Audit Procedure for Going Concern

Auditors must assess the company’s going concern status by considering the company’s financial stability and ability to continue meeting obligations. This is done to ensure that the financial statements accurately reflect the company’s financial position.

When there are negative trends, such as credit denial, ongoing losses, or lawsuits, the auditor must take action to investigate the company’s financial health. This will help the auditor determine whether the company is still able to be a going concern or not.

If there are doubts, the auditor can give an opinion on the company’s going concern status. This opinion is based on the auditor’s assessment of the company’s current financial situation and its ability to continue operating.

The auditor needs to be aware of the company’s financial situation and be able to provide an accurate assessment of its financial health.

Going Concern

The going concern premise is a fundamental principle in accounting that postulates the continuity of business operations for the foreseeable future, necessitating a thorough evaluation of an entity’s capability to fulfill its obligations without the need for significant alteration of its business model. This assumption underpins financial reporting, as it affects the valuation of assets and liabilities and the presentation of the financial statements.

However, when the auditor assesses the going concern status, they are confronted with the reality that some entities face challenges that threaten their ability to continue as a going concern. The emotion tied to this assessment is palpable, as it touches on the livelihoods of employees, the trust of investors, and the ripple effects on the economy.

Consider the following:

1. Uncertainty: The distress felt by stakeholders when there is doubt about the company’s future.
2. Responsibility: The weight upon management’s shoulders to secure the company’s longevity.
3. Hope: The aspiration for recovery strategies to succeed and preserve the enterprise.
4. Resolve: The determination to address and overcome financial hurdles.

Audit Risk

In assessing an entity’s going concern, auditors must diligently evaluate audit risks, which encompass the likelihood that economic, financial, operational, regulatory, and reputational uncertainties could materially misstate the financial statements.

Economic risks demand particular attention as changes in market conditions, industry trends, and competition can significantly alter the entity’s operational landscape. For example, a downturn in the market could reduce demand for the entity’s products or services, affecting revenue and cash flow.

Financial risks also pose a grave concern. Auditors must thoroughly investigate the entity’s liquidity position, debt obligations, and cash flow adequacy. High levels of debt or consistent negative cash flows might signal an inability to sustain operations in the long term.

Operational risks such as labor disputes, quality control issues, and supply chain disruptions can further destabilize an entity, putting its continuation in jeopardy.

Moreover, regulatory risks are pivotal in the audit assessment. Changes in legislation or regulatory enforcement actions can lead to significant compliance costs or penalties, potentially impacting the entity’s financial sustainability.

Internal Control

Evaluating the internal control environment is essential to assessing the entity’s ability to remain a viable operation in the long-term. Internal control processes, including risk management, must be evaluated for design and effectiveness. This includes testing the operating effectiveness of the internal controls, including financial performance, management, and compliance. Assessment of any weaknesses or control deficiencies is necessary to determine the impact to the entity’s going concern.

Communication of test results to management is essential to ensure appropriate remedial action is taken. Documentation of procedures and processes associated with internal control is also necessary to ensure compliance with standards and regulations.

Consistent monitoring and testing of all internal control processes is the only way to ensure the entity remains a viable operation in the long-term.

Audit Procedure

In order to accurately assess the entity’s ability to remain a viable operation in the long-term, an audit procedure must be conducted to evaluate and document internal control processes.

This involves reviewing management’s assessment of the entity’s ability to continue as a going concern, analyzing financial performance, evaluating financial position, reviewing related party transactions, evaluating compliance with laws and regulations, analyzing debt structure and terms, reviewing contractual obligations, and evaluating compliance with accounting standards and accuracy of financial statements.

The audit procedure should also include a review of the internal control system. This includes evaluating the risk assessment process, the control activities, the monitoring process, and the information and communication systems.

It is important to ensure that the internal control system is properly designed and implemented, so that the entity can effectively detect and prevent errors, fraud, and other issues that could lead to financial difficulties.

The audit procedure should also include a review of the entity’s financial statements. This involves assessing the accuracy and completeness of the financial statements, and ensuring that they are prepared by generally accepted accounting principles.

The financial position is scrutinized, with a focus on assets and liabilities to unearth any signs of financial distress that could threaten the going concern assumption. Auditors also investigate related party transactions, which can often have a material effect on the entity’s financial stability and operational independence.

Compliance with relevant laws and regulations is evaluated, as non-compliance can severely affect the entity’s operational viability. The auditors analyze the structure and terms of the entity’s debt, assessing the company’s capability to service its debt over time. Furthermore, a review of contractual obligations is conducted to ensure that the entity can fulfill its commitments without compromising its going concern status.

This review should also include a comparison of the entity’s financial statements to other similar entities in the same industry, to ensure that the entity’s financial performance is in line with industry standards.

Conclusion

The going concern audit procedure is essential for assessing the audit risk of a business entity.

An internal control system should be implemented to ensure the accuracy of the financial statement.

Adequate procedures should include:

• An understanding of the entity’s operations and industry
• An assessment of the entity’s ability to continue as a going concern
• Review of management’s plans for future operations
• Consideration of any related party transactions.

An auditor should use professional judgement when evaluating the going concern audit risk and document the evidence obtained. An auditor should also consider the impact of any events or conditions that could result in the entity not continuing as a going concern.

In conclusion, the auditor should adequately address the going concern audit risk by implementing a comprehensive audit procedure.