The audit of ‘going concern’ and material uncertainties are key concepts for auditors. The current pandemic has increased the risk of ‘going concern’ for many businesses. Aegis&Co. explains what is ‘going concern’ and shares key issues and factors for companies to review during Covid-19.
Going Concern and its Audit Concept – Management’s Responsibilities
ISA 570 states that under the going concern assumption, an entity is viewed as continuing in business for the foreseeable future. Financial Statements are prepared on a going concern basis, unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so.
Management’s responsibility for Going Concern
It is the responsibility of management to assess whether the use of the going concern basis of accounting is appropriate, or not, when they are preparing the financial statements on a whole.
In order to come to the conclusion if an entity is able to continue in business for the next fiscal year, management will have to make knowledgeable decisions on various uncertain future outcomes of events or conditions.
The following factors are relevant to that judgment:
- The degree of uncertainty associated with the outcome of an event or condition increases significantly the further into the future an event or condition or the outcome occurs. For that reason, most financial reporting frameworks that require an explicit management assessment specify the period for which management is required to take into account all available information.
- The size and complexity of the entity, the nature and condition of its business and the degree to which it is affected by external factors affect the judgment regarding the outcome of events or conditions.
- Any judgment about the future is based on information available at the time at which the judgment is made. Subsequent events may result in outcomes that are inconsistent with judgments that were reasonable at the time they were made.
Unwillingness of Management to make or extend its initial assessment
If the auditor requests management to make an assessment, or extend their initial assessment of going concern and management refuses to, 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.
COVID-19 and going concern: increased risk of material uncertainties
The audit of going concern and material uncertainties are key concepts for auditors. The current pandemic has increased the risk of going concern for many entities. Collecting evidence as well as expressing an opinion has become much more challenging yet essential and auditors must continue to maintain their professional skepticism.
Some of the key issues to be considered in light of the COVID-19 pandemic are:
- Does the nature of the company’s business indicate factors of an increased risk?
- How has the entity been impacted by COVID-19 in terms of cash flows, supply chains, and debts?
- How liquid is the entity and what financing options are available? Can current debts be re-negotiated?
- Have the forecasted cash flows taken into account COVID-19 and its implications on the entity’s ability to continue as a going concern?
- Is there any government support and what is the extent and timing of such support?
