Going Concern

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Going Concern Case Example: ABC Manufacturing Company

Context

Given the competitive nature of the electronic components industry and various challenges such as fluctuating demand, regulatory changes, and financial pressures, ABC Manufacturing Company may face conditions that could cast significant doubt upon its ability to continue as a going concern.

Audit Objective

To assess whether there are material uncertainties about ABC Manufacturing Company’s ability to continue as a going concern for a period of at least twelve months from the date of the audit report, and to ensure that these considerations are appropriately disclosed in the financial statements.

Types of Audit Evidence and Documentation for Going Concern

1. Management’s Assessment

• Case: Review management’s assessment of the company’s ability to continue as a going concern, including the methods, assumptions, and data used in their evaluation.

• Documentation: Document the review of management’s going concern assessment, noting the period covered by the assessment, the basis for conclusions reached, and whether management’s assessment is reasonable.

2. Identifying Conditions or Events

• Case: Identify any conditions or events that may cast significant doubt on the company’s ability to continue as a going concern, such as financial losses, liquidity issues, or breaches of loan covenants.

• Documentation: Prepare a list of identified conditions or events, including their nature, the dates they occurred or were identified, and their potential impact on the company’s going concern status.

3. Evaluating Financial Viability

• Case: Evaluate the company’s financial projections, cash flow forecasts, and other relevant financial information to assess its ability to meet its obligations when they fall due.

• Documentation: Document the analysis of financial viability, including key assumptions used in forecasts, sensitivity analyses performed, and conclusions regarding the company’s ability to continue operations.

4. Consideration of Mitigating Factors

• Case: Assess any plans or actions management has initiated to mitigate conditions or events that raise doubt about the company’s ability to continue as a going concern.

• Documentation: Summarize management’s plans or actions, including their feasibility, implementation status, and expected effectiveness in addressing going concern issues.

5. Assessing the Need for Disclosures

• Case: Determine whether the financial statements adequately disclose the company’s going concern uncertainties and management’s plans to address them.

• Documentation: Review and document the adequacy of going concern disclosures in the financial statements, noting any deficiencies or areas requiring enhancement.

6. Impact on the Auditor’s Report

• Case: Based on the going concern assessment, consider the implications for the auditor’s report, including the need for an emphasis of matter paragraph or a modification of the auditor’s opinion if material uncertainties exist.

• Documentation: Document the conclusion regarding the impact of the going concern assessment on the auditor’s report, including the rationale for any emphasis of matter or modification of opinion.

7. Communication with Those Charged with Governance

• Case: Communicate with those charged with governance regarding the outcomes of the going concern assessment, including any significant uncertainties and their implications for the financial statements and auditor’s report.

• Documentation: Summarize communications with those charged with governance, detailing the nature of discussions, concerns raised, and responses received.

Conclusion

The assessment of going concern is a critical aspect of the audit process that requires careful consideration of various financial and non-financial factors. Through comprehensive documentation, auditors provide evidence of their evaluation of the company’s ability to continue as a going concern, ensuring that significant risks and uncertainties are adequately disclosed and reflected in the auditor’s report. This process helps ensure that users of the financial statements are fully informed of the company’s future prospects and any material uncertainties it faces.