3D5 - Going Concerns

docx

School

University of Illinois, Chicago *

*We aren’t endorsed by this school

Course

435

Subject

Accounting

Date

Nov 24, 2024

Type

docx

Pages

Uploaded by JusticeCapybaraMaster1521

3D5 - Going Concerns Going Concern Audit Requirements - Conclude, based on audit evidence obtained, whether substantial doubt about ability to continue as a going concern for a reasonable period of time o At least 1 year beyond the F/S date o Consider time period required by applicable financial reporting framework - Assess adequacy of uncertainty disclosures o NOT accounting framework specific - Determine implications on auditor’s report o Emphasis-of-matter paragraph o Disclaimer of opinion is an option Additional Procedures If Substantial Doubt Exists - Document and review the cause of substantial doubt - Obtain information about management’s plans to mitigate risk - Assess the likelihood of effective implementation of plans - Identifying elements especially significant to mitigating the risk - Review reasonableness of projections and future performance - Plan and perform sufficient appropriate procedures - Obtain appropriate written representations from management - Summarize procedures performed and conclusions reached Example Specific Audit Procedures - Review of subsequent events - Verify compliance with terms of debt agreements - Read of minutes of meetings - Inquiry of entity’s legal counsel about litigation, claims, and assessments - Confirm third and related parties details of support arrangements Going Concern Indicators - Negative Trends - Other Indicators of Possible Financial Difficulties - Internal Matters - External Matters That Have Occurred Financial and Economic Going-Concern Risk Indicators - Negative trends in cash flows from operating activities - Recurring operating losses - Lack of ability to obtain additional financing - Heavy reliance on related party for financial support - Defaults on debt, debt covenants, or both - Arranges in dividends

Operating Environment Going-Concern Risk Indicators - Turnover of key management or other positions - Work stoppages or other labor difficulties - Substantial dependence on particular project success - Uneconomic long-term commitments - Entrance into an unprofitable market - Negative legal, legislative, or regulatory proceedings - Uninsured catastrophic event Potential Management Plans - Dispose of assets - Delay or reduce payments - Increase capital - Borrow money - Restructure debt Auditing Client Projections - Document understanding of management’s ability to prepare accurate projections - Review and document key assumptions Audit Documentation Required - Management representation letter o Company takes ownership of all projections and represent that all relevant information has been provided - Communication with those charged with governance o Even if the auditor overcomes substantial doubt o Orally or in writing, but MUST be documented in file Impact on Auditor’s Report – Substantial Doubt NOT Alleviated - Consider ADEQUATE disclosure in footnotes o Qualified or adverse opinion due to departure from applicable financial reporting framework if NOT - Include an emphasis-of-matter paragraph following opinion paragraph o Ensure the wording “substantial doubt” and “going concern” is used - Disclaimer of opinion is an option Information to Disclose - Conditions and events creating the doubt - Possible effect, including operations cutbacks, layoffs, bankruptcy filing, etc. - Management’s evaluation of significance and mitigating factors - Whether operations MAY need to be discontinued - Management’s plans, including prospective F/S - Information about asset recoverability or liability classification

Question #1 An auditor has substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time because of negative cash flows and working capital deficiencies. Under these circumstance, the auditor would be most concerned about the: a) Control environment factors that affect the organizational structure b) Correlation of detection risk and inherent risk c) Effectiveness of the entity’s internal control activities d) Possible effects on the entity’s financial statements Question #2 In accordance with generally accepted auditing standards, which of the following is NOT the responsibility of the auditor in a financial statement audit? a) Specifically opine as to whether the entity can continue as a going concern for an excess of one year from the balance sheet date b) Assess the adequacy of going concern disclosures asserted by reporting entity management c) Determine the implications of any going concern uncertainty on the auditor’s report d) Obtain written management representations when substantial doubt about an entity’s ability to continue as a going concern exists Question #3 Which of the following is a typical audit procedure performed when there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time? a) Document and review the cause of any substantial doubt with management b) Conclude on the likelihood of the ability to continue as a going concern, absent management’s assertions c) Disclaim an opinion if there is NOT absolute assurance that the entity will continue to be a going concern for at least a year from the balance sheet date d) Qualify an opinion if there is doubt about an entity’s ability to continue as a going concern Question #4 Which of the following is a VALID concern when evaluating the adequacy of management’s plans to dispose of assets to alleviate a going concern uncertainty? a) How available is debt financing b) What are the possible adverse effects of disposal of assets on long-term operations c) How will delay of expenditures negatively impact the ability to maintain operations for a reasonable period of time d) Can equity ownership be expanded

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version