Question

Going concern issues are an extremely problematic issue for auditors. Discuss the leading indicators an auditor should investigate when they are concerned about an entity's ability to continue operating in the near future. What role do you believe the auditor should play as the management team determines whether a Going Concern Disclaimer should be included in the annual report.

Answer 1

The going concern principle is that you assume a business will continue in the future, unless there is evidence to the contrary. When an auditor conducts an examination of the accounting records of a entity, he or she has an obligation to review its ability to continue as a going concern.

Leading indicators an auditor should investigate:

1. Legal proceedings against the company, which may include pending liabilities and penalties related to the violation of environmental or other laws

2. The loss or expiration of a key license or patent.

3. Àdverse financial ratios, negative trends of profit, recurring losses, declining sales etc.

4. Loss of key managers or skilled employees or key Management.

5. Change in the government policies which directly impacts on the continuity of entity e.g. ban on liquor by govt. would direct impact on liquor manufacturers and traders.

6. Lost of a big project is the main indicator of going concern. let say the business is operating several different projects and fifty percent of those projects are lost to competitors, then the entity will face the going concern.

The responsibility of assessing the going concern capability of the entity is lies with management and auditor is just needed to review the management assessment and consider if those assessments are in the line with their understanding or not. While reviewing such assessment auditor may not be able to obtain sufficient evidence to report on the going concern.

Auditor should include a disclaimer of opinion in his audit report if he is unable to give his opinion on the going concern of the entity based on the work he performed. The reason for the disclaimer of opinion should clearly stated in the audit report under the heading 'Basis for disclaimer of opinion'.

Therefore, if auditor is unable to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion, he should not express an opinion on the accompanying financial statements of entity by giving disclaimer of opinion.