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SA 570 (Revised) “Going Concern”

Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 Swati asked about 2 years ago

1. explain the procedures to be performed by the auditor in expressing opinion on going concern assumptions ? 2. what are the financial indicators to be considered by an auditor for evaluation of the going concern assumptions?

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 megha answered about 2 years ago

Hello, **`what are the financial indicators to be considered by an auditor for evaluation of the going concern assumptions?`** Ans. Indicators to be considered for evaluation of Going Concern Assumption: SA 570 “Going Concern” deals with the auditor’s responsibility in the audit of financial statements with respect to management’s use of the going concern assumption in the preparation and presentation of the financial statements. **As per SA 570, financial indicators to be considered for evaluation of going concern are listed below:** **• Net liability or net current liability position. • Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment; or excessive reliance on short-term borrowings to finance long-term assets. • Indications of withdrawal of financial support by creditors. • Negative operating cash flows indicated by historical or prospective financial statements. • Adverse key financial ratios. • Substantial operating losses or significant deterioration in the value of assets used to generate cash flows. • Arrears or discontinuance of dividends. • Inability to pay creditors on due dates. • Inability to comply with the terms of loan agreements. • Change from credit to cash-on-delivery transactions with suppliers. • Inability to obtain financing for essential new product development or other essential investments**

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 CA Sandeep Bohra answered about 2 years ago

Hi... --Under the going concern assumption, an entity is viewed as continuing in business for the foreseeable future. General purpose 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. --When the use of the going concern assumption 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. **Explain the procedures to be performed by the auditor in expressing opinion on going concern assumptions ?** **Risk Assessment Procedures and Related Activities** --When performing risk assessment procedures as required by SA 315 the auditor shall consider whether there are events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. In so doing, the auditor shall determine whether management has already performed a preliminary assessment of the entity’s ability to continue as a going concern,and: --If such an assessment has been performed, the auditor shall discuss the assessment with management and determine whether management has identified events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern and, if so, management’s plans to address them; or If such an assessment has not yet been performed, the auditor shall discuss with management the basis for the intended use of the goingconcern assumption, and inquire of management whether events or conditions exist that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern. --The auditor shall remain alert throughout the audit for audit evidence of events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. --**Evaluating Management’s Assessment** --The auditor shall evaluate management’s assessment of the entity’s ability to continue as a going concern. **Additional Audit Procedures When Events or Conditions Are Identified** --If events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a going concern, the auditor shall obtain sufficient appropriate audit evidence to determine whether or not a material uncertainty exists through performing additional audit procedures, including consideration of mitigating factors. These procedures shall include: (a) Where management has not yet performed an assessment of the entity’s ability to continue as a going concern, requesting management to make its assessment. (b) Evaluating management’s plans for future actions in relation to its going concern assessment, whether the outcome of these plans is likely to improve the situation and whether management’s plans are feasible in the circumstances. (c) Considering whether any additional facts or information have become available since the date on which management made its assessment. (d) Requesting written representations from management and, where appropriate, those charged with governance, regarding their plans for future action and the feasibility of these plans. **what are the financial indicators to be considered by an auditor for evaluation of the going concern assumptions?** --Events or Conditions That May Cast Doubt about Going Concern Assumption are described below:- **Financial** • Net liability or net current liability position. • Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment; or excessive reliance on short-term borrowings to finance long-term assets. • Indications of withdrawal of financial support by creditors • Negative operating cash flows indicated by historical or prospective financial statements. • Adverse key financial ratios. • Substantial operating losses or significant deterioration in the value of assets used to generate cash flows. • Arrears or discontinuance of dividends. • Inability to pay creditors on due dates. • Inability to comply with the terms of loan agreements. • Change from credit to cash-on-delivery transactions with suppliers. • Inability to obtain financing for essential new product development or other essential investments. **Operating** • Management intentions to liquidate the entity or to cease operations. • Loss of key management without replacement. • Loss of a major market, key customer(s), franchise, license, or principal supplier(s). • Labor difficulties. • Shortages of important supplies. • Emergence of a highly successful competitor. **Other** • Non-compliance with capital or other statutory requirements. • Pending legal or regulatory proceedings against the entity that may, if successful, result in claims that the entity is unlikely to be able to satisfy. • Changes in law or regulation or government policy expected to adversely affect the entity. • Uninsured or underinsured catastrophes when they occur.

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