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    Acca - F 8 - L6

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    shazyasghar
    The document discusses the auditor's responsibility to evaluate a company's ability to operate as a going concern. It outlines indicators that a company may not be a going concern, such as continued losses, reduced operations, or financial difficulties. It also describes audit procedures the auditor should perform to evaluate the going concern assumption, including reviewing profit projections, bank agreements, and management's plans. Finally, it discusses how the auditor's report should be modified depending on whether a material uncertainty around going concern exists or adequate disclosure is not provided in the financial statements.

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    Acca - F 8 - L6

    Uploaded by

    shazyasghar
    175 views7 pages
    The document discusses the auditor's responsibility to evaluate a company's ability to operate as a going concern. It outlines indicators that a company may not be a going concern, such as continued losses, reduced operations, or financial difficulties. It also describes audit procedures the auditor should perform to evaluate the going concern assumption, including reviewing profit projections, bank agreements, and management's plans. Finally, it discusses how the auditor's report should be modified depending on whether a material uncertainty around going concern exists or adequate disclosure is not provided in the financial statements.

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    ACCA_F 8 _L6

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    The document discusses the auditor's responsibility to evaluate a company's ability to operate as a going concern. It outlines indicators that a company may not be a going concern, such as continued losses, reduced operations, or financial difficulties. It also describes audit procedures the auditor should perform to evaluate the going concern assumption, including reviewing profit projections, bank agreements, and management's plans. Finally, it discusses how the auditor's report should be modified depending on whether a material uncertainty around going concern exists or adequate disclosure is not provided in the financial statements.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    175 views7 pages

    Acca - F 8 - L6

    Uploaded by

    shazyasghar
    The document discusses the auditor's responsibility to evaluate a company's ability to operate as a going concern. It outlines indicators that a company may not be a going concern, such as continued losses, reduced operations, or financial difficulties. It also describes audit procedures the auditor should perform to evaluate the going concern assumption, including reviewing profit projections, bank agreements, and management's plans. Finally, it discusses how the auditor's report should be modified depending on whether a material uncertainty around going concern exists or adequate disclosure is not provided in the financial statements.

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    You are on page 1of 7

    ACCA Paper F8

    AUDIT AND INTERNAL REVIEW INTERNATIONAL STREAM

    Autumn 2008 Lecture 6

    Application of the Going Concern Concept to Audits.

    DATE: Spring 2008

    TUTOR:

    ISA 570 GOING CONCERN

    1
    Actions that an auditor should carry out to try and ascertain whether an entity is a
    going concern:-

    “During planning and performing audit procedures and in evaluating the results the
    auditors should consider the appropriateness of management assumptions when
    preparing the financial statements of the enterprise”

    Since financial statements are prepared on the assumption of going concern, it is


    essential for the auditor to give positive consideration to the applicability of the
    going concern basis at the planning stage and throughout the audit. Risk evaluation
    and findings during the audit may uncover indicators of going concern problems:

    Operational problems:
    1
    2 Continued Trading loss

    1 Forced reduction in operation

    1 Loss of key suppliers or customers

    1 Litigation with customers and suppliers

    1 Increased competitions

    1 Dependence on one product.

    Financial problems:

    1 Net current liabilities

    1 Funding operations from overdue VAT/PAYE

    1 Excess borrowing to finance daily obligations

    1 Loan defaults

    1 Cancellation of capital projects

    1 Inability to pay debts as and when due

    2
    1 Refusals to renew/extend overdraft limits
    Personnel problems:
    1
    2 Loss of key personnel

    1 Prolonged industrial disputes

    If the above indicators are detected, the auditor should seek evidence to support
    the going concern assumption.

    The evidence includes:-

    1 Profit and cash flow projection covering the period at least 12 months from
    the date the directors approve the financial statements.

    1 Examine orders received and contracts signed

    1 Holding company or bank support.

    Directors support.

    Audit Procedures (Tests) For Going Concern:

    3
    ISA 570 requires that the auditor, when forming an opinion as to whether financial
    statements gives a true and fair view should consider the entity’s ability to continue
    as a going concern and make any relevant disclosure in the financial statements.

    Audit Procedures:

    1 Assess the adequacy of the means by which the directors have satisfied
    themselves that the adoption of the going concern basis is appropriate.

    1 Examine all relevant evidences available to support the going concern status.

    1 Review the director’s business review and their assessment of the future.

    1 Assess the systems or other means by which the directors have identified
    warnings of future risks and uncertainties.

    1 Examine budgets and other future plans and assess the reliability of such
    budgets by references to past performances.

    1 Examine management accounts and other reports of recent activities.

    1 Obtain confirmation of existing bank borrowing facilities and suppliers credits.

    1 Review the board minute for any discussion of going concern matters.

    1 Enquire of the director’s plan for resolving any issue that may threaten the
    going concern of the company.

    1 Consider obligations undertakings guarantee with lenders, suppliers and


    group companies for giving or receiving support.
    2 Review management’s plans for future actions based on its going concern
    assessment.

    4
    – Gather additional sufficient and appropriate audit evidence to confirm whether or
    not a material uncertainty exists regarding the going concern concept.
    – Seek written representations from management regarding its plans for future
    action.
    – Obtain information from company bankers regarding continuance of loan facilities.
    – Review receivables ageing analysis to determine whether there is an increase in
    days – which may also indicate cash flow problems.

    Audit procedures if the company is not considered to be a going concern

    – Discuss the situation again with the directors. Consider whether additional
    disclosures are required in the financial statements or whether the financial
    statements should be prepared on a ‘break up’ basis.
    – Explain to the directors that if additional disclosure or restatement of the financial
    statements is not made then the auditor will have to modify the audit report.
    – Consider how the audit report should be modified. Where the directors provide
    adequate disclosure of the going concern situation, then an emphasis of matter
    paragraph is likely to be appropriate to draw attention to the going concern
    disclosures.
    – Where the directors do not make adequate disclosure of the going concern
    situation then qualify the audit report making reference to the going concern
    problem. The qualification will be an ‘except for’ opinion or an adverse opinion
    depending on the auditor’s opinion of the situation.

    Impact on the audit report:

    5
    1
    2 Based on the audit evidence obtained, the auditor should determine if in his
    judgement a material uncertainty exists related to events or conditions that alone
    or in aggregate may cast significant doubt on the entity’s ability to continue as a
    going concern.

    1 If there is a “significant level of concern” but company is still a going


    concern, then issue an unqualified audit report but with explanatory paragraph in
    the basis of opinion section. Highlight the existence of material uncertainty relating
    to the event or condition that may cast significant doubt on the entity’s ability to
    continue as going concern and draws attention to the note in the financial
    statement that discloses the matter.

    1 If adequate disclosure is not made in the financial statements the auditor


    should express a qualified or adverse opinion as appropriate. The report should
    include reference to the fact that there is a material uncertainty that may cast
    significant doubt about the entity’s ability to continue as a going concern.

    1 If in the auditor’s judgement the entity will not be able to continue as a going
    concern, the auditor should express an adverse opinion if the financial statements
    have been prepared on a going concern basis.

    1 If disclosure in the financial statement regarding going concern is inadequate


    then issue a qualified audit opinion based on disagreement.

    6
     London School of Business and Finance 2007 Page of 7 7

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