Going Concern – Implications for the Auditor's Report (SA 570)
## Implications for the Auditor's Report – Going Concern
Standard: SA 570 (Revised) – Going Concern
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### Overview: Three Scenarios
The type of opinion depends on two questions:
1. Is the use of the Going Concern basis appropriate?
2. Has management made adequate disclosure of the uncertainty?
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## Scenario i – Inappropriate Use of Going Concern Accounting
Situation
Auditor's Opinion
Entity is following Liquidation basis (correctly) but auditor thinks Going Concern should apply
Unmodified opinion (entity is right; no issue for auditor)
Entity is following Going Concern basis but auditor concludes it is inappropriate (entity should use Liquidation basis)
Modified opinion → Adverse
> Key: If the going concern basis is wrong, the auditor expresses an Adverse opinion because the financial statements as a whole are misleading.
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## Scenario ii – Appropriate Use of Going Concern Accounting (Material Uncertainty Exists)
Management correctly uses Going Concern basis, but a Material Uncertainty exists.
Has Management Made Adequate Disclosure?
Auditor's Opinion
Special Report Element
YES – Adequate disclosure made
Unmodified opinion
Add MURGI Para (Material Uncertainty Related to Going Concern) in the audit report
NO – Adequate disclosure NOT made
Modified opinion → Qualified or Adverse
Reason: MU exists but adequate disclosure not done
### What is MURGI Para?
A separate section added to an unmodified (clean) opinion report.
Its purpose: Draw the user's attention to the disclosure made by management about the going concern uncertainty.
The auditor is NOT modifying the opinion — they are highlighting the disclosure already made by management.
### What constitutes "Adequate Disclosure"?
When Material Uncertainty Exists, management must disclose:
1. The principal event or condition creating the uncertainty.
2. Management's plans to deal with the event or condition.
3. A clear statement that the entity may not be able to realise its assets and discharge its liabilities in the normal course of business.
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## Scenario iii – Management Has Not Done Assessment / Refuses to Extend Period
Situation
Auditor's Opinion
Management has not performed a going concern assessment
Modified → Qualified
Management refuses to extend assessment to at least 12 months
Modified → Qualified
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## Summary Decision Tree
```
Is Going Concern basis appropriate?
│
├─ NO (entity should liquidate but uses GC basis)
│ └─ Adverse Opinion
│
└─ YES
│
├─ No Material Uncertainty
│ └─ Unmodified Opinion (standard report)
│
└─ Material Uncertainty Exists
│
├─ Adequate Disclosure by Mgmt? YES
│ └─ Unmodified + MURGI Para
│
└─ Adequate Disclosure by Mgmt? NO
└─ Qualified or Adverse Opinion
```
Worked example
### Example 1
Scenario: ABC Ltd is facing severe losses and its auditor concludes that the company should prepare accounts on a liquidation basis. However, management has prepared the accounts on a going concern basis.
→ The going concern basis is inappropriate. The auditor issues an Adverse opinion because the financial statements do not give a true and fair view.
### Example 2
Scenario: XYZ Ltd has a significant loan maturing in 8 months with no refinancing arranged yet. Management has disclosed this fact in the notes, described their refinancing plans, and stated that if refinancing fails, they may not be able to meet obligations.
→ Going concern basis is appropriate. Material Uncertainty EXISTS. Disclosure is adequate.
→ Auditor issues Unmodified opinion + MURGI Para in the report.
### Example 3
Scenario: PQR Ltd has Material Uncertainty about going concern but management's notes only mention 'the company faces some financial difficulties' without describing the specific event, plans, or the possibility of inability to realise assets.
→ Disclosure is INADEQUATE.
→ Auditor issues a Qualified or Adverse opinion (depending on pervasiveness).
### Example 4
Scenario: Management has not prepared any going concern assessment despite the auditor identifying several financial red flags.
→ Auditor first asks management to conduct the assessment. If management refuses or fails to extend to 12 months → Qualified opinion.
⚠️ Common exam mistakes
Thinking MURGI Para means the auditor is expressing a qualified opinion — it does NOT. MURGI Para is added to an UNMODIFIED (clean) opinion to draw attention to an existing disclosure.
Confusing Qualified vs Adverse in the 'inappropriate use' scenario — if GC basis is wrong, it's Adverse (not just Qualified), because the entire basis of accounting is wrong.
Forgetting that 'No material uncertainty' still requires some disclosure per the applicable financial reporting framework (FRF) — the auditor checks this too.
Mixing up: 'Entity follows Liquidation correctly' → Unmodified opinion (auditor agrees); 'Entity follows GC when it should liquidate' → Adverse opinion.
Bare-Act text Para 17–21 · SA 570 (Revised) – Going Concern, issued by ICAI · click to expand
Based on the audit evidence obtained, the auditor shall conclude whether, in the auditor's judgment, a material uncertainty exists related to events or conditions that, individually or collectively, may cast significant doubt on the entity's ability to continue as a going concern... If the auditor concludes that the use of the going concern basis of accounting is appropriate in the circumstances but a material uncertainty exists, the auditor shall determine whether the financial statements: (a) Adequately disclose the principal events or conditions that may cast significant doubt on the entity's ability to continue as a going concern and management's plans to deal with these events or conditions; and (b) Disclose clearly that there is a material uncertainty related to events or conditions that may cast significant doubt on the entity's ability to continue as a going concern and, therefore, that it may be unable to realise its assets and discharge its liabilities in the normal course of business. If adequate disclosure is made in the financial statements, the auditor shall express an unmodified opinion and the auditor's report shall include a separate section under the heading 'Material Uncertainty Related to Going Concern'... If adequate disclosure is not made in the financial statements, the auditor shall express a qualified opinion or adverse opinion, as appropriate.