Question
In: Accounting
Do you think that auditors are hesitant to recognize a going concern in case they are...
Do you think that auditors are hesitant to recognize a going concern in case they are wrong? Why or why not ?
Solutions
Expert Solution
According to the going concern concept, the business a assumed to continue for an infinite period during which it will purchase assets and owed liabilities. The auditor evaluates the ability of a company to continue as a going concern for a maximum period one year. Such a defined period approach fails to test the company on various activities which occurs during the life span of the company like loan defaults, denial to trade credit, contingent litigation, long term commitments, etc.
Sometime the business strategically assigned a third party guarantor to give surety on the company debts. This assures the auditors that the company can manage its debts and the business will remain operational for one year. However the auditor fails to evaluate the solvency and liquidity position of the business as it relies on the third party vendor.
Thus in some cases, the auditor's opinion are wrong in terms of a going concern and they hesitate on this.
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