Going Concern arises when an entity will continue its business for the foreseeable future. The financial statements for general purposes are prepared under the going concern assumption unless management intends to liquidate the entity, cease operations, or there is no other realistic alternative.
Financial Audit Purpose
In a financial audit, the auditor’s purpose and responsibility are to obtain sufficient audit evidence to evaluate whether the Management maintained a going concern assumption preparing its financial statements. Similarly, the auditor’s responsibility is to inform the Management of any uncertainty regarding the entity’s ability to continue as a going concern during the financial audit.
Considerations for assessing the going concern assumption
ISA 570 provides us as auditors or business consultants with application guidance for the going concern assessment, being our main objectives:
- To obtain sufficient audit evidence from the management to assess whether the financial statements for general purposes have been prepared under the going concern assumption.
- To determine whether or not there is uncertainty related to events or conditions that cast doubt on the going concern assumption.
- To determine the implications for the audit report.
To assess if the Company’s ability continues as a going-concern, value judgments will have to be under 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 judgments about the near-term future will be based on the most recent information.
As mentioned in the factors for assessing the Company’s ability to continue as a going concern, shareholders and managers will need to pay attention to the degree of difficulty or risk associated with the business, such as portfolio risk, supply, and payment capacity, debt risk, and outflow of qualified personnel. In addition, the capacity to face new laws or measures that the Government may take related to the Company’s activities.
If questionable facts or conditions exist during the assessment of the going concern assumption, these should be disclosed in the financial statements to alert the users thereof the possibility that the Company may not be able to continue with its activities, based on the audit evidence obtained.
Material Uncertainty and Auditor’s Assessment
Today the Companies are at risk of continuing their activities due to COVID-19 and the social isolation (quarantine) it has caused. During this period, companies have had to comply and suspend their activities or operate limitedly via teleworking.
The shareholders and company managers face the great challenge of restarting and developing their activities, evaluating entrepreneurship alternatives to generate economic benefits for the companies and their workers while complying with health and safety protocols.
This is a significant impact on the financial statements of the companies. Thus, we as auditors must evaluate whether the information disclosed in the financial statements is according to IAS 1 “Financial Statements Filing” to use professional judgment to determine whether there are material uncertainties that may affect the ability of the companies to continue as a going concern.