Going Concern for ACCA Audit and Assurance (AA)

What this chapter covers

Going concern: topics in the order to study them

1. 1Going Concern Basis and Management ResponsibilitiesStart here because you must know what the basis means, who assesses it and over what period before you can audit it.
2. 2Indicators of Going Concern ProblemsNext learn to spot financial, operating and other warning signs, as scenarios give you these facts and you must recognise them.
3. 3Audit Procedures for Going Concern (ISA 570)Once you can spot the problems, learn how the auditor responds, using the management assessment, forecasts, finance and further evidence.
4. 4Going Concern Disclosures and Audit Reporting ImplicationsFinish with the outcome, as the conclusion and the adequacy of disclosure decide the form of the audit opinion.

How to prepare Going concern

1. Learn the definition of the going concern basis and the split of duties: management assesses, the auditor evaluates that assessment and concludes on its use and on any material uncertainty.
2. Build a short list of indicators in groups: financial, operating and other. Practise picking them out from a scenario and saying why each matters.
3. Learn the ISA 570 procedures as a flow: review management's assessment, discuss plans, examine forecasts and their assumptions, check loan terms and support, review subsequent events, and obtain written representations.
4. Make a one-page decision chart for reporting: no material uncertainty, material uncertainty adequately disclosed, disclosure inadequate (qualified if the effect is material but not pervasive, adverse if it is material and pervasive), going concern basis inappropriate (adverse), and management unwilling to make or extend its assessment (a possible scope limitation, leading to a qualified opinion or a disclaimer depending on whether sufficient appropriate evidence can be obtained by other means).
5. Practise objective questions on the reporting rules until you answer without hesitation, since there is no partial credit.
6. Write at least two timed constructed-response answers. Use headings, link each point to the scenario facts, and give specific procedures rather than general ones.
7. Finish by checking your answers: did you tie each procedure to a named indicator, and did you state the effect on the audit report?

Common mistakes in Going concern

• Saying the auditor is responsible for deciding whether the entity is a going concern.

  Fix: Write that management prepares the assessment and the auditor evaluates it and reports their conclusion.

• Listing indicators without explaining why they threaten going concern or tying them to the scenario.

  Fix: Quote the scenario fact, name the indicator and add a short consequence, such as a covenant breach making a loan repayable.

• Giving vague procedures like 'check the accounts' or 'discuss with management'.

  Fix: Name the document or action: cash flow forecast, loan agreement, bank confirmation, board minutes, post year-end sales and payments.

• Confusing the audit opinion types when disclosure is adequate and inadequate.

  Fix: Use your decision chart: adequate disclosure keeps the opinion unmodified with a material uncertainty section; inadequate disclosure leads to qualification or an adverse opinion.

• Ignoring management's plans and mitigating factors when judging going concern.

  Fix: Assess whether plans such as asset sales, new finance or cost cuts are feasible and supported by evidence before concluding.

• Forgetting the link between going concern and other areas, such as subsequent events and valuation of assets.

  Fix: Note that going concern doubts can affect asset carrying amounts, classification of debt and disclosures, and mention these effects where relevant.

Last-day revision: Going concern

• ✓Going concern basis: the entity will continue operating for the foreseeable future, with no intention or need to liquidate or cease trading.
• ✓Management makes the assessment; the auditor evaluates it and concludes on whether the basis is appropriate.
• ✓Management's assessment covers at least twelve months from the date of approval of the financial statements. Under ISA 570 (Revised), the auditor asks management to extend its assessment if it covers a shorter period. The auditor also asks management to look further if the auditor is aware of relevant events beyond that period.
• ✓Financial indicators include net liabilities, negative cash flows, breached covenants and inability to pay creditors.
• ✓Operating indicators include loss of key management, major customers or suppliers, and labour problems.
• ✓Other indicators include legal action, changed legislation and uninsured disasters.
• ✓Key procedures: review forecasts and assumptions, loan agreements, post year-end events, and management's plans.
• ✓Obtain written representations about management's plans and their feasibility.
• ✓Material uncertainty adequately disclosed: unmodified opinion with a separate going concern section in the report.
• ✓Disclosure inadequate: qualified opinion if the effect is material but not pervasive, adverse opinion if it is material and pervasive.
• ✓Going concern basis inappropriate but used: adverse opinion.
• ✓If management is unwilling to make or extend its assessment, the auditor considers the implications for the report, which may be a qualified opinion or a disclaimer of opinion, depending on whether sufficient appropriate evidence can be obtained by other means.

Going concern in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

• ACCA Strategic ProfessionalSubsequent events and going concern
• CA IntermediateCompletion and Review
• CA FinalAdvanced Auditing, Assurance and Professional Ethics