AS 2415: Consideration of an Entity’s Ability to Continue as a Going Concern
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Warning signs include falling market share, poor creditworthiness, employee turnover, low liquidity, lawsuits, excessive business loss, and inability to innovate. OverdraftOverdraft is a banking facility that offers short-term credit to the account holders by allowing them to withdraw money from their savings Going Concern Accounting And Auditing or current account even if their account balance is or below zero. LiquidationLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order.
What is an example of a going concern in accounting?
Examples of Going Concern
A state-owned company is in a tough financial situation and is struggling to pay its debt. The government gives the company a bailout and guarantees all payments to its creditors. The state-owned company is a going concern despite its poor financial position.
It can determine how financial statements are prepared, influence the stock price of a publicly traded company and affect whether a business can be approved for a loan. Lastly, an important aspect of this is that the disclosures are required by the financial accounting framework to be made by management. Regardless of where we end up with respect to whether substantial doubt is alleviated or not, the auditor always might be in a situation of having to qualify his or her opinion if the disclosures are not appropriate in the circumstances. Let’s drill down on those basic objectives and consider the steps the auditor goes through in achieving those objectives. The first one, of course, is to consider, from the auditor’s perspective, whether there are any conditions or events that cause or raise substantial doubt about the ability to continue as a going concern. An example follows of an explanatory paragraph in the auditor’s report describing an uncertainty about the entity’s ability to continue as a going concern for a reasonable period of time.
Going concern tips for auditors during the pandemic
Since the act was passed, high-profile litigation citing the auditors’ failure to issue a going-concern opinion, such as the class-action lawsuits by Kmart’s shareholders against PricewaterhouseCoopers, and Adelphia’s against Deloitte & Touche, has been drastically reduced. 4 The inclusion of https://kelleysbookkeeping.com/ an explanatory paragraph in the auditor’s report contemplated by this section should serve adequately to inform the users of the financial statements. Nothing in this section, however, is intended to preclude an auditor from declining to express an opinion in cases involving uncertainties.
This can protect investors from continuing to risk their money on a business that may not be viable for much longer. With increased market volatility, rising inflation, supply chain disruptions, labor shortages and skyrocketing interest rates, the going concern assumption can’t be taken for granted. Management must take current and expected market conditions into account when making this call — and be prepared to provide auditors with the appropriate documentation. Contact us before year end if you have concerns about your company’s going concern assessment. Examples of corrective actions include plans to raise equity, borrow money, restructure debt, cut costs, or dispose of an asset or business line.
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This alert focuses on the considerations applicable to issuers who report their financial statements on the basis of U.S. Generally Accepted Accounting Principles and to audits of those issuers performed pursuant to Public Company Accounting Oversight Board (“PCAOB”) auditing standards. We note, however, that International Financial Reporting Standards (“IFRS”) also contain a requirement that an entity assess its status as a going concern. As a result, many of the observations contained herein may also be relevant to issuers who report using IFRS. Although global pandemics were not included on the list of adverse conditions in either AS 2415 or Subtopic , the economic shock that COVID-19 has created will provide a basis for many companies and auditors to conduct a more searching going-concern analysis than usual in the months to come. As we address in the next section, this analysis will be especially difficult in a crisis such as COVID-19 whose duration and economic effects are so unpredictable.
