Describe external auditor‘s responsibilities and the work that the auditor should perform in relation to the going concern status of companies

External auditor responsibilities – going concern ISA 570 Going Concern deals with this issue.

(i) Auditors are required to consider the going concern status of companies and any disclosures regarding going concern in forming their audit opinion. Companies that are listed on stock exchanges may be required to make additional disclosures in relation to going concern issues.

(ii) Auditors are required to assess the adequacy of the means (the processes) by which directors have satisfied themselves that the going concern basis is appropriate and that adequate disclosures have been made. Auditors conduct an initial analysis at the planning stage of the audit as well as assessments at later stages.

(iii) Auditors should make enquiries of the directors and examine appropriate documentation supporting the company‘s going concern status such as budgets and cash flow forecasts.

(iv) Auditors consider whether the period to which directors have paid particular attention is adequate. This should normally be at least 12 months from the balance sheet date. Auditors also enquire of management as to their knowledge of events or conditions beyond this period that may cast significant doubt on the entity‘s ability to continue as a going concern.

(v) Auditors need to consider the appropriateness of assumptions which directors have made, the sensitivity of assumptions to external and internal changes, any obligations, guarantees or undertakings arranged with other entities, the existence and adequacy of borrowing facilities and the directors‘ plans to deal with any going concern problems.

(vi) Auditors are required to document the extent of any concerns, taking account of matters that have come to their attention during the course of the audit and in particular, financial, operational, or other indicators of going concern problems that are present.

(vii) Indicators of going concern issues would include trading losses, impairment of assets, net liabilities, defaults on loans, liquidity problems, an inability to refinance loans where necessary, fundamental changes in the markets or technology having an adverse effect on the company, loss of management, staff, customers or suppliers, or major litigation, for example.

(viii) Auditors should consider the need to obtain written management representations.

(ix) Auditors should consider the adequacy of any disclosures in the financial statements.

Share through

Leave a Reply

Your email address will not be published. Required fields are marked *