Auditing Going Concern

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Aubrey Watkins
6 years ago
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1 Auditing Going Concern Lulzim Zeka Audit Training of Trainers Workshop Vienna, 18 November 2013

2 Agenda Why going concern matters Auditing going concern Case study New reporting requirements

3 Why going concern matters? IAS 1 requirement Increased importance in the wake of financial crisis Response from IAASB to increase audit quality

4 Auditing going concern ISA 570 and ISA 570 (revised) Management makes assessment of going concern considering following factors The degree of uncertainty about the events and conditions increases in the future (time period) Size, complexity, nature and conditions of the business Judgments are made on the information available at the time

5 Responsibilities of the auditor Obtain sufficient and appropriate evidence Conclude about the appropriateness of management s use of the going concern basis Conclude whether there is a material uncertainty about the entity s ability to continue as a going concern

Risk assessment procedures The auditor shall consider whether material uncertainty exists If management has performed going concern assessment Auditor discusses the

6 Risk assessment procedures The auditor shall consider whether material uncertainty exists If management has performed going concern assessment Auditor discusses the assessment with the management If management has not performed going concern assessment Auditor shall discuss with management the basis for the intended use of the going concern

7 Evaluating Management s Assessment The auditor shall cover the same period as that used by management to make its assessment If management s assessment covers less than twelve months - the auditor shall request management to extend its assessment period to at least twelve months from that date

8 Evaluating management s assessment The process management followed The assumptions on which management's assessment is based Management's plans for future action and whether these are feasible

9 Audit procedures When events or conditions are identified Analysing and discussing cash flow Analysing and discussing interim financial statements Reading the terms of debentures and loan agreements Reading minutes of the meetings of shareholders/board Performing audit procedures regarding subsequent events

10 Events or conditions - Financial Net liabilities or net current liability position Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment Indications of withdrawal of financial support by lenders Negative operating cash Adverse key financial ratios

11 Events or conditions - Operating Management intends to liquidate the entity or to cease operations Loss of key management without replacement Loss of a major market, key customer(s), franchise, license, or principal supplier(s) Emergence of a highly successful competitor

12 Events or conditions - Other Non-compliance with capital or other statutory requirements Pending legal or regulatory proceedings against the entity resulting in claims unable to satisfy Changes in law or regulation or government policy Uninsured or underinsured catastrophes when they occur

13 Auditor conclusions and reporting The auditor shall conclude whether material uncertainty exists The auditor s report shall include a separate section under the heading Going Concern

14 Going Concern basis is appropriate and no material uncertainty identified Going concern paragraph An explanation of the going concern basis of accounting A statement that, management s use of the going concern basis is appropriate A statement that, the auditor has not identified a material uncertainty that may cast significant doubt on the entity s ability to continue as a going concern A statement that neither management nor the auditor can guarantee the entity s ability to continue as a going concern

15 Going Concern basis is appropriate but material uncertainty is identified Going concern paragraph Disclosure of principal events or conditions Disclose clearly that there is a material uncertainty

16 Case study Identify events or conditions that may cast significant doubt about going concern Audit work to be performed

17 New reporting requirements IAASB s proposed and revised ISAs ISA 701, Communicating Key Audit Matters in the Independent Auditor s Report ISA 260 (Revised), Communication with Those Charged with Governance ISA 570 (Revised), Going Concern ISA 705 (Revised), Modifications to the Opinion in the Independent Auditor s Report Proposed ISA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor s Report

18 Reporting on going concern in the audit report Additional going concern paragraph Key audit matters paragraph Does not affect audit work

19 Challenges Such a qualification can result in tougherto-get and more expensive financing deals, just when the company is most in need of a break. Indeed, once hit with a goingconcern qualification, companies may succumb to a self-fulfilling prophecy

20 Thank you

INTERNATIONAL STANDARD ON AUDITING (UK) 570 (REVISED) GOING CONCERN

INTERNATIONAL STANDARD ON AUDITING (UK) 570 (REVISED) GOING CONCERN (Effective for audits of financial statements for periods commencing on or after 15 December 2019) Introduction CONTENTS Paragraph Scope