COVER PAGE
DEFINE A ‘GOING CONCERN’ AND DISCUSS THE AUDITOR’S
RESPONSIBILITIES IN RESPECT OF GOING CONCERN.
Going concern refers to the assumption that an entity will continue its operations for the
foreseeable future will not be forced to liquidate or cease its activities (ACCA, 2025). This
assumption is important in financial reporting because it affects the valuation of assets and
liabilities.
According to the International Standard on Auditing (ISA) 170, the auditor’s responsibilities
regarding the going concern must be:
1. Evaluating management’s plans
Management is responsible for assessing whether the entity can continue as a going concern.
The auditor reviews this assessment to determine its effectivity. The assessment includes:
- Reviewing management’s plans to reduce costs, and increase revenue.
- Assessing the potentiality of these plans and the likelihood of being implemented
effectively.
- Considering whether management’s plans are consistent with the entity’s past
experiences and industry trends.
2. Perform risk assessment procedures
The auditor must identify events or conditions that may cast doubt on the entity’s ability to
continue as a going concern. This includes factors such as :
- Financial difficulties, such as consistent losses or negative cashflows.
- Loss of key customers, suppliers, or personnel.
- Difficulty in meeting debt obligations or maintaining compliance with loan contract
agreements.
- Changes in market conditions or industry trends which may also have an impact on
most companies.
3. Gather audit evidence.
If there are indicators of financial distress, the auditor must obtain sufficient evidence to
support management’s assertions.
4. Consider the impact on the Auditor’s report.
If materiality exists, the auditor may need to modify their audit opinion in the audit report. An
emphasis of matter paragraph in the audit report should be made and it should :
- Describe the uncertainty surrounding the entity’s ability to continue as a going
concern.
- Explain clearly the relevant disclosures in the financial statements.
- Indicate also that these matters do not affect the auditor’s opinion on the financial
statements.
The auditor assesses whether a company can continue operating by reviewing financial risks,
management plans, and market conditions. If material uncertainties exist, they ensure these
concerns are clearly disclosed in the financial statements. This helps investors and
stakeholders make informed decisions.
EXPLAIN THE ACTIONS THAT AN AUDITOR SHOULD CARRY OUT TO TRY
AND ASCERTAIN WHETHER AN ENTITY IS A GOING CONCERN.
When assessing an entity’s ability to continue as a going concern, an auditor follows a
structured approach to gather relevant evidence. The following actions include :
1. Review management’s plan
- The auditor evaluates whether management has proper plans to address financial
difficulties.
- The plan includes strategies to improve cash flow, cut costs, increase revenue, or
obtain new financing.
- The auditor assesses the feasibility of these plans and whether they align with industry
trends and past company performance.
2. Analyze financial indicators
- The auditor reviews the entity’s debt levels and assess whether it can loan or secure
additional funding.
- Cash flow forecasts are examined to see if the company has enough money to sustain
operations.
- Liquidity ratios (such as current ratio and quick ratio) are reviewed to determine if the
entity can meet short term obligations.
3. Obtain written presentations from management
- Management provides going concern assessment statements, which confirms that in
their opinion, the entity will continue operating for the foreseeable future.
- These written representations serve as audit evidence and help ensure transparency in
the financial reporting.
4. Evaluate industry and economic conditions
- External factors such as inflation, government regulatory changes, economic
downturns, or technological disruptions can impact an entity’s existence.
- Market trends and competition are analyzed to assess whether the entity can sustain
profitability.
5. Assess future events
- The auditor examines events after the reporting period that might impact the going
concern assessment.
- Major losses, legal cases, regulatory actions, or any unexpected market changes are
taken into account.
- Changes in operations, such as factory closures may indicate financial distress.
In conclusion the above actions help ensure that financial statements clearly reflect the
entity’s ability to continue its operations. The auditor forms an informed opinion based on his
audit evidence gathered. If material uncertainties exist, they must be disclosed to both the
shareholders and stakeholders of an entity and maintain transparency and reliability in
financial reporting.
REFERENCE LISTS
ACCA (n.d) Going concern. Available at: https://www.accaglobal.com/gb/en/student/exam-
support-resources/fundamentals-exams-study-resources/f8/technical-articles/going-
concern.html (Accessed: 27 April 2025).
IRBA (2015) ISA 570 Revised: Going Concern. Available at:
https://www.irba.co.za/upload/ISA-570-Revised.pdf (Accessed: 27 April 2025).
American Institute of Certified Public Accountants (AICPA) (2020) AU Section 341: The
Auditor's Consideration of an Entity's Ability to Continue as a Going Concern. Available at:
https://www.aicpa.org/research/standards/auditattest/au-00341.html (Accessed: 27 April
2025).
Public Company Accounting Oversight Board (PCAOB) (2020) AS 2415: Consideration of
an Entity's Ability to Continue as a Going Concern. Available at:
https://pcaobus.org/standards/auditing-standards/as-2415 (Accessed: 27 April 2025).
International Auditing and Assurance Standards Board (IAASB) (2018) ISA 570: Going
Concern. Available at: https://www.iaasb.org/publications/isa-570-going-concern (Accessed:
27 April 2025).
