Question

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

Answer 1

(ii) 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?

The determination of the adequacy of the financial statement disclosure, may involve determining whether the information explicitly draws the reader’s attention to the possibility that the entity may be unable to continue realizing its assets and discharging its liabilities in the normal course of business.

The following is an illustration of an Emphasis of Matter paragraph when the auditor is satisfied as to the adequacy of the note disclosure:

Emphasis of Matter

“Without qualifying our opinion, we draw attention to Note X in the financial statements which indicates that the Company incurred a net loss of ZZZ during the year ended December 31, 20XX and, as of that date, the Company’s current liabilities exceeded its total assets by YYY. These conditions, along with other matters as set forth in Note X, indicate the existence of a material uncertainty which may cast significant doubt about the Company’s ability to continue as a going concern.”

In extreme cases, such as situations involving multiple material uncertainties that are significant to the financial statements, the auditor may consider it appropriate to express a disclaimer of opinion instead of adding an Emphasis of Matter paragraph. ISA 705 (Revised) establishes requirements and provides guidance on this issue.

The following is an illustration of the relevant paragraphs when a qualified opinion is to be expressed:

Basis for Qualified Opinion

“The Company’s financing arrangements expire and amounts outstanding are payable on March 19, 20XX. The Company has been unable to re-negotiate or obtain replacement financing. This situation indicates the existence of a material uncertainty which may cast significant doubt on the Company’s ability to continue as a going concern and therefore it may be unable to realize its assets and discharge its liabilities in the normal course of business. The financial statements (and notes thereto) do not fully disclose this fact.

Qualified Opinion

In our opinion, except for the incomplete disclosure of the information included in the preceding paragraph, the financial statements give a true and fair view of (present fairly, in all material respects) the financial position of the Company at December 31, 20XX and of its financial performance and its cash flows for the year then ended in accordance with ...”

The following is an illustration of the relevant paragraphs when an adverse opinion is to be expressed:

Basis for Adverse Opinion

“The Company’s financing arrangements expired and the amount outstanding was payable on December 31, 20XX. The Company has been unable to re-negotiate or obtain replacement financing and is considering filing for bankruptcy. These events indicate a material uncertainty which may cast significant doubt on the Company’s ability to continue as a going concern and therefore it may be unable to realize its assets and discharge its liabilities in the normal course of business. The financial statements (and notes thereto) do not disclose this fact.

Adverse Opinion

In our opinion, because of the omission of the information mentioned in the preceding paragraph, the financial statements do not give a true and fair view of (or do not present fairly, in all material respects) the financial position of the Company as at December 31, 20XX, and of its financial performance and its cash flows for the year then ended in accordance with... (and do not comply with...) ...”

(ii) Where management has validly and actively refused to undertake financial-statements-wide assessment of its going concern status?

In certain circumstances, auditor may believe it necessary to request management to make or extend its assessment. If management is unwilling to do so, a qualified opinion or a disclaimer of opinion in the auditor’s report may be appropriate, because it may not be possible for the auditor to obtain sufficient appropriate audit evidence regarding the use of the going concern assumption in the preparation of the financial statements, such as audit evidence regarding the existence of plans management has put in place or the existence of other mitigating factors.