AAA – L3 – Q3 – Going Concern

Audit manager reviews a client with going concern issues where directors refuse to disclose a required note in financial statements.

Question

As the Audit Manager of Zelton & Associates, you are responsible for conducting reviews on audit files where there is potential disagreement between your firm and clients.

You are looking at DuaKonta LTD’s audit file’s going concern section. DuaKonta LTD is a client with severe cash flow issues as well as other, less significant operational signs of going concern issues.

According to the working papers, DuaKonta LTD is now attempting to raise funds to support its operating cash flows, and if the funds are not obtained, there will be serious uncertainty over the company’s ability to continue as a going concern. After reviewing the working papers, it came to light that the going concern assumption is appropriate. However, it is advised that the financial statements include a note outlining the company’s cash flow issues, a description of the financing being sought and an assessment of the company’s going concern status. The Directors of DuaKonta LTD do not wish to include the note in the financial statements.

Required:
a) Compare and contrast the responsibilities of Management and of Auditors, in relation to the assessment of going concern. You should include a description of the procedures used in this assessment where relevant.

b) Consider and comment on FOUR possible reasons the Directors of DuaKonta LTD are reluctant to provide the note to the financial statements.

c) Identify and discuss the implications for the auditor’s report if:
i) The directors refuse to include the disclosure note.
ii) The directors agree to include the disclosure note

Answer

a) Responsibilities of management and auditors in relation to going concern.

ISA 570 Going Concern discusses the responsibilities of management and auditors in relation to the going concern assumption. It explains management’s responsibilities with regards to going concern as detailed in IAS 1 Presentation of Financial Statements. This standard requires management to make an assessment of an entity’s ability to continue as a going concern. If management becomes aware of material uncertainties casting significant doubt on the entity’s ability to continue as a going concern, these must be disclosed. Management should also disclose if the financial statements are not prepared on a going concern basis and if so, the basis on which they are prepared and the reason the entity is not regarded as a going concern.

The auditor is responsible for obtaining sufficient, appropriate evidence about the appropriateness of managements use of the going concern assumption in the financial statements. Based on the evidence collected, the auditor must conclude whether there is a material uncertainty about the entity’s ability to continue as a going concern and then determine the implications for the auditor’s report.

Therefore, the main responsibility of management is to assess the entity’s ability to continue as a going concern, use the correct basis of presentation and make the correct disclosures in the financial statements. The auditor is responsible for providing an opinion on whether management have fulfilled these obligations and collecting enough evidence to support this.

Indicators
Both management and auditors use a range of indicators in making an assessment of going concern. They will both look at financial indicators, such as adverse key financial ratios, and also operating indicators, for example the emergence of a highly successful competitor. Management use indicators as part of their day to day management of the business, while auditors do so in order to understand the business and carry out analytical procedures.

Procedures
Auditors are required to carry out additional procedures if events or conditions are identified that cast significant doubt on the entity’s ability to continue as a going concern. Specifically, these procedures include:

Requesting management to make an assessment of going concern if it has not already done so.
Evaluating managements future plans in relation to the going concern assessment
If management have prepared a cash flow forecast and this is significant, evaluating the reliability of the underlying data and underlying assumptions.
Considering facts or information which have become available since

Tags: Auditor Responsibility, Disclosure, Financial Statement Notes, Going Concern, ISA 570, Management Responsibility, Material Uncertainty, Modified Audit Report
Level: Level 3

Topic: Evaluation and review, Reporting

Uploader: Samuel Duah