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John Selwood's audit clinic

This month John focuses on auditor’s responsibilities relating to going concern, when companies are in financial distress.

Question
I am completing an audit where the company is having financial difficulties. The bank has not renewed funding and is calling in its debt, and the directors are having difficulty arranging replacement funding. The directors are confident that they can turn things around. What are the implications for my audit report?

Answer
As with many things in auditing, it depends. I think it’s fairly clear that there are material uncertai ntiescasting significant doubt on the company’s ability to continue as a going concern. But, as auditor, youhav e to consider the following:

  • Is the use of the going concern basis appropriate? The going concern basis of preparing the financial statements will be appropriate unless the activities have actually ceased or whenthere is no realistic alternative but to cease. Therefore, the going  concern basis will almost always be the basis upon which the financial statements are prepared. However, don’t forget to ensure that you have sufficient audit evidence to support this.
  • Is there adequate disclosure in the financial statements relating to going concern? This is a much more important and difficult area. This disclosure needs to be done properly in order for the financial statements to show a true and fair view.

Where there is material uncertainty, casting significant doubt on going concern, then there will have to be suitably prominent disclosure of the uncertainties and the potential impact of those uncertainties on the financial statements.

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