
 Confirm that whether or not there any material uncertainties regarding going concern and
perform necessary audit procedures whether or not the company is going concern.
 If there is any material uncertainties exist, ensure those uncertainties are completely disclosed
and in case of it is confirmed, ensure that financial statements are prepared on break-up basis, if
there is no such actions from management, then consider the impact on audit report.

Going concern 3 By:- Haris Hanif

Impacts on audit report regarding going concern:-

No. Scenarios Impact on the Audit Report

1 Going concern status is valid but material
uncertainty exist and those are correctly
disclosed in the financial statements
(NOTES)

2 Going concern status is valid but material

uncertainty exist and those are NOT
disclosed in the financial statements
(NOTES)

3 Going concern status is NOT valid and

financial statements are prepared on the
basis of accruals.

4 Management is NOT assessing the going

concern status
Or
Management is NOT extending the
assessment of going concern

…………when Auditor asked to do so…

Going concern 4 By:- Haris Hanif