What's in an Auditor’s Report: Opinions, Good and Bad
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If so, the auditor must draw attention to the uncertainty regarding the entity’s ability to continue as a going concern, in their auditor’s report. On the other hand, inappropriate use of the going concern assumption by an entity may cause the auditor to issue an adverse opinion on the financial statements. This Guidance provides a framework to assist directors, audit committees and finance teams in determining whether it is appropriate to adopt the going concern basis for preparing financial statements and in making balanced, proportionate and clear disclosures. Separate standards and guidance have been issued by the Auditing Practices Board to address the work of auditors in relation to going concern. If the auditor concludes that the entity’s disclosures with respect to the entity’s ability to continue as a going concern for a reasonable period of time are inadequate, a departure from generally accepted accounting principles exists.
The dollar value represented by the total current assets figure reflects the company’s cash and liquidity position and allows management to prepare for the necessary arrangements to continue business operations. Current assets are important to businesses because they can be used to fund day-to-day business operations and to pay for ongoing operating expenses. Since the term is reported as a dollar value of all the assets and resources that can be easily converted to cash in a short period, it also represents a company’s liquid assets. Current assets represent all the assets of a company that are expected to be conveniently sold, consumed, used, or exhausted through standard business operations with one year. Current assets appear on a company’s balance sheet, one of the required financial statements that must be completed each year.
Key Considerations When Selling a Business as a Going Concern
Continuation of an entity as a going concern is assumed in financial reporting in the absence of significant information to the contrary. Under the going concern assumption, an entity is viewed as continuing in business for the foreseeable future. General purpose financial statements are prepared on a going concern basis, unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so. 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 (for example, the going concern basis is not relevant for some financial statements prepared on a tax basis in particular jurisdictions). 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.
It may be necessary to obtain additional information about such conditions and events, as well as the appropriate evidential matter to support information that mitigates the auditor’s doubt. An example follows of an explanatory paragraph (following the opinion paragraph) in the auditor’s report describing an uncertainty about the entity’s ability to continue as a going concern for a reasonable period of time.
The auditor’s evaluation is based on his or her knowledge of relevant conditions and events that exist at or have occurred prior to the date of the auditor’s report. The auditor’s consideration of disclosure should include the possible effects of such conditions and events, and any mitigating factors, including management’s plans. When financial statements of one or more prior periods are presented on a comparative basis with financial statements of the current period, reporting guidance is provided in section 508. The auditor evaluates an entity’s ability to continue as a going concern for a period not less than one year following the date of the financial statements being audited (a longer period may be considered if the auditor believes such extended period to be relevant). The auditor considers such items as negative trends in operating results, loan defaults, denial of trade credit from suppliers uneconomical long-term commitments, and legal proceedings in deciding if there is a substantial doubt about an entity’s ability to continue as a going concern.
Due to different attributes attached to business operations, different accounting methods, and different payment cycles, it can be challenging to correctly categorize components as current assets over a given time horizon. Each ratio uses a different number of current asset components against the current liabilities of a company. The total current assets figure is of prime importance to the company management with regards to the daily operations of a business. As payments toward bills and loans become due at the end of each month, management must be ready the necessary cash.
If the auditor concludes that substantial doubt does not exist, he should consider the need for disclosure. Despite this, some fund managers may be required to sell the stock to maintain an appropriate level of risk in their portfolios. A negative judgment may also result in the breach of bank loan covenants or lead a debt rating firm to lower the rating on the company’s debt, making the cost of existing debt increase and/or preventing the company from obtaining additional debt financing. They can help business review their internal risk management along with other internal controls.
What’s in an Auditor’s Report: Opinions, Good and Bad
For a company to be a going concern, it must be able to continue operating long enough to carry out its commitments, obligations, objectives, and so on. If there is uncertainty as to a company’s ability to meet the going concern assumption, the facts and conditions must be disclosed in its financial statements.
- When financial statements of one or more prior periods are presented on a comparative basis with financial statements of the current period, reporting guidance is provided in section 508.
- The auditor’s evaluation is based on his or her knowledge of relevant conditions and events that exist at or have occurred prior to the date of the auditor’s report.
Companies that are a going concern may defer reporting long-term assets at current value or liquidating value, but rather at cost. A company remains a going concern when the sale of assets does not impair its ability to continue operation, such as the closure of a small branch office that reassigns the employees to other departments within the company. The management of the company decides whether they are satisfied by following the going concern assumption or not.
As discussed in Note X to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note X. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. A current definition of the going concern assumption can be found in the AICPA Statement on Auditing Standards No.1 Codification of Auditing Standards and Procedures, Section 341, “ The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern”(AU Section 341). The ‘going concern’ concept assumes that the business will remain in existence long enough for all the assets of the business to be fully utilized. However, generally accepted auditing standards (GAAS)doinstruct an auditor regarding the consideration of an entity’s ability to continue as a going concern.
Accounting standards try to determine what a company should disclose on its financial statements if there are doubts about its ability to continue as a going concern. In May 2014, the Financial Accounting Standards Boarddetermined financial statements should reveal the conditions that support an entity’s substantial doubt that it can continue as a going concern. Statements should also show management’s interpretation of the conditions and management’s future plans. The going concern concept is not clearly defined anywhere in generally accepted accounting principles, and so is subject to a considerable amount of interpretation regarding when an entity should report it. However, generally accepted auditing standards (GAAS) do instruct an auditor regarding the consideration of an entity’s ability to continue as a going concern.
Other kinds of audit opinions
What is the meaning of going concern concept in accounting?
going concern assumption definition. An accounting guideline which allows the readers of financial statements to assume that the company will continue on long enough to carry out its objectives and commitments. In other words, the accountants believe that the company will not liquidate in the near future.
In general, an auditor examines a company’s financial statements to see if it can continue as a going concern for one year following the time of an audit. Conditions that lead to substantial doubt about a going concern include negative trends in operating results, continuous losses from one period to the next, loan defaults, lawsuits against a company, and denial of credit by suppliers. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.
Continuation of an entity as a going concern is presumed as the basis for financial reporting unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements are prepared under the liquidation basis of accounting (Financial Accounting Standards Board, 2014).
If the management thinks that for their business this assumption is not appropriate then the management can prepare the financial statements using the breakup basis. In break up basis the assets are reported at the amount which is likely to be realized from the sale of the given asset and liabilities are reported at the amounts at which they are expected to be settled. One modification to an auditor’s report is serious — when the CPA expresses doubts about the capability of the business to continue as a going concern. A going concern is a business that has sufficient financial wherewithal and momentum to continue its normal operations into the future and would be able to absorb a bad turn of events without having to default on its liabilities.
The going concern principle allows the company to defer some of its prepaid expenses until future accounting periods. The going concern assumption is a fundamental assumption in the preparation of financial statements. Under the going concern assumption, an entity is ordinarily viewed as continuing in business for the foreseeable future with neither the intention nor the necessity of liquidation, ceasing trading or seeking protection from creditors pursuant to laws or regulations. Accordingly, unless the going concern assumption is inappropriate in the circumstances of the entity, assets and liabilities are recorded on the basis that the entity will be able to realize its assets, discharge its liabilities, and obtain refinancing (if necessary) in the normal course of business. Accountants use going concern principles to decide what types of reporting should appear on financial statements.
Pertinent conditions and events giving rise to the assessment of substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time. The fact that the entity may cease to exist as a going concern subsequent to receiving a report from the auditor that does not refer to substantial doubt, even within one year following the date of the financial statements, does not, in itself, indicate inadequate performance by the auditor. Accordingly, the absence of reference to substantial doubt in an auditor’s report should not be viewed as providing assurance as to an entity’s ability to continue as a going concern.
Reporting guidance for such situations is provided in section 508, Reports on Audited Financial Statements. After the auditor has evaluated management’s plans, he concludes whether he has substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time.