Audit Procedures for Going Concern: Assertions, Procedures, and Risks

Get step-by-step guidance on how to invest in Tesla stock and learn the ins and outs of this electric vehicle company. A going concern is a company that is financially stable and, at the very least, is likely to survive for the next 12 months. A company in poor shape that is not seen as a going concern may not last for 12 more months. One of the larger repercussions of going conern not being a going concern is the credit challenge. New lenders are unlikely to issue new credit, at least at a reasonable interest rate.

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Hence, a declaration of going concern means that the business has neither the intention nor the need to liquidate or to materially curtail the scale of its operations. Under IFRS Standards, management assesses all available information about the future, considering the possible outcomes of events and changes in conditions, and the realistically possible responses to such events and conditions. Events or conditions arising after the reporting date but before the financial statements are authorized for issuance should be considered. IAS 1 states that management may need to consider a wide range of factors, including current and forecasted profitability, debt maturities and replacement financing options before satisfying its going concern assessment. A key part of the auditor’s work is evaluating management’s assumptions and projections.

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Behind each role are individuals who have made meaningful contributions to our firm—people we’ve collaborated with, mentored, learned from, Accounting Security and shared successes with. Billie Anne is a freelance writer who has also been a bookkeeper since before the turn of the century. She is a QuickBooks Online ProAdvisor, LivePlan Expert Advisor, FreshBooks Certified Partner and a Mastery Level Certified Profit First Professional. In 2012, she started Pocket Protector Bookkeeping, a virtual bookkeeping and managerial accounting service for small businesses. You’ve likely heard of people in audit getting disappeared from KPMG in recent days, we certainly have.

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But with historically low attrition and continued market shifts, this is a necessary step to better align our firm for the future. An entity is assumed to be a going concern in the absence of significant information to the contrary. An example of such contrary information is an entity’s inability to meet its obligations as they come due without substantial asset sales or debt restructurings. If such were not the case, an entity would essentially be acquiring assets with the intention of closing its operations and reselling the assets to another party.

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In our experience, if there are such material uncertainties, then the company usually provides disclosure as part of the basis of preparation note in the financial statements. US GAAP requires management’s plans to meet certain conditions payroll to be considered in the assessment. If a company is not considered a going concern, its financial statements must be prepared using a different approach often called the liquidation basis of accounting. Going concern concept is a simple but very important financial accounting principle which stipulates the basis on which financial statements are prepared depending on the likelihood of the company continuing its normal course of business.

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• Further, other actions such as deferring capital expenditures or adjusting the workforce may be needed to generate enough cash flow to meet the company’s financial obligations.
• Management must also consider the likelihood, magnitude and timing of the potential effects of any adverse conditions and events.
• You’ve likely heard of people in audit getting disappeared from KPMG in recent days, we certainly have.
• The auditor is required by the Securities and Exchange Commission to disclose in the financial statements of a publicly traded company whether going concern status is in doubt.
• This testing is performed by the auditor in order to provide assurance that the entity’s internal controls are operating effectively and that the financial statements are accurate and complete.
• Operational disruptions, such as regulatory changes, technological shifts, or geopolitical tensions, can also threaten viability.
• Thus, the label going concern indicates that a company is making enough money to stay afloat for the foreseeable future or until there is evidence to the contrary.

This latest edition includes illustrative application of going concern’s most significant complexities. The going concern concept is not clearly defined anywhere in the US generally accepted accounting principles, and so is subject to a considerable amount of interpretation regarding when an entity should report it. However, generally accepted auditing standards (GAAS) do instruct an auditor regarding the consideration of an entity’s ability to continue as a going concern. This testing is performed by the auditor in order to provide assurance that the entity’s internal controls are operating effectively and that the financial statements are accurate and complete.

This means the business can pay all debt payments, fixed expenses, and operating expenses using its existing cash and a reasonable estimate of new cash flow during the year. Accounting standards determine what a company must disclose on its financial statements if there are doubts about its ability to continue as a going concern. The assumption that a business is expected to continue in future affects the timing, nature and amount on which accounting transactions are recorded. For example, one criteria for classification of assets and liabilities into current and non-current is whether they are realized/settled within normal course of business.