Question

5. Consideration of going concern assumption underlying the financial statements preparation and presentation remains visibly an...

5. Consideration of going concern assumption underlying the financial statements preparation and presentation remains visibly an important task during the external audit. International Financial Reporting Standards (IFRS) require that financial statements are prepared on a going concern basis unless management intends to liquidate the entity or to cease operations or has no realistic alternative but to do so. When an entity does not prepare its financial statements on a going concern basis, IFRS requires disclosure of the basis used by the entity. Moreover, under IFRS, disclosures are required when management is reasonably aware of material uncertainties related to events and conditions that may cast significant doubt about an entity’s ability to continue as a going concern or when the substantial doubt is alleviated as a result of consideration of management’s plans. Required a. Clearly distinguish between the management’s responsibilities and auditor’s responsibilities relating to going concern b. Set out any 2 financial conditions and 2 non-financial conditions that may cast doubt about the going concern assumption of management and clearly indicate how each of those conditions will impact on the entity’s going concern c. Detail out any six procedures the auditor should perform following the identification of events that may cast doubt about the assumption that will enable him gather sufficient appropriate audit evidence in concluding on whether material uncertainty exists d. Describe how and why the following scenarios will impact on the auditor’s report (i) Where there is appropriate use of going concern but management has only made a single line statement of a material uncertainty that is concluded upon by the auditor. (ii) Where management has validly and actively refused to undertake financial-statements-wide assessment of its going concern status

Homework Answers

Answer #1

(A)
Responsibilities of the Management

The preparation of the financial statement requires the management to assess the entity’s ability to continue as a going concern even if the financial reporting framework does not include an explicit requirement to do so
Factor like degree of uncertainty , Subsequent events and External factors are relevant for making a judgement by the management to assess the entity’s ability to continue as a going concern

Responsibilities of the Auditor

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.

However, the potential effects of inherent limitations on the
auditor’s ability to detect material misstatements are greater for future events or conditions that may cause an entity to cease to continue as a going concern. The auditor cannot predict such future events or conditions. Accordingly, the absence of any reference to a material uncertainty about the entity’s ability to continue as a going concern in an auditor’s report cannot be viewed as a guarantee as to the entity’s ability to continue as a going concern.


(B)

Financial Factors :

• Net liability or net current liability position.
• Fixed-term borrowings approaching maturity without realistic prospects of renewal or
repayment; or excessive reliance on short-term borrowings to finance long-term assets
• Indications of withdrawal of financial support by creditors.
• Negative operating cash flows indicated by historical or prospective financial
statements.
• Adverse key financial ratios.
• Substantial operating losses or significant deterioration in the value of assets used to
generate cash flows.
• Arrears or discontinuance of dividends.
• Inability to pay creditors on due dates.
• Inability to comply with the terms of loan agreements.


Non Financial Factors ;

• Management intentions to liquidate the entity or to cease operations.
• Loss of key management without replacement.
• Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
• Labor difficulties.
• Shortages of important supplies.
• Emergence of a highly successful competitor
• Non-compliance with capital or other statutory or regulatory requirements, such as
solvency or liquidity requirements for financial institutions.
• Pending legal or regulatory proceedings against the entity that may, if successful,
result in claims that the entity is unlikely to be able to satisfy.
• Changes in law or regulation or government policy expected to adversely affect the entity.


(C)

Audit procedures that are relevant for auditors, may include the following:

?- Analyzing and discussing cash flow, profit and other relevant forecasts with
     management.
? -Analyzing and discussing the entity’s latest available interim financial statements.
? -Reading the terms of debentures and loan agreements and determining whether any have
     been breached.
? -Reading minutes of the meetings of shareholders, those charged with governance and
      relevant committees for reference to financing difficulties.
? -Inquiring of the entity’s legal counsel regarding the existence of litigation and claims
     and the reasonableness of management’s assessments of their outcome and the estimate of their
     financial implications.
? -Confirming the existence, legality and enforceability of arrangements to provide or
      maintain financial support with related and third parties and assessing the financial ability of such
    parties to provide additional funds.
    -Determining the adequacy of support for any planned disposals of assets

(D)

The management’s uses of going concern
assumption

Material uncertainty wthether the events or
sonditions constitute a
material uncertainty

The adequacy

of related

disclosures in

the financial

statements

AUDITORS’ OPINION

Appropriate

Do not exists

Adequate

Unmodified opinion

Appropriate

Exists

Adequate

Unmodified opinion (but

have to include an Emphasis of matter paragraph in the auditor’s report

Appropriate

Exists

Disclosures are not made

Qualified opinion or Adverse opinion

InAppropriate

Exist

Unimportant

Adverse opinion

InAppropriate

Material uncertainties are significant to the financial statements as a whole

Unimportant

Disclaimer of opinion

This question can be answered in multiple ways. I tried to summarise and keep it concise . Hope you find it useful. Thanks and Goodluck !

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