This blog is written by Mr. Muneeb Sultan Arif, Associate Internal Audit. Please read this blog and provide your valued comments.
Going Concern; A Rationale
For any set of accounts, and regardless of who completes them, particular accounting principles must be followed. One of the accounting principles that need to be followed when producing a set of accounts is going concern, and both auditors and management need to be fully aware of what this mean in practice.
What Exactly is Going Concern
A business that is not at a risk of Liquidation, or no such events exist that will cease entity’s operations. As per International Standard on Auditing 560 Auditor shall consider whether events or conditions exist that may cause significant doubt on entity’s ability to continue as going concern.
Following are the examples of such events or conditions
- Net liability or net current liability position.
- Inability to repay debentures and long term loans at scheduled dates without any possibility of rescheduling of debts.
- Indications of withdrawal of financial support by creditors.
- Inability to obtain financing for essential new product development.
- Change from credit to cash transactions with suppliers.
- Inability to pay creditors on due dates.
- Default in compliance of loan terms.
- Arrears or discontinuance of dividends.
- Negative operating cash flows.
- Adverse key financial ratios.
- Management intentions to liquidate entity or to cease operations.
- Loss of key management without replacement.
- Loss of major market, key customer, franchise, license, supplier.
- Labour difficulties including strikes.
- Shortage of important supplies.
- Emergence of a highly successful competitor.
- Non compliance with capital or other statutory requirements.
- Legal proceedings that may jeopardize entity’s ability to continue business.
- Change in laws and government policies expected to adversely affect the entity.
- Uninsured or underinsured disasters when they occur.
Responsibility regarding going concern
It is the responsibility of management to decide initially whether or not the entity should be considered as a going concern, taking in to account a broad range of factors from cash flow to competition.
Auditors are then responsible for collecting sufficient appropriate evidence to support management’s decision, and concluding whether or not it is appropriate.
Matters to be Communicated to Those Charged with Governance
The Auditor shall communicate the following with those charge with governance;
- Whether events or conditions constitute a material uncertainity.
- Whether use of going concern basis is appropriate.
- The adequacy of related disclosures in financial statements.
- The implications for the auditors report.
Muneeb Sultan Arif