Under the Going Concern basis, financial statements assume the entity will continue operations unless there’s intent to liquidate or no realistic alternative. This article delves into the key aspects of SA 570, focusing on its impact, risk assessment, and the auditor’s responsibilities.
Going Concern
- Under the Going concern basis of accounting, the financial statements are prepared on the assumption that the entity is a going concern and will continue its operations for the foreseeable future, unless management intends to liquidate the entity or cease operations or has no realistic alternative but to do so.
- Special purpose financial statements may or may not be prepared in accordance with a Financial Reporting Framework for which the going concern basis of accounting is relevant.
- When the use of the going concern basis of accounting is appropriate, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business.
Responsibility of the Auditor
- The auditor is required to obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management’s use of going concern basis of accounting in the preparation of financial statements.
- Material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern, by its nature, a key audit matter as per SA 701*.
Note*– SA 701 refers to communicating key audit matters in the independent auditor’s report deals with the responsibilities of an auditor to communicate the key audit matters in his/her audit report.
- The auditor is also required to conclude and report on the basis of audit evidence obtained, about whether any material uncertainty exists about the entity’s ability to continue as a going concern.
Risk Assessment Procedures
- While performing the risk assessment procedure, auditor should consider whether events and conditions exists that may cast significant doubt on entities ability to continue as a going concern.
i. If Management has performed assessment, the auditor shall:
a) Discuss assessment with management.
b) Determine whether management has identified event or conditions that individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern, and
c) If so, management’s plan to address them.
ii. If Management has performed assessment, the auditor shall:
a) Discuss assessment with management.
b) Determine whether management has identified event or conditions that individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern, and
c) If so, management’s plan to address them.
An Auditor can obtain sufficient and appropriate audit evidence while performing Risk Assessment Procedures by evaluating the following factors:
i. Financial Indicators
a) Negative net worth
b) Net liability or net current liability position
c) Negative operative cash flows,
d) Adverse key ratios
e) Substantial losses etc.
ii. Operating Indicators
a) Loss of key management without replacement
b) Management intentions to liquidate the entity or to cease operations
c) Loss of a major market or principal supplier etc.
iii. Other Indicators
a) Non-compliances with statutory or regulatory compliances
b) Changes in laws & regulations that is expecting to have adverse effect on the entity etc.
Additional audit procedures when events or conditions are identified.
- The auditor is required to perform additional audit procedure when events or conditions which cast a significant doubt on the entity’s ability to continue as going concern are identified. The following are the additional audit procedures which are required to be performed by the auditor:
a) Requesting management to make its assessment of the entity’s ability to continue as going concern, if not made earlier
b) Evaluating management’s plans for future actions in terms of feasibility
c) Analysis of the cash flow forecast prepared, if any i.e. the data used, the assumptions made
d) Requesting written representations from the management and, where appropriate, those charge with governance
e) Determining whether there is adequate support for the assumptions and forecast made.
COVID – 19 Impact
- Due to covid-19 there could have impact on the assumption related to going concern. For some entities, the impact could be severe and may leave management with no realistic alternative but to liquidate or cease operations.
- Going concern assessment is critically important, auditor will need to consider whether the threat to liquidity as a result of supply/demand disruption present a material uncertainty to the going concern status for the 12 months beyond the reporting date. SA 570 (Revised) also requires auditors to consider events that make a significant doubt on the entity’s ability to continue as a going concern beyond the period of management assessment.
- Audit teams should robustly assess the going concern and viability risks relating to covid 19 threat in compliance with SA 570 (Revised), this includes:
i. It is the responsibility of management to make the assessment as to whether the entity is a going concern.
ii. Evaluating whether there is adequate support for the assumptions underlying management’s assessment.
Disclosures in the Audit Report
- In case management has significant doubt about the entity’s ability to continue as a going concern, disclose the uncertainties, even if it concludes that no materiality exists.
- When a material uncertainty exists, disclose the fact that entity’s ability to continue as a going concern is subject to a material uncertainty
- When a material uncertainty exists, disclose the fact that entity’s ability to continue as a going concern is subject to a material uncertainty.
- Enhanced disclosures regarding estimation uncertainty might be required, for instance, assumptions may be subject to a material change within the next period.
- Additional disclosures in the board’s report or in an annual report (other than financial statement and auditor’s report) need to be provided.
- Disclose any changes in financial risks such as credit risks, liquidity risks, currency risks and other price risks and changes in objectives, policies, and processes for managing those risks are expected.
Impact on Auditor’s Report
- Inappropriate Audit Evidence Obtained
If the auditor concludes based on the audit evidence obtained and the audit procedures performed that the going concern basis of accounting followed by the management is inappropriate, then the auditor shall express adverse opinion.
- Appropriate Audit Evidence Obtained and Management made Adequate Disclosure
If the auditor concludes based on the audit evidence obtained and the audit procedures performed that the going concern basis of accounting followed by the management is appropriate and the management has made adequate disclosure about the same, then the auditor shall draw attention to the concerned note in the auditor’s report.
- Appropriate Audit Evidence Obtained and Management not made Adequate Disclosure
If the auditor concludes based on the audit evidence obtained and the audit procedures performed that the going concern basis of accounting followed by the management is appropriate, but the management has not made adequate disclosure about the same, then the auditor shall express qualified or adverse opinion in accordance with SA 705*.
Note*- SA 705 refers to modification to the opinion in the independent auditor’s report applies when the auditor concludes that a modification to the auditor’s opinion on the financial statements is necessary.
- No material uncertainty
If the auditor is able to identify the events or conditions but there is no material uncertainty, then the auditor has to evaluate the requirements of the applicable financial reporting framework to provide adequate disclosure about the events or conditions that may cast significant doubt on the entity’s ability to continue as going concern.
CARO Reporting Requirement
On the basis of the financial ratios, ageing and expected dates of realization of financial assets and payment of financial liabilities, other information accompanying the financial statements, the auditor’s knowledge of the Board of Directors and management plans, whether the auditor is of the opinion that no material uncertainty exists as on the date of the audit report that company is capable of meeting its liabilities existing at the date of balance sheet as and when they fall due within a period of one year from the balance sheet date” [Paragraph 3 (xix) of CARO, 2020]
Auditor’s Responsibilities under this clause
a) Comment on whether there is a material uncertainty of going concern
b) Refer to Implementation guide for SA 570 (Going concern)
c) If the audit report has a Material Uncertainty relating to Going Concern para, duly consider it while reporting under this clause.
d) Test to be conducted as of date of the audit report which includes subsequent events too.
Conclusion: Understanding the nuances of SA 570 is pivotal for auditors, especially in the context of the going concern basis. As businesses navigate challenges like those posed by COVID-19, auditors play a crucial role in ensuring transparent reporting and adherence to standards, ultimately safeguarding the integrity of financial information. Meeting the CARO reporting requirements is vital for a comprehensive and reliable audit report.
The contributors to the Article are Sumit Mahajan, AccuWiz Consulting LLP along with inputs from CA Kapil Singhal.
Disclaimer: The content/information is only for general information of the user and shall not be construed as legal advice. The facts stated are based on information available in public domain. Views expressed above are personal.
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