Question

In: Accounting

What are expectation from auditors when a company facing economic difficulty and may not be able...

What are expectation from auditors when a company facing economic difficulty and may not be able to continue as a going concern?

Solutions

Expert Solution

The going concern assumption is a fundamental principle in the preparation of financial statements. Under the going concern basis of accounting an entity would be required to prepare the financial statements on the assumption that:

• An entity is a going concern

• It would continue its operations for an unforeseeable future.

The auditor of the entity is required to obtain sufficient appropriate audit evidence to ensure whether a material uncertainty exists about the entity’s ability to continue as a going concern.

following three situations in terms of the going concern assumption that impacts an auditor’s opinion:

Use of the going concern assumption is inappropriate: If the financial statements have been prepared using the going concern basis of accounting but, in the auditor’s judgement, management’s use of the going concern basis of accounting in the preparation of the financial statements is inappropriate, the auditor would express an adverse opinion.

Use of the going concern assumption is appropriate but a material uncertainty exists: In case an entity considers the going concern assumption to be appropriate, but a material uncertainty exists, then such an entity would have to make disclosure of the fact in the financial statements of presence of uncertain future events or conditions that may result in the entity being unable to continue in business in the foreseeable future. The auditor will consider the adequacy of the disclosures made in the financial statements by management and accordingly, modify his/her audit report by including a separate section which would explain that material uncertainty related to going concern exists. In case, the auditor is of the opinion that the disclosure provided is inadequate or in case no disclosure has been provided, the auditor would express a qualified or an adverse opinion.

Management unwilling to make or extend its assessment: In situations where an auditor has requested management to make an assessment, or extend their original assessment of going concern, however, management has refused to make, or extend such an assessment then the auditor would consider the implications for the report.


Related Solutions

What are some expectations from auditors when entities face economic difficulties? Support your answer with some...
What are some expectations from auditors when entities face economic difficulties? Support your answer with some examples.
Question 2 “If a company is in financial difficulty, a secured creditor or the court may...
Question 2 “If a company is in financial difficulty, a secured creditor or the court may put the company into receivership.” REQUIRED: Answer the following questions in relation to receivership. Please support your analysis with relevant legislation and/or case law. a) Who/what is a receiver? Who appoints a receiver and why? b) What is the effect of the receiver’s appointment on • the company; • the directors; • shareholders; • secured creditors; and • unsecured creditors?
What is Rational Expectation? How are “rational” economic agents expected to behave? What is Bounded Rationality?...
What is Rational Expectation? How are “rational” economic agents expected to behave? What is Bounded Rationality? As an outcome, how does bounded rationality differ from rational expectations?
what are some economic differences that one may face in an international company.
what are some economic differences that one may face in an international company.
what is going on in the world from an economic standpoint that may impact Shoedazzle business?
what is going on in the world from an economic standpoint that may impact Shoedazzle business?
What is a key difficulty to be overcome when selecting observed seismograms for the design of...
What is a key difficulty to be overcome when selecting observed seismograms for the design of a structure? Briefly summarize two alternatives.
What are the economic factors versus the environmental factors facing the oil industry?
What are the economic factors versus the environmental factors facing the oil industry?
What is the expectation for the number of face cards (aces not included) when 10 cards...
What is the expectation for the number of face cards (aces not included) when 10 cards are drawn, with replacement, from a standard deck
A researcher may have difficulty separating moral hazard from adverse selection. Use an example to show...
A researcher may have difficulty separating moral hazard from adverse selection. Use an example to show why this may be the case.
A researcher may have difficulty separating moral hazard from adverse selection. Use an example to show...
A researcher may have difficulty separating moral hazard from adverse selection. Use an example to show why this may be the case.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT