Going Concern

Accordingly, unless the going concern assumption is inappropriate in the circumstances of the entity, assets and liabilities are recorded on the basis that the entity will be able to realize its assets, discharge its liabilities, and obtain refinancing in the normal course of business. The auditors moved for summary judgment after discovery, arguing that the acquirers were fully aware of the shipping entity’s dire financial condition and a going concern disclosure would not have told them anything they did not already know. In particular, the acquirers had, in conjunction with their underwriter, prepared an offering document circulated to potential financers of the deal. That prospectus detailed the shipping company’s continuing losses and cash shortages and stated that, unless fresh capital was found quickly, the entity’s ability to continue operations was questionable. More, and more current, information on the operations and financial soundness of public companies is available to any interested party before making any investment or lending decision. Regulators, recognizing the importance of more and timelier data, have shortened the period for reporting year- or quarter-end financial statements and have increased the information companies must disclose.

  • Lennox also discovered that a company would frequently receive a going concern audit opinion when the leverage level was high.
  • Lending institutions have analysts who evaluate a borrower and its financial condition.
  • Details of financing facilities sought and now available at balance date, potentially to cover any working capital deficiency, including expiry periods and any significant requirements under the facility agreements i.e. debt covenants.
  • Current events and conditions may have a significant impact on an organisation’s ability to continue as a going concern.
  • This term also refers to a company’s ability to make enough money to stay afloat or to avoid bankruptcy.
  • Details of the results of the key scenario modelling on the entity’s ability to meet its obligations over the forecast period.

Although going concern is one of the top three areas we get questions about, the requirements are not actually that complex. Certainly, as we alluded to, there are probably a handful of unique considerations that require the auditor to use professional judgment when applying the requirements of the standards. When you look at what we’re facing with the pandemic, clients with very strong balance sheets may not have significant doubt about being able to operate as a going concern for a 12-month period just based on the strength of their financials. It’s possible that we may have businesses out there that can withstand this for 12 months just based on the strength of their financials.

Going Concern Auditing Summary

The present study contributes to improving the previous studies in accordance with the influence of audit client tenure, audit lag, opinion shopping, liquidity ratio and leverage to the going concern audit opinion of a company. Results of the study indicated that the variables of the opinion shopping and the leverage affected the going concern audit opinion, whereas the variables of the audit client tenure, the audit lag and the liquidity ratio did not affect the going concern audit opinion. Another aspect for auditors to consider is that the conditions and events we’re facing should not be considered to be an automatic going concern report for any company. It’s likely that we may see more going concern conclusions, but it’s not automatic. There are many, many businesses out there that have very strong financial statements, for example. The conditions or events that led the auditor to believe that there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time. 2 The guidance provided in this section applies to audits of financial statements prepared either in accordance with generally accepted accounting principles or in accordance with a comprehensive basis of accounting other than generally accepted accounting principles.

What is an example of going concern?

Examples of Going Concern

A state-owned company is in a tough financial situation and is struggling to pay its debt. The government gives the company a bailout and guarantees all payments to its creditors. The state-owned company is a going concern despite its poor financial position.

Those requirements for disclosure are essentially in the accounting framework, so they’re embedded in U.S. When financial statements of one or more prior periods are presented on a comparative basis with financial statements of the current period, reporting guidance is provided in AS 3105. After the auditor has evaluated management’s plans, he concludes whether he has substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time.

Going concern guidance for review engagements

Statements should also show management’s interpretation of the conditions and management’s future plans. Accountants who view a company as a going concern generally believe a firm uses its assets wisely and does not have to liquidate anything.

And if those funds are expended as intended, the portions of the loan that are expended in accordance with the program would be forgiven. The requirement to assess a company’s ability to continue as a going concern is a relatively new requirement – dating back to 2017.

How a going concern qualification affects a business

If a public or private company reports that its auditors have doubts about its ability to continue as a https://www.bookstime.com/, investors may take that as a sign of increased risk, although an emphasis of matter paragraph in an audit report does not necessarily indicate that a company is on the verge of insolvency. Despite this, some fund managers may be required to sell the stock to maintain an appropriate level of risk in their portfolios.

  • In-depth analysis, examples and insights to give you an advantage in understanding the requirements and implications of financial reporting issues.
  • Certain expenses and assets may be deferred in financial reports if a company is assumed to be a going concern.
  • The write-down process includes taking a loss on the income statement, so net income already doing badly will get even worse.
  • The most critical reason that auditors might fail to issue a going-concern opinion, however, could be a fundamental misunderstanding of the assumption itself.
  • In this case, the present study did not predict the opinion which the companies would possibly receive when changing the auditor.

On one hand, the opinion shopping does not affect the going concern audit opinion in which it means the auditor’s independence is not affected even though he/she is threatened to lose clients, should he/she provide the going concern audit opinion . On the other hand, Lennox asserted that the opinion shopping influenced the going concern audit opinion. I should also just quickly point out that’s the standard issued by FASB for nongovernmental entities. About the Company’s ability to continue as a going concern within the next twelve months from the date these financial statements are available to be issued. The ability to continue as a going concern is dependent upon profitable future operations, positive cash flows, and additional financing. The financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future.

The liquidity ration to the going concern audit opinion

If the auditor concludes there is substantial doubt, he should consider the adequacy of disclosure about the entity’s possible inability to continue as a Going Concern for a reasonable period of time, and include an explanatory paragraph in his audit report to reflect his conclusion. The amount of data now available places a prudent investor or lender in a position to make a reasoned determination about an entity’s ability to continue as a going concern, with more current financial data than was examined by the auditor as of the date the financial statements are issued. The financial statements are not the only, or the most current, source of information from which to make an investment decision. The going concern audit opinion is also related to the financial situation of a company, in this case, the liquidity ratio and the leverage level. The liquidity ratio aims to measure the company’s ability to fulfill the current liabilities (Weston and Brigham, 2001; Masyitoh and Adhariani, 2010). The smaller the liquidity of a company, it shows the struggle of the company in paying out the liabilities.

Going Concern

Assess its plans to mitigate events or conditions that may cast significant doubt on the organisation’s ability to continue as a going concern. In particular, management would be expected to reassess the availability of finance.

The auditor evaluates an entity’s ability to continue as a going concern for a period not less than one year following the date of the financial statements being audited . The auditor considers such items as negative trends in operating results, loan defaults, denial of trade credit from suppliers uneconomical long-term commitments, and legal proceedings in deciding if there is a substantial doubt about an entity’s ability to continue as a going concern. If so, the auditor must draw attention to the uncertainty regarding the entity’s ability to continue as a going concern, in their auditor’s report. On the other hand, inappropriate use of the going concern assumption by an entity may cause the auditor to issue an adverse opinion on the financial statements. This Guidance provides a framework to assist directors, audit committees and finance teams in determining whether it is appropriate to adopt the going concern basis for preparing financial statements and in making balanced, proportionate and clear disclosures.

Is a going concern a qualified opinion?

A qualified opinion, on the other hand, is not what a business wants to see. It's given when the auditor has doubts about the company and the assumption that it is a going concern. A qualified opinion can be a concern to investors, lenders and other stakeholders.

On the other hand, if you’re operating a business in the hospitality industry — restaurants, bars, airlines, cruise ships, things like that — obviously the conditions and events give rise to going concern matters. Certainly, it would be hard to deny that the pandemic and COVID-19 create events and conditions that may cause doubt about an organization’s ability to continue as a going concern. Depending on the sector in which the entity operates, it may or may not cause significant doubt. The example that everybody uses these days is, if your business happens to make toilet paper, the environment is probably not leading you to question your ability to continue as a going concern. Auditors may need refreshers on what the auditing standards say about going concern and how they interact with the accounting requirements. Receive timely updates on accounting and financial reporting topics from KPMG. In-depth analysis, examples and insights to give you an advantage in understanding the requirements and implications of financial reporting issues.

A Word on the Persistent Low Morale of the Audit Profession

The elements of management’s plans that the auditor considered to be particularly significant to overcoming the adverse effects of the conditions or events. See our Guide to annual financial statements – COVID-19 supplement, which illustrates possible examples of going concern and liquidity risk disclosures. When companies prepare their year-end financial statements1 under IFRS® Standards, disclosures around going concern are especially important to achieve transparency and provide users with relevant information. Management assesses how the current events and conditions impact its operations, in particular, its revenue, expenses, funding and liquidity, with the key focus being whether it will have sufficient liquidity to continue to meet its obligations as they fall due.

The data sources of the study were from the annual financial statements of the manufacturing companies that were listed in Indonesian Stock Exchange (ISE/BEI) during the period of 2009–2013. The auditor’s accountability encompasses providing the assurance service in the form of an evaluation of the financial statement made by the agent about the reasonableness of the financial statement. The audit opinion given by the auditor can be a measurement for the principals to assess the agent’s performance in managing the company’s business activities. Results of the hypothesis examination indicated that the variables of opinion shopping and leverage affected the going concern audit opinion, whereas the variables of audit client tenure, audit lag and liquidity ratio did not affect the going concern audit opinion. FASB only requires the evaluation for the year following the date the financial statements are issued . Events following this one year period have no bearing on the current year going concern decisions.

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