Question

8. What is “Going Concern Principle”? What are the implications of this principle? How does it affect Balance Sheet – explain briefly? What are the responsibilities of an Auditor if this is at stake?

Answer 1

Going concern principle

As the name suggests, going concern principle implies that business will continue its operations.in future and will not be forced to liquidate or discontinue. A company is considered going concern if there is no evidence available to believe that it will cease the operations in foreseeable future. Companies prepay expense and accrue expense with a belief that it will continue in the future. The principle is applicable to the company as a whole ie, if one of the segment is shut down that wouldn't mean that the company is no longer a going concern.

Implications & affect on balance sheet

• It allows to defer expenses to future accounting periods.
• Assets and liabilities are recorded on the understanding that the company will be able to realize its assets, discharge the liabilities, obtains refinancing.
• If after identified considerations, the auditor concludes doubt about the entity's ability to continue as a going concern , the audit report should include an explanatory paragraph (following the opinion paragraph) to reflect that conclusion. The accounting will be no longer on accrual method but on reliable determination of said net assets. The assets would have to be recognized at fair values.

Auditor's responsibilities if Going concern principle is at stake

• The auditor must assess management's judgement regarding the going concern as part of of audit. The indicators should be analyzed in planning phase only.
• The auditor should obtain management's plan to mitigate the effect of such conditions
• If the auditor comes to conclusion that company will not be continued, he must issue an adverse opinion and include an explanatory paragraph in the report indicative of the condition