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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Subsequent events and going concern

Harlow Co's directors prepared accounts on a going concern basis and disclosed a material uncertainty. During the audit of the year ended 31 March 20X6, the auditor learns that management intends to cease trading within two months after signing, because its only customer has terminated its contract. The directors still insist on the going concern basis, with a note disclosing the risk. What is the auditor's appropriate response?

The auditor should give an adverse opinion, because with trading about to cease the going concern basis is inappropriate, and disclosure of the risk cannot remedy a fundamentally wrong basis of preparation.

  1. AIssue an unmodified opinion with a material uncertainty section, since disclosure has been made
  2. BIssue a qualified opinion on the basis of limitation of scope
  3. CIssue an adverse opinion, because use of the going concern basis is inappropriateCorrect
  4. DWithdraw from the engagement without issuing a report

Explanation

If the financial statements are prepared on a going concern basis but, in the auditor's judgement, management's use of that basis is inappropriate, ISA 570 (Revised) requires an adverse opinion. Disclosure does not cure an inappropriate basis when cessation is intended or inevitable. A material uncertainty section applies only where the basis is appropriate. Scope limitation is not the issue because the evidence is available.

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