## SA-570: Going Concern
### Basics
- An enterprise is viewed as a Going Concern — continuing in operation for the foreseeable future.
- Basis of Accounting:
- If management intends to liquidate or cease operations → Liquidation Basis
- Otherwise → Going Concern Basis (entity can discharge liabilities and realize assets in normal course of business)
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### Indicators of Going Concern Doubt
| Financial | Operating | Other |
|---|---|---|
| Negative cash flows | Labour unrest / strikes | Regular violations of law |
| Huge liabilities | Loss of key management | Pending litigations and claims |
| Arrears of dividends | Shortage of key supplies | Change in laws or government policy |
| Arrears of creditors | Loss of key customer | Uninsured catastrophes |
| Adverse financial ratios | Loss of market share | |
| Default in loan repayment | Emergence of highly successful competitor | |
| Substantial operating losses | Loss of license | |
| Significant deterioration in asset values | ||
| Inability to comply with loan agreement terms | ||
| Change from credit to cash-on-delivery with suppliers | ||
| Inability to obtain financing for essential new products |
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### Preliminary Assessment on Going Concern
1. Management has performed assessment → Discuss with management whether events casting significant doubt on going concern have been identified.
2. Management has NOT performed assessment → Discuss with management and prompt them to perform it.
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### Obtaining Sufficient and Appropriate Audit Evidence (SAAE)
1. Request management to make its assessment if not yet done.
2. Evaluate management's plans for future actions and assess their feasibility.
3. If a cash flow forecast is a significant factor:
a. Evaluate reliability of underlying data used to prepare the forecast.
b. Determine whether adequate support exists for the assumptions underlying the forecast.
4. Consider whether additional facts have become available since the date of assessment.
5. Request Written Representations (WR) from management and TCWG regarding future plans and feasibility.
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### Responsibilities
Management's Responsibility — Management forms a judgement considering:
- The degree of uncertainty increases the further into the future an event or condition occurs.
- Size, complexity, nature, and condition of the entity and external factors affect the judgment.
- Judgements are based on information available at the time; subsequent events may be inconsistent with earlier judgements.
Auditor's Responsibility:
1. Assess whether management's evaluation of going concern is appropriate.
2. Determine whether a material uncertainty exists about the entity's ability to continue as a going concern.
3. These responsibilities exist even if the Financial Reporting Framework (FRF) does not expressly require it.
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### Evaluating Management's Assessment
- The auditor is not responsible for rectifying the lack of analysis by management.
- However, a lack of detailed analysis may not prevent the auditor from concluding on whether going concern is appropriate (e.g., where the entity has a history of profitable operations and ready access to financial resources).
- Auditor shall evaluate the process, assumptions, and plans for future action.
- Auditor must cover at least the same period as management, or a higher period if prescribed by law.
- If management's assessment period is less than 12 months, the auditor must extend it to 12 months.
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### Reporting Implications
| Situation | Auditor's Report |
|---|---|
| Management refuses to make preliminary assessment | Modified Opinion |
| FS prepared on Going Concern basis but Going Concern is inappropriate | Adverse Opinion |
| FS prepared on Liquidation basis and Going Concern is inappropriate | Unmodified Opinion + EOM paragraph |
| Going Concern appropriate, Material Uncertainty exists, adequately disclosed | Unmodified Opinion — Separate section headed "Material Uncertainty Related to Going Concern" drawing attention to the note; state opinion is not modified |
| Going Concern appropriate, Material Uncertainty exists, NOT disclosed by management | Modified Opinion (Qualified or Adverse) — Basis for Opinion paragraph states material uncertainty exists but FS do not disclose it |