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 !

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
19.   Under to PSA 260, those matters that arise from the audit of financial statements and...
19.   Under to PSA 260, those matters that arise from the audit of financial statements and in the opinion of the auditor, are both important and relevant to those charged with governance in overseeing the financial reporting and disclosure process are called a.   Audit matters of governance interest b.   Significant audit matters c.   Auditor findings d.   Material misstatement in the financial statements 20.   Audit matters of governance interest to be communicated to those charged with governance ordinarily include a.   Audit...
Various Reporting Situations. Assume that the auditors encountered the following separate situations when deciding on the...
Various Reporting Situations. Assume that the auditors encountered the following separate situations when deciding on the report to issue for the current-year financial statements. (If the kind of opinion depends on the reason for the scope limitation (if applicable), the degree of materiality, and/or the pervasiveness of the matter discussed, then choose an answer choice that encompasses the two possible opinion types.) The auditors decided that sufficient appropriate evidence could not be obtained to complete the audit of significant investments...
Question 7 Abu Ltd had 100,000 shares in issue, but then makes a 1 for 5...
Question 7 Abu Ltd had 100,000 shares in issue, but then makes a 1 for 5 rights issue on 1 October 2017 at a price of GH¢1. The market value on the last day of quotation with rights was GH¢1.60. Total earnings are GH¢50,000 in 2017 and GH¢40,000 in 2016. Required: Calculate the Earnings per share for the year ended 31 December 2017 and the corresponding figure for 2016 in accordance with IAS 33: Earnings per share Question 5 Adom...
Hi. I want to get feedback on this question. What should i add or remove or...
Hi. I want to get feedback on this question. What should i add or remove or any correction. Boulded written is question and regulat writing is answer. Please guide. Thank you. BACKGROUND Apply audit risk and materiality concepts to address the following circumstances regarding Able & Baker LLP’s audits of the financial statements of Foster Engineering, Inc. 1. Able & Baker LLP auditors are beginning their audit of Foster’s 2017 financial statements. Because of changes in the market and increased...
Framework for the Preparation and Presentation of Financial Statements, the term used with respect to Income...
Framework for the Preparation and Presentation of Financial Statements, the term used with respect to Income which arises in the ordinary course of business is: a. Gain b. Profit c. Sales d. Revenue e. Equity Ltd a Debit amount of $58,300 including 10% GST, was posted to the Accounts Receivable Control account on the last day of 30th June, 2019. Originally, from which Special Journal would this posting of $58,300 most likely have come from? a. Purchases b. Cash Payments...
Evaluating a potential client requires which of the following steps? Question 21 options: 1) Communicate with...
Evaluating a potential client requires which of the following steps? Question 21 options: 1) Communicate with the predecessor auditor. 2) Preplan the audit. 3) Establish the terms of the engagement. 4) None of these. Question 22 (3 points) What factor would most likely would cause a CPA not to accept a new audit engagement? Question 22 options: 1) the prospective client's unwillingness to permit inquiry of its legal counsel 2) the inability to review the predecessor auditor's documentation 3) the...
During the trial, lawyers for the accused said that the men believed that the accounting decisions...
During the trial, lawyers for the accused said that the men believed that the accounting decisions they made were appropriate at the time, and that the accounting treatment was approved by Nortel’s auditors from Deloitte & Touche. Judge Marrocco accepted these arguments. Marrocco added he was “not satisfied beyond a reasonable doubt” that the trio (i.e., Dunn, Beatty, and Gollogly) had “deliberately misrepresented” financial results. Given the facts of the case, do you believe Judge Marrocco’s decision was justified? Explain....
Discuss how the respective organizations’ relations with stakeholders could have potentially been affected by the events...
Discuss how the respective organizations’ relations with stakeholders could have potentially been affected by the events that took place at Enron and how the situation could have been dealt with differently to prevent further damage? THE FALL OF ENRON: A STAKEHOLDER FAILURE Once upon a time, there was a gleaming headquarters office tower in Houston, with a giant tilted "£"' in front, slowly revolving in the Texas sun. The Enron Corporation, which once ranked among the top Fortune 500 companies,...
What role could the governance of ethics have played if it had been in existence in...
What role could the governance of ethics have played if it had been in existence in the organization? Assess the leadership of Enron from an ethical perspective. THE FALL OF ENRON: A STAKEHOLDER FAILURE Once upon a time, there was a gleaming headquarters office tower in Houston, with a giant tilted "£"' in front, slowly revolving in the Texas sun. The Enron Corporation, which once ranked among the top Fortune 500 companies, collapsed in 2001 under a mountain of debt...
Discuss ethical issues that can be identified in this case and the mode of managing ethics...
Discuss ethical issues that can be identified in this case and the mode of managing ethics Enron finds itself in this case. How would you describe the ethical culture and levels of trust at Enron? Provide reasons for your assessment. THE FALL OF ENRON: A STAKEHOLDER FAILURE Once upon a time, there was a gleaming headquarters office tower in Houston, with a giant tilted "£"' in front, slowly revolving in the Texas sun. The Enron Corporation, which once ranked among...