A going concern is a business that functions without the threat of liquidation for the foreseeable future, usually regarded as at least within 12 months. It implies for the business the basic declaration of intention to keep running its activities at least for the next year, which is a basic assumption to prepare financial statements considering the conceptual framework of the IFRS. Hence, the declaration of going concern means that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations.
Responsibilities of Auditors and Management
Fundamental to a financial statement audit is the division of responsibility between management and the independent auditor. The critical distinction is:
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Management is responsible for preparing the financial statements and the contents of the statements are the assertions of management
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The independent auditor is responsible for examining management’s financial statements and expressing an opinion on their fairness
Responsibility of an Auditor
The external, independent auditor is engaged to render an opinion on whether a company’s financial statements are presented fairly, in all material respects, in accordance with financial reporting framework. The audit provides users such as lenders and investors with an enhanced degree of confidence in the financial statements. An audit conducted in accordance with International Standards on Auditing and relevant ethical requirements enables the auditor to form that opinion.
To form the opinion, the auditor gathers appropriate and sufficient evidence and observes, tests, compares and confirms until gaining reasonable assurance. The auditor then forms an opinion of whether the financial statements are free of material misstatement, whether due to fraud or error. Some of the more important auditing procedures include:
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Inquiring of management and others to gain an understanding of the organization itself, its operations, financial reporting, and known fraud or error
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Evaluating and understanding the internal control system
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Performing analytical procedures on expected or unexpected variances in account balances or classes of transactions
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Testing documentation supporting account balances or classes of transactions, etc.
The auditor is also required to disclose any going concern issues in the financial statements under a paragraph ‘Emphasis of matter’. Going concern does affect the auditor’s opinion in terms of the overall presentation of the financial statements.
The auditor is required to review the information used by directors in drawing their conclusion that the going concern basis is appropriate. In smaller entities where management’s going concern assessment might not be formally documented, the auditor needs to expand the procedures to determine how management is comfortable that their entity is still a going concern. If the entity is for example obtaining financing from an external party, an analysis of the business generally needs to be provided to the third party. This analysis can be a very good indication for the auditors to understand why management considers it a going concern, bearing in mind it needs to be corroborated.
The auditor also considers disclosures about going concern and liquidity risk made in financial statements. If the auditor concludes that the disclosures are not adequate to meet the requirements of accounting standards, including the need for financial statements to give a true and fair view, they are required to qualify their opinion and to provide their reasons for doing so.
Where a material uncertainty exists that leads to significant doubt about a company’s ability to continue as a going concern, the auditor has the following choices:
Where the directors have concluded that the going concern basis is appropriate and
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The uncertainty has been adequately disclosed in the financial statements; the auditor will issue an unqualified opinion and include an emphasis of matter paragraph. If there are significant multiple other material uncertainties, auditors may disclaim their opinion instead of adding an emphasis of matter paragraph.
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The uncertainty has not been adequately disclosed in the financial statements; the auditor will issue a qualified opinion, stating the reasons why, or give an adverse opinion, depending on the pervasiveness.
Management’s responsibility:
The Company’s Chief Executive Officer and Chief Financial Officer are responsible for having established and maintaining disclosure controls and procedures and internal controls over financial reporting. The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements. The Board of Directors carries out this responsibility principally through its Audit Committee.
Management’s responsibility for the fairness of the representations in the financial statements carries with it the privilege of determining which disclosures it considers necessary. Ultimately, management is responsible for all decisions concerning the form and content of the statements.
When conducting their going concern assessment, the directors will have to evaluate which of three potential conclusions is appropriate to the circumstances of the company:
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there are no material uncertainties that may cast significant doubt about the company's ability to continue as a going concern
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there are material uncertainties related to events or conditions that may cast significant doubt about the company's ability to continue as a going concern but the going concern basis remains appropriate
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the use of the going concern is not appropriate
The accounting standards require directors to make disclosures about the existence and the nature of material uncertainties that lead to significant doubts about going concern.