Question

Describe the going concern assumption and describe how it is considered by auditors.

Answer 1

The term going concern implies that entity will continue for ever without any predetermined life for it. Thus fundamental accounting assumption calls for considering all entities shall run for indefinate period of time unless cirumstances indicate otherwise.

This assumption is fundamental for presentation balancesheet values and recognisation of unrelaised gains and losses in income statement. As long as going concern assumption is hold by the accountant and by management perception, all fixed assets are valued at their book values without considering their current market values. Inventory shall be valued at lower of cost or market value.

Role of auditor in considering going concern assumption is not primary. But in performing his duties, when checking the proper valuation of assets based on accounting standards and GAAP, he had obtain reasonable assurance from the management about their perception on continutiy of the entity.

In the event of any natural calamities occuring after balancesheet date and management opts not to adjust those values into balancesheet, auditor had to cross check the possibility of entity to run in near future due the impact of disasters of any kind.

Auditors considers going concern on the basis of

(1) Estimated quantum of loss done and percentage of business assets damaged.

(2) Estimated future earnings from restructured organisation.

(3) Contnuing huge losses and capital lost as a result of it.

(4) Firms ability to pay for its long term debts after restructuring.