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Therefore, it may be noted that companies that are not a going concern may need external financing, restructuring, asset liquidation, or be acquired by a more profitable entity. A company may not be a going concern based on the financial position on either its income statement or balance sheet. For example, a company’s annual expenses may so vastly outweigh its revenue that it can’t reasonably https://kelleysbookkeeping.com/ make a profit. On the other hand, a company may be operating at a profit buts its long-term liabilities are coming due and not enough money is being made. Management intends to finance operating costs over the next twelve months with existing cash on hand and loans from its directors. The valuation of a company is important from the shareholders’ and investors’ perspective.

Some special-purpose frameworks may address this evaluation of a reasonable period of time. For instance, the Financial Reporting Framework for SMEs also has the period defined as 12 months from the financial statement date, for example the balance sheet date. Auditors may need refreshers on what the auditing standards say about going concern and how they interact with the accounting requirements. An entity is assumed to be a going concern in the absence of significant information to the contrary. An example of such contrary information is an entity’s inability to meet its obligations as they come due without substantial asset sales or debt restructurings.

Sidebar: Going Concern: Audit Opinion Trends

Special purpose financial statements may or may not be prepared in accordance with a financial reporting framework for which the going concern basis is relevant . 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. Notwithstanding the considerations above, a detailed assessment of going concern based on formal procedures like budgets, cash flow forecasts etc. is likely to provide the most persuasive audit evidence to evaluate the management’s Going Concern Accounting And Auditing assessment. In such circumstances the auditor should make enquiries about the process followed by management to make the assessment, about the assumptions on which the assessment is based and about management’s plans for future actions; additionally the auditor should examine relevant financial information used for the assessment. Lastly, we’ll consider the accountant’s reporting responsibilities under various scopes of services in various scenarios and how to audit this often-contentious topic. In that case, management is required to make disclosures required by the accounting framework made by management.

The example that everybody uses these days is, if your business happens to make toilet paper, the environment is probably not leading you to question your ability to continue as a going concern. Creditors often regard a subject to qualification as a separate reason for not granting a loan, a reason in addition to the circumstances creating the uncertainty that caused the qualification. This frequently puts the auditor in the position, in effect, of deciding whether a company is able to obtain the funds it needs to continue operating. The auditor’s expression of uncertainty about the company’s ability to continue may contribute to making it a certainty.

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Examples of corrective actions include plans to raise equity, borrow money, restructure debt, cut costs or dispose of an asset or business line. In case the auditor decides to qualify their audit report, it may raise the issue of whether assets are already impaired, which may highlight the need to write down the value of the assets from their carrying value to liquidation value. However, a company can choose to justify their decisions and attempt to make the auditor believe that poor business operating conditions are only temporary. The auditor is required by the Securities and Exchange Commission to disclose in the financial statements of a publicly traded company whether going concern status is in doubt.

• And if substantial doubt has been alleviated by management’s plans, then management would disclose the conditions and events that gave rise to the substantial doubt as well as their plans for alleviating it, and in that case there would be no requirement to modify the standard auditor’s opinion.
• Management must also identify the basis in which the financial statements are prepared and often disclose these financial reports with an audit report with a going concern opinion.
• The auditor is required by the Securities and Exchange Commission to disclose in the financial statements of a publicly traded company whether going concern status is in doubt.
• Going concern is important because it is a signal of trust about the longevity and future of a company.
• We conclude that the proposals from Exposure Draft will most likely have a positive effect on audit reporting, after their final revision.
• Nothing in this section, however, is intended to preclude an auditor from declining to express an opinion in cases involving uncertainties.
• And while our site doesn’t feature every company or financial product available on the market, we’re proud that the guidance we offer, the information we provide and the tools we create are objective, independent, straightforward — and free.

The auditor should not use conditional language regarding the existence of substantial doubt about the entity’s ability to continue as a going concern. Though management’s plans are disclosed, the probability of success is not provided. Fourth, there is a slight discrepancy between the time period applicable to an issuer’s going-concern analysis and that applicable to the auditor, but the period during which both parties obtain the evidence that is relevant to their analysis is the same. Lenders look at a company’s financial statements to assess creditworthiness and would be reluctant to loan money to a business that is not stable. Before an auditor issues a going concern qualification, company leadership will be given an opportunity to create a plan to take corrective actions that can improve the outlook for the business. If the auditor determines the plan can be executed and mitigates concerns about the business, then a qualified opinion will not be issued.