Going Concern and Audit Engagements

By CPABC
Last Revision: 10/20/2016

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.  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.

The Auditor’s Responsibilities

The responsibilities of the auditor regarding the application of the going concern assumption are included in CAS 570 Going Concern.

CAS 570.6

The auditor's responsibility is to obtain sufficient appropriate audit evidence about the appropriateness of management's use of the going concern assumption in the preparation of the financial statements and to conclude whether there is a material uncertainty about the entity's ability to continue as a going concern. This responsibility exists even if the financial reporting framework used in the preparation of the financial statements does not include an explicit requirement for management to make a specific assessment of the entity's ability to continue as a going concern.

CAS 570.7

However, as described in CAS 200, the potential effects of inherent limitations on the auditor's ability to detect material misstatements are greater for future events or conditions that may cause an entity to cease to continue as a going concern. The auditor cannot predict such future events or conditions. Accordingly, the absence of any reference to going concern uncertainty in an auditor's report cannot be viewed as a guarantee as to the entity's ability to continue as a going concern.

The auditor is required to consider whether there are any events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern.  This should include discussion with management regarding their assessment of the entity’s ability to continue as a going concern. 

Additional Audit Procedures When Events or Conditions Are Identified

If events or conditions have been identified that may cast significant doubt on the entity's ability to continue as a going concern, the auditor is required to obtain additional audit evidence to determine whether or not a material uncertainty exists.  CAS 570 requires that the additional audit procedures include:

  1. Obtaining an assessment of the entity's ability to continue as a going concern from management if this has not been already performed
  2. Evaluating management's plans to remedy the situation, including their feasibility and whether or not they likely to improve the situation
  3. If applicable, an evaluation of management’s cash flow forecast including a consideration of the reliability of the underlying data uses and determining whether there is adequate support for the assumptions applied.
  4. Considering whether any additional facts or information have become available since the date on which management made its assessment.
  5. Requesting written representations from management and, where appropriate, those charged with governance regarding their plans for future action and the feasibility of these plans.

Audit Conclusions and Reporting

CAS 570.18-21 provide guidance on the auditor’s conclusion as well as the reporting requirements when the use of going concern assumption appropriate but a material uncertainty exists and when the use of going concern assumption is deemed inappropriate.

CAS 570.18

 If the auditor concludes that the use of the going concern assumption is appropriate in the circumstances but a material uncertainty exists, the auditor shall determine whether the financial statements:

  1. Adequately describe the principal events or conditions that may cast significant doubt on the entity's ability to continue as a going concern and management's plans to deal with these events or conditions; and
  2. Disclose clearly that there is a material uncertainty related to events or conditions that may cast significant doubt on the entity's ability to continue as a going concern and, therefore, that it may be unable to realize its assets and discharge its liabilities in the normal course of business.

CAS 570.19

If adequate disclosure is made in the financial statements, the auditor shall express an unmodified opinion and include an Emphasis of Matter paragraph in the auditor's report to:

  1. Highlight the existence of a material uncertainty relating to the event or condition that may cast significant doubt on the entity's ability to continue as a going concern; and
  2. Draw attention to the note in the financial statements that discloses the matters set out in paragraph 18.

CAS 570.20

If adequate disclosure is not made in the financial statements, the auditor shall express a qualified opinion or adverse opinion, as appropriate, in accordance with CAS 705. The auditor shall state in the auditor's report that there is a material uncertainty that may cast significant doubt about the entity's ability to continue as a going concern.

CAS 570.21

If the financial statements have been prepared on a going concern basis but, in the auditor's judgment, management's use of the going concern assumption in the financial statements is inappropriate, the auditor shall express an adverse opinion.