Definition

Going concern assumption means the entity is able and intends to continue its operations for the foreseeable future. If the entity is a going concern, financial statement should reflect the concept in terms of assets realization and liabilities discharge.

Scope of ISA 570

This ISA defines the auditor’s responsibilities regarding going concern implications used by management while preparing financial statements.

Responsibility for Assessment of the Entity’s Ability to Continue as a Going Concern

The financial reporting framework and IAS-1 requires management to assess the entity’s ability to continue as going concern in addition to financial statement disclosures.

Going concern assessment remains a fundamental requirement of financial statement preparation irrespective of the financial framework’s requirement.

Additionally, management is responsible for applying judgment about uncertain events/conditions expected in the foreseeable future as part of their going concern assessment. Similarly, the complexity, business nature, and challenges of the events or conditions need to be considered. Likewise, the impact of the subsequent events needs to be considered.  

Responsibility of the auditor

The auditor’s responsibility is to obtain sufficient and appropriate audit evidence on the appropriateness of management’s use of the going concern assumption. However, the auditor’s use of the going concern assumption does not guarantee that the entity is a going concern, as the auditor is not expected to predict future events/conditions.

Objectives of ISA 570

The following are the objectives of the ISA 570

• If material uncertainty exists, it causes significant doubt about the entity’s ability to continue its operations in the foreseeable future.
•  Obtain sufficient and appropriate audit evidence on the entity’s ability to continue as a going concern.
• Appropriately report the use of going concern assumption.

Requirements of ISA 570

Following are the requirements of ISA 570.

1. The auditor needs to assess whether management has performed a preliminary assessment of the entity’s ability to continue as a going concern.
2. Inquire with management if uncertain conditions exist that significantly impact the entity’s ability to continue as a going concern.
3. While performing audit procedures, the auditor needs to remain alert to identify events that may cast significant doubt on the entity’s ability to continue as a going concern.
4. Evaluate management’s assessment of the status of the going concern.
5. The management’s evaluation needs to cover 12 months from the date of the financial statement. However, if the assessment covers less than 12 months, the auditor shall request that the management cover at least 12 months.

If uncertain events/conditions are identified while auditing

1. Evaluate management’s plan to improve the situation related to identified uncertain events/conditions. If management’s plans are feasible in the given circumstances, the assessment needs to be made.
2. Review cash flow forecast in terms of data reliability and adequacy of assumptions.
3. Consider additional facts and obtain written representation.

Auditor’s conclusion

1. Evaluate whether sufficient and appropriate audit evidence was obtained on the entity’s ability to continue as a going concern. This helps ensure whether the use of the going concern assumption is appropriate in the given circumstances.
2. Based on evidence, the auditor needs to judge the magnitude of material uncertainty in terms of occurrence likelihood and potential impact. So, disclosure may be necessary for compliance and framework purposes.  
3. In the case of material uncertainty, the disclosure needs to be adequate in line with the applicable financial reporting framework.

Implications for the Auditor’s Report

When the use of going concern assumption is not appropriate

• An adverse opinion is issued when the auditor concludes that the use of the going concern assumption is inappropriate.

When material uncertainty exists, appropriate disclosure is made.

1. Include an additional paragraph in the audit report named “Material uncertainty related to going concern.” This paragraph should draw attention to the note in the financial statement explaining the nature of material uncertainty that significantly impacts the business’s ability to continue as a going concern.

When material uncertainty exists, appropriate disclosure is NOT made.

1. Qualified/adverse report is issued.
2. Based on qualified/adverse opinion, the state ”opinion is qualified/adverse based on the material uncertainty that exists but is not disclosed in the financial statement.”

Events/conditions that create material uncertainty 

Financial factors include but are not limited to the following.

1. Adverse current ratio.
2. Excess reliance on short-term borrowings.
3. No more support from creditors.
4. Adverse ratios.
5. Substantial financial losses.
6. Inability to access financing.
7. Suppliers not approving credit.

Operating factors include the following,

1. Key management loss.
2. Loss of market share.
3. Short supplies.
4. Intense emerging competition.
5. Declined sales

Wrap up

Going concern assumption refers to an entity’s ability and intention to continue as a going concern. Management is primarily responsible for assessing the entity’s ability to continue as a going concern. On the contrary, the auditor is responsible for evaluating the going concern assessment made by management.

Further, the auditor is responsible for obtaining sufficient and appropriate audit evidence on the entity’s ability to continue as a going concern.

The going concern assumption directly impacts the audit report. If management’s assumption of the going concern is inappropriate, the auditor must qualify/adversely assess the audit opinion.

If the use of the going concern assumption is appropriate but material uncertainty exists and management discloses the same in the financial statement, the auditor is required to add a paragraph and refer attention to the financial statement note where the nature of material uncertainty is disclosed.

If the use of going assumption is appropriate but material uncertainty exists and management does not disclose uncertainty, in this case, the auditor must modify/qualify the audit opinion.