Question

(a) What are the auditor's responsibilities for 'going concern assumptions’'? (250 - 300 words) (b) Maxim Stewart is the partner in charge of the audit for a new client, Southern Southerland (SS). The client engaged Maxim's audit firm in November 2017, in preparation for the 2018 audit. From 30 January 2018 onwards, SS has consistently paid its suppliers late, well in excess of the suppliers' agreed credit terms. This has resulted in some suppliers demanding cash on delivery from SS. Maxim is also aware from his review of correspondence between SS and its bank that the company has been experiencing cash flow problems since 2016. Required: Identify any significant events or conditions that individually or collectively may cast significant doubt on SS's ability to continue as a going concern (290 - 320 words). Please provide reference also

Answer 1

a) Going concern is a Fundamental Accounting Assumption that the entity will continue its operations for the forseeable future. Generally financial statements are prepared on going concern basis unless the management intends otherwise.Special purpose financial statements may or may not be prepared in accordance with a financial reporting framework for which the going concern basis of accounting is relevant (e.g., the going concern basis of accounting is not relevant for some financial statements prepared on a tax basis). When the use of the going concern basis of accounting is appropriate, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business. The following are the respnsibilites of an auditor under going concern assumption:-

1. The auditor’s responsibilities are to obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements, and to conclude, based on the audit evidence obtained, whether a material uncertainty exists about the entity’s ability to continue as a going concern. These responsibilities exist even if the financial reporting framework used in the preparation of the financial statements does not include an explicit requirement for management to make a specific assessment of the entity’s ability to continue as a going concern.

2. auditor should review the events after balance sheet date having an effect on the going concern assumption eg:- earthquake,fire etc

3. auditor should analyse and discuss the latest cashflow statement, operating budget and profit forecast.

4. auditor should obtain written representration in respect of above matters.