AUDITING AND FORENSIC ACCOUNTING
(ACC 403)
(3 UNITS)
SALAWU Mary Kehinde
Department of Management
and Accounting
Faculty of Administration
GOING CONCERN
Learning Objectives: At the end of this module, you
should be able to
• Tell management and auditor’s responsibility
• Identify the symptoms
• Itemise various mitigating plans
• Describe the procedure in assessing a clients going
concern status
Introduction to content
• Management and auditor’s responsibility
• Symptoms of going concern problems
• Mitigating plans
• Procedure in assessing a clients going concern status
• IAS 1 (Presentation of Financial Statements)
stipulates that the auditors are required to consider
the entity’s ability to continue as a going concern,
and any relevant disclosures in the financial
statements when forming an opinion as to whether
financial statements give a true and fair view.
Going concern is the ability of a business entity to
continue operation and meet obligations
Auditor’s Responsibility
Auditor may detect risk during an audit that can
lead to the need to question an entity’s ability to
continue as a going concern:
Evaluate whether there is substantial doubt about
the entity’s ability to continue as a going concern
for a reasonable period to time, not to exceed one
year beyond the date of the financial statements
being audited (hereinafter referred to as a
reasonable period of time).
• auditor’s evaluation is based on his knowledge of
relevant conditions and events that exist at or have
occurred prior to the completion of fieldwork.
• The Information about such conditions or
events is obtained from the application of
auditing procedures planned and performed
to achieve audit.
• An entity’s going concern is in doubt when it
can continue in operation and meet its
obligations only on condition that:
• (a) It sells substantial amounts of its assets
outside the ordinary course of business; and
• (b) its creditors are willing to forgive or
restructure its debt.
• The directors are responsible for the preparation of
financial statements which give a true and fair view
of the state of affairs and of the profit or loss for
that period.
• The directors should ensure that the financial
statements comply with the provisions of the
Companies and Allied Matters Act, Cap. C 20, LFN
2004.
• The directors are obliged to ensure that:
(a) Proper accounting records are maintained;
(b) Internal control procedures are instituted which,
as far as is reasonably possible, safeguard the assets,
prevent and detect fraud and other irregularities;
(c) Applicable accounting standards are followed;
(d) Suitable accounting policies are adopted and
consistently applied;
(e) Judgements and estimates made are reasonable
and prudent; and
(f) The going concern basis is used, unless it is
inappropriate to presume that the company will
continue in business.
Auditor’s Responsibilities
It is the responsibility of the auditors to form an
independent opinion based on the audit of the
financial statements and to report to the members
thereon.
The audit of the financial statements does not
relieve the directors of any of their responsibilities
on the financial statements.
If the auditor concludes there is substantial doubt
about the entity to continue as a going concern for
a reasonable period of time (not to exceed one
year from the date of the financial statements),
the auditor should:
(a) Determine that this fact is appropriately
disclosed in the financial statements; and
(b) Reflect that conclusion in explanatory
paragraph.
In a properly planned audit, it should not be
necessary to design auditing procedures
specifically directed at the going concern
issue. The results of auditing procedures
designed and performed to achieve other
audit objectives should be sufficient for that
purpose. For example, conditions and events
that could raise doubts may be identified
through some of the following procedures:
(a) Analytical procedures;
(b) Review of subsequent events;
(c) Review of compliance with the terms of debt
and loan agreements;
(d) Reading of minutes of meetings of stockholders,
board of directors, and important committees of
the board;
(e) Inquiry of the entity’s lawyers about litigation,
claims and assessments; and
(f) Confirmation with related and third parties of
the details of arrangements to provide or maintain
financial support.
Symptoms of going concern problems
Negative quantitative trend:
(a) Recurring operating losses;
(b) Working capital deficiencies;
(c) Negative cash flows from operating activities;
(d) Adverse key financial ratios.
(e) Default on loan or similar agreements;
(f) Dividends in arrears;
(g) Denial of usual trade credit from suppliers;
(h) Restructuring of debt;
(i) Non-compliance with statutory capital
requirements;
Negative qualitative factors / trend
Loss of a key management staff
Strike and other labour difficulties
Heavy dependence on the success of an asset or product
Excessive reliance on a customer or supplier
Loss of a key franchise or patent
Political risks
Technological developments that render a key product or
asset obsolete
Undue influence by a market dominant competitor
Need to seek new sources or methods of financing or to
dispose of substantial assets (outside the course of
business).
Examples of External factors:
(a) Legal proceedings, legislation, or similar matters that might
jeopardise an entity’s ability to operate;
(b) Loss of a key franchise, licence, or patent; loss of a principal
Customer
(c) Uninsured or underinsured catastrophe such as fire, flood,
drought, earthquake;
Note
If substantial doubt exists about the entity’s ability to
continue as a going concern for a reasonable period of time,
auditors should:
(i) Obtain information about management’s mitigation plans;
and
(ii) Assess the likelihood that such plans can be effectively
implemented. customer or supplier;
Management’s mitigation plans might include:
• Quantitative matters:
Postponement of replacement of assets
Disposal of assets without significantly
affecting operations
Lease assets rather than outright purchase
Reschedule existing facilities
Raise additional equity by fresh issue of rights
issues
Quantitative matters:
• Securing a suitable employee where a key staff is lost
• Finding alternative markets where a key supplier of customer is
lost
• Embarking on diversification excercise
• Using alternative resources
Auditor’s Evaluation of the Plans
(a) Consider whether there is adequate evidence
supporting management’s ability to carry out the
plans. For example, plans to dispose of assets
could be difficult or impossible to accomplish;
(b) Ascertain if there are restrictive covenants in
loan agreements limiting such disposals;
(c) Request management to provide information
about significant management’s plans, and
(d) Consider whether there is adequate support for
the significant assumptions underlying the plans.
Procedure in assessing a clients going
concern status
Review of the cash flow forecasts prepared for the
subsequent accounting period and note whether
there are improvement from prior year
Review the management accounts and the financial
records prepared for the subsequent accounting
period
Review the minutes of meetings of the clients
directors and management
Review the correspondence with the company's
creditors with the aim to identify whether there are
pressures form the creditors to redeem financial
Review the profit forecast in the subsequent
accounting period with the aim to identify
improvement in the companies profitability
Review the companies post balance sheet trading
and ensure that improvement in trading are
reflected in the companies cash flow and profits
forecasts
Review the companies position is relation to
similar companies in the same industry
Generally review the rescue plans initiated by the
companies management
Where financial support is to be given by the
clients bankers and sister companies review the
If after evaluating management’s plans, the
auditor concludes that substantial doubt exists
about the entity’s ability to continue as a going
concern for a reasonable period of time; the
auditor should then consider:
(a) The adequacy of financial statement
disclosure about the entity’s possible inability to
continue as a going concern; and
(b) Include an explanatory paragraph (following
the opinion paragraph) in the audit report to
reflect that conclusion.
Contents of auditors’ disclosures on going
concern
Auditors’ disclosures about the entity’s ability to continue
as a going
concern might include the following information:
(a) Pertinent conditions and events giving rise to the
assessment of substantial doubt about the entity’s ability
to continue as a going concern for a reasonable period of
time;
(b) The possible effects of such conditions and events;
(c) Management’s evaluation of the significance of those
conditions and events and mitigating factors;
(d) Possible discontinuance of operations;
(e) Management’s plans, including relevant prospective
financial
information; and
(f) Information about the recoverability or classification of
recorded
asset amounts or the amounts or classification of liabilities.
Summary
• Management and auditor’s responsibility
• Symptoms of going concern problems
• Mitigating plans
• Procedure in assessing a clients going concern status
