The International Standard on Auditing (ISA) 570: Going Concern serves a critical role in the audit process. In Going Concern and Practical Opinion Forming, Lindsay Webber took a closer look into the topic.
Objective of ISA 570
An objective of ISA 570 to ensure that auditors obtain sufficient appropriate audit evidence to conclude whether a material uncertainty exists regarding the entity's ability to continue as a going concern. This involves assessing the appropriateness of management's use of the going concern basis of accounting when preparing financial statements and reporting in accordance with ISA 570.
Going Concern Assumption
The going concern assumption underpins the preparation of financial statements. It presumes that an entity will continue its operations for the foreseeable future unless there is an intention by management to liquidate the entity, cease trading, or no realistic alternative but to do so[1:2]. The ability of an entity to continue as a going concern is fundamental as it affects the basis of accounting in financial statements[1:3].
Risk Assessment Procedures
Auditors are required to design and perform risk assessment procedures to identify events or conditions that may cast significant doubt on the entity's ability to continue as a going concern. These procedures are crucial for determining whether a material uncertainty related to going concern exists, which would necessitate further evaluation and disclosure.
Evaluating Management and Their Assessment
Evaluating management's assessment of the going concern assumption is a key responsibility of the auditor. This includes maintaining professional scepticism and ensuring that the period covered by management's assessment is at least 12 months from the date of approval of the financial statements. If this period is shorter, the auditor must consider the implications for the audit report.
Evaluating the Sufficiency and Appropriateness of Audit Evidence Obtained
The auditor must evaluate whether the audit evidence obtained is sufficient and appropriate to support the conclusions drawn regarding the going concern assumption. This includes determining if a material uncertainty exists and if management's use of the going concern basis of accounting is appropriate.
Requirements and Practical Compliance
ISA 570 outlines specific requirements for auditors, including the need to obtain management representations related to going concern and assess the views of those responsible for governance. Auditors must also review disclosures related to going concern, assess plans for future actions, and communicate with those charged with governance. Practical compliance involves documenting the auditor's concerns, if any, about the entity's ability to continue as a going concern, supported by narrative and substantive facts and figures. Additionally, auditors must evaluate whether the disclosures in the financial statements provide a true and fair view and whether the period of assessment for going concern is adequate.
In conclusion, ISA 570 plays a vital role in the audit process by guiding auditors in evaluating an entity's ability to continue as a going concern. By adhering to the standard's requirements, auditors can provide valuable insights into the entity's financial health and future prospects.
For the full session, please click here. In this session, Lindsay Webber covers:
Session 7: Going Concern and Opinions;
- ISA 700 - The Unqualified Audit Opinion
- ISA 570 - Material Uncertainty Due to Going Concern
- ISA 706 - Emphasis of Matter Paragraphs & Other Matter Paragraphs & First Time Audits
- ISA 705 – Modified Opinions; Limitation of Scope, Adverse & Disclaimers of Opinion
- ISA 701 - Key Audit Matters;
- ISA 710 – Comparative information
- ISA 720 – Auditors Responsibility for Other Information.
Session 8: Practical Opinion Forming & Review of Live Audit Reports.
- Live Audit Opinion Review
The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.
