Guide to Going Concern Assessments

For example, a company’s annual expenses may so vastly outweigh its revenue that it can’t reasonably make a profit. On the other hand, a company may be operating at a profit buts its long-term liabilities are coming due and not enough money is being made. There are situations that may arise when the auditor may request management to make an assessment, or extend their original assessment of going concern. If management refuse to make, or extend, an assessment of going concern the auditor will consider the implications for the report. Anticipated costs connected to a premature termination of business operations should be provided for.

An entity is assumed to be a going concern in the absence of significant information to the contrary. An example of such contrary information is an entity’s inability to meet its obligations as they come due without substantial asset sales or debt restructurings. If such were not the case, an entity would essentially be acquiring assets with the intention of closing its operations and reselling the assets to another party. https://www.bookstime.com/articles/in-kind-donations Going concern concept is an assumption that a business entity will not be forced to halt its operations in the near term and will not need to liquidate its assets. The business is expected to operate for the foreseeable future or at least for the next twelve months. If the auditor considers the management report to be inadequate in this regard, he must qualify his audit opinion in terms of the management report.

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It’s given when the auditor has doubts about the company and the assumption that it is a going concern. Thus, the value of an entity that is assumed to be a going concern is higher than its breakup value, since a going concern can potentially continue to earn profits. It is possible for a company to mitigate an auditor’s view of its going concern status by having a third party guarantee the debts of the business or agree to provide additional funds as needed. By doing so, the auditor is reasonably assured that the business will remain functional during the one-year period stipulated by GAAS.

– In the early 2000s, General Motors was experiencing great financial difficulties and was ready to declare bankruptcy and close operations all over the world. In normal circumstances, GM would not be considered a going concern, but since the Federal government stepped in, we have no reason to believe that GM will cease to operate. In both cases a paragraph explaining the basis for the qualified or adverse opinion will be included after the opinion paragraph and the opinion paragraph will be qualified ‘except for’ or express an adverse opinion. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. The going concern approach utilizes the standard intrinsic and relative valuation approaches, with the shared assumption that the company (or companies) will be operating perpetually.

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– Assume Microsoft is currently suing a small tech company for copyright violation over its software package. Since this software package is the only operation the small tech company does, losing this lawsuit would be detrimental. The small tech company is not a going concern because it is probable they will be out of business after the lawsuit is settled.

Accountants use going concern principles to decide what types of reporting should appear on financial statements. Companies that are a going concern may defer reporting long-term assets at current value or liquidating value, but rather at cost. A company remains a going concern when the sale of assets does not impair its ability to continue operation, such as the closure of a small branch office that reassigns the employees to other departments within the company.

What is the role of a financial auditor?

When faced with such a requirement, candidates must be careful not to produce a list of generic audit procedures, but instead identify and highlight the factors from the scenario that may call into question the entity’s ability to continue as a going concern. Once these factors have been identified, candidates should then be able to think about the procedures the auditor may adopt to establish whether the factors mean the going concern basis of accounting is appropriate in the circumstances, or not. Candidates attempting AA will need to have a sound understanding of the concept of going concern. Among other syllabus requirements, candidates must ensure they are aware of the respective responsibilities of auditors and management regarding going concern. The provisions in ISA 570, Going Concern deal with the auditor’s responsibilities in relation to management’s use of the going concern basis of accounting in the preparation of the financial statements.

A financial auditor is hired by a business to evaluate whether its assessment of going concern is accurate. After conducting a thorough review (audit) of the business’s financials, the auditor will provide a report with their assessment. In order for a company to be a going concern, it usually needs to be able to operate with a significant debt restructuring or massive financing overhaul. Therefore, it may be noted that companies that are not a going concern may need external financing, restructuring, asset liquidation, or be acquired by a more profitable entity. A company may not be a going concern based on the financial position on either its income statement or balance sheet.

Qualified opinion

A firm’s inability to meet its obligations without substantial restructuring or selling of assets may also indicate it is not a going concern. If a company acquires assets during a going concern principle time of restructuring, it may plan to resell them later. Consider how a single substantial lawsuit, default on a loan, or defective product can jeopardize the future of a company.

• If a business is not a going concern, it means it’s gone bankrupt and its assets were liquidated.
• Statements should also show management’s interpretation of the conditions and management’s future plans.
• The Federal government took more than $250,000 worth or Gibson’s inventory and slapped them with large fines for violating international laws.
• Listing of long-term assets normally does not appear in a company’s quarterly statements or as a line item on balance sheets.