Auditors are required to consider going concern for a period of 12 months from the date of the signature of the audit opinion. ASIC has consistently raised the issue of Going Concern as they believe there is inadequate disclosure regarding the ability of entities to continue in business, particularly if economic climate factors are taken into account and this will affect the opinion provided by the auditors.
Planning Phase
Going Concern issues should be discussed among the entire Audit team and become part of the planning documentation. In addition, dialogue between the client and the audit engagement team is critical early in the audit – well before the audit team makes an onsite appearance to identify going concern issues early in the engagement.
TIP: Understanding the business is key – consider:
- New competitors
- Industry “health” (eg competitors or complimentary businesses going into administration; demand – increasing or decreasing?)
- Business costs (employees, raw materials)
Risk Indicators & Audit Evidence
The auditor’s assessment of risk drives the level of going concern work. The engagement team needs to gather documentation and speak with entity management about how they are addressing each of these risks which might affect the financial statements. Auditors need to ensure that they challenge assumptions in management’s budgets to form an opinion about how realistic this might be. Some risk indicators which might indicate going concern issues are:
- Negative operating cashflows / consistent losses / overdraft limits & use
- Net liability position
- Onerous bank covenants, breach history
- Significant unfunded commitments
- Sales of key assets/divisions
- Loss of key personnel / recent personnel restructures
- Obsolete stock levels
TIP: Professional skepticism should be applied. Senior members of the Audit Team should be responsible for conducting or at the very least, reviewing this part of the audit in detail, simply because lack of experience from juniors may not elicit the detailed responses necessary.
TIP: Make sure you have sufficient, appropriate audit evidence to support your Going Concern assumption.
Review, Evaluation & Report of “Going Concern”
The audit guidelines flowchart provided in ASA 570 Going Concern can be used to guide your determination of the audit opinion to be provided in respect of going concern.
TIP: As you move through the flowchart, link or highlight any documentation you have gathered to justify your audit opinion at each decision tree of the chart.
TIP: Make sure that you are consistent in your report – for example, are covenants discussed in the liabilities section, but not covered in going concern?
TIP: Speak to the client early to encourage them to write their going concern disclosures as soon as possible, since these disclosures can be quite controversial.
The audit documentation around the conclusions about Going Concern should be quite detailed, particularly if the audit evidence has identified significant uncertainties in relation to this requirement.
Conclusion:
Even though final figures may not be available, the planning, procedures, evidence gathering and potential narrative regarding Going Concern can be well underway as soon as an audit is commenced for any entity.
TIP: Remember ASIC requirements: “if not documented, it’s not done”. Carmen Ridley, AASB Board Member and independent industry consultant (www.afrs.com.au) compiled the content of this article. You can access Carmen’s bio for her qualifications. She also contributes regular blog and newsletter articles for CaseWare Australia & New Zealand, as well as providing Australian content for our template developments.
This article is proudly sponsored by CaseWare Australia & New Zealand (distributors of world renowned CaseWare software and developers of the Australian & New Zealand Audit and Financial Reporting templates).
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