Under the going concern basis of accounting addressed by ISA 570, the financial statements are prepared on the assumption that the entity is a going concern and will continue its operations for the foreseeable future. The auditor's responsibility is to obtain sufficient appropriate audit evidence regarding the appropriateness of management's use of that basis, and to conclude whether a material uncertainty exists about the entity's ability to continue as a going concern.
What Does the Going Concern Basis of Accounting Assume?
Under the going concern basis of accounting, the financial statements are prepared on the assumption that the entity is a going concern and will continue its operations for the foreseeable future.
Who Is Responsible for Assessing the Entity's Ability to Continue?
Responsibility for assessing the entity's ability to continue as a going concern rests primarily with management. Some financial reporting frameworks contain an explicit requirement for management to make such an assessment; for example, International Accounting Standard (IAS) 1 requires management to make an assessment of an entity's ability to continue as a going concern.
What Exactly Is the Auditor's Responsibility?
The auditor's responsibilities are to obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management's use of the going concern basis of accounting in the preparation of the financial statements, and to conclude, based on the audit evidence obtained, whether a material uncertainty exists about the entity's ability to continue as a going concern.
Does a Clean Report Guarantee the Entity Will Continue?
No. The standard states explicitly that the absence of any reference to a material uncertainty about the entity's ability to continue as a going concern in an auditor's report cannot be viewed as a guarantee as to the entity's ability to continue as a going concern.
What Period Must Management's Assessment Cover?
If management's assessment of the entity's ability to continue as a going concern covers less than twelve months from the date of the financial statements, the standard requires the auditor to request management to extend its assessment period to at least twelve months from that date.
What Does the Auditor Do When Events Raise Significant Doubt?
If events or conditions have been identified that may cast significant doubt on the entity's ability to continue as a going concern, the standard requires the auditor to obtain sufficient appropriate audit evidence to determine whether or not a material uncertainty exists, through performing additional audit procedures, including consideration of mitigating factors. The standard also requires the auditor to remain alert throughout the audit for audit evidence of events or conditions that may cast significant doubt on the entity's ability to continue as a going concern.
Legal References
- ISA 570 (Revised) — Going Concern, Paragraphs 2, 6, 7, 13 and 16.
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