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