Business on the move is considered when an entity will continue with its business in the foreseeable future. General purpose financial statements are prepared under the going concern assumption, unless management intends to liquidate the entity or cease operations, or there is no other realistic alternative.
Objective in a Financial Audit
In a financial audit, the auditor’s objective and responsibility is to obtain sufficient audit evidence to evaluate whether management has been able to maintain the business hypothesis in place in the preparation and preparation of its financial statements. Similarly, during the financial audit the auditor has the responsibility to inform Management if there is any material uncertainty regarding the entity’s ability to continue as a going concern.
Considerations when evaluating the business hypothesis on the move
ISA 570 provides us as auditors or business consultants the application guide for the evaluation of ongoing business, being our main objectives:
- To obtain sufficient audit evidence from management to assess whether the general purpose financial statements have been prepared under the going concern assumption.
- To determine whether or not material uncertainty exists in relation to facts or conditions that give rise to doubt about the going concern assumption.
- Determine the implications for the audit report.
In order to obtain an assessment of the Company’s ability to continue as a going concern, value judgments will have to be made, considering the following factors:
- The degree of uncertainty associated with the Company’s performance.
- The complexity of the Company related to the nature and conditions of its activities, as well as the impacts of external factors.
- Any value judgment about the short-term future will be based on the most recent information.
As mentioned in the factors of consideration for the valuation of the Company’s capacity to continue as a going concern, shareholders and managers will have to pay attention to the degree of difficulty or risks related to the business, such as portfolio risk, supply and payment capacity and risk of indebtedness and departure of qualified personnel. To this factor, we must add the capacity to face new laws or measures that may be taken by the Government related to the Company’s activities.
If, during the evaluation of the business assumption in progress, there are facts or conditions that may give rise to doubts, these should be disclosed, based on the audit evidence obtained, in the financial statements, in order to draw the attention of the users of the financial statements to the possibility that the Company may not be able to continue with its activities.
Material Uncertainty and Auditor’s Assessment
Today, companies are at risk of continuing their activities because the State declared a national emergency in the country and caused social isolation (quarantine) due to the COVID-19 pandemic. During this period, companies have had to comply and suspend their activities or operate limited teleworking.
The shareholders and managers of companies have a great challenge to restart and develop their activities by evaluating alternatives for entrepreneurship in order to generate economic benefits for the companies and their workers, complying with safety and health protocols.
This event has a significant impact on the companies’ financial statements; therefore, we as auditors must assess whether the information disclosed in the financial statements is in accordance with IAS 1 “Presentation of Financial Statements”, so that we can rely on professional judgment and determine whether there are material uncertainties that may affect the companies’ ability to continue as a going concern.