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TS4 - Considering going concern
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What do mandatory Australian Auditing Standards require? 
 
Mandatory ASA* 570 Going Concern requires the auditor to evaluate management’s assessment of the entity’s ability to continue as a going concern. In doing this you need to consider the relevant period which means the period of approximately 12 months from the date of your current report to the expected date of your next report.  
 
In evaluating management’s assessment you would ordinarily consider:

  • the process management followed to make its assessment, including any assumptions made 
  • whether the assessment has taken into account all relevant information of which you are aware as a result of audit procedures.
For superannuation funds, Section 130 of the Superannuation Industry (Supervision) Act 1993 also requires the auditor to be satisfied the fund is solvent prior to signing the audit report.  
 
Why is documenting your review of going concern important? 
 
The going concern basis is the fundamental assumption underlying the preparation of the financial statements and is therefore critical in determining the value and classification of the entity’s assets and liabilities. If the going concern assumption is erroneous, the financial statements are highly likely to contain material misstatements. For example, an entity that is a going concern may have a non-current liability in the form of a bank loan. However, if that same entity were not a going concern then the bank loan would become a current liability and may increase in amount due to penalties, etc. 
 
Legal action is often taken against auditors when a business fails despite being considered a going concern at the time of the most recent audit. Documenting your going concern review may help to minimise your liability in the event of future legal action, as the documentation provides evidence that you carried out the audit in accordance with ASAs. 
 
In addition, the going concern review is part of the completion stage of the audit and helps ensure you have sufficient appropriate evidence on which to base your audit opinion, reducing the risk of issuing an incorrect audit report. 
 
What should you do if there is significant doubt regarding going concern? 
 
When a question arises regarding the appropriateness of the going concern assumption, ASA 570 requires you to:
  • review management’s plans for future actions 
  • gather evidence to confirm or dispel whether or not a material uncertainty exists 
  • endeavour to obtain written representations from management regarding its plans for future action.
ASA 570.32 - .34 contains further details on the procedures generally used when going concern is at risk. In addition, the standard contains the following appendices which you may find useful:
  • Appendix 1: going concern and audit opinions (a flowchart to help you decide the appropriate audit opinion in a number of situations)
  • Appendix 2: examples of mitigating factors
  • Appendix 3: example audit reports
What action do you need to take? 
Prior to signing all your audit reports, ensure that you have carried out and documented your going concern review. 
For further guidance, refer to ASA 570. This standard is currently available at www.auasb.gov.au and will be available in your Members’ Handbook at following the December 2006 update. 
 
* Mandatory Auditing Standards (ASAs) apply to audits of financial reports and other financial information for financial reporting periods commencing on or after 1 July 2006. The superseded AUS standard contained similar requirements.