slaus 570- going concern

8/12/2019 Slaus 570- Going Concern

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A Presentation to-

SLAuS 570 Going Concern

By Tishan Subasinghe


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Overview of the

presentation


Introduction to the Presentation

Introduction to Going Concern Assumption

Accounting Standards perspective

Objectives of SLAuS 570

Responsibilities of the Management/ Auditor

Planning, Risk assessment Procedures and

Related Activities

Events and Conditions that may cast doubt about

Going Concern Assumption

Evaluating Managements Assessment

Period Beyond Managements Assessment

Additional Audit Procedures

Audit Conclusion And Reporting

Discussion


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Introduction to




What is Going Concern AssumptionAn entity is viewed as

continuing in business

operations for the foreseeable

future.


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ExamplesAn oil and gas firm operating in

Nigeria is stopped by a Nigerian

court from carrying out operations

in Nigeria.

The firm is not a going concern in

Nigeria, because it has to shutdown.



A nationalized refinery is facing

cash flows problems but the

government of the country

provided a guarantee to the

refinery to help it out with allpayments, the refinery is a going

concern despite poor financial

position.

Examples


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A bank is in serious financial

troubles and the government is not

willing to bail it out.

The Board of Directors has passed

a resolution to liquidate the

business.The bank isnot a going concern.

Examples



A merchandising company has a

current ratio below 0.5.

A creditor $1,000,000 demanded

payment which the company could not

make.

The creditor requested the court toliquidate the business and recover his

debts and the court grants the order.

The company is no longer a going

concern.

Examples


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Accounting Standards

perspective


Accounting Standards Perspective

LKAS 1 Presentation of Financial Statements

When preparing financial Statements,

management shall make an assessment of

the entitys ability to continue as going

concern (section 25 LKAS 1)

An entity shall prepare Financial

Statements on going concern basis unlessmanagement either intend to liquidate the

entity or to cease the trading or has no

realistic alternative but to do so


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Accounting Standards Perspective

LKAS 1 Presentation of Financial Statements

When management is aware, in making its

assessmen,t of material uncertainties related to

the events or conditions that may cast significant

doubt upon the entity's ability to continue as a

gong concern the entity shall disclose those

uncertainties

When an entity does not prepare its financial

statements in going concern basis it shall disclose

the fact together with the basis on which it

prepared the financial statements and the reason

why the entity is not regarded as a going concern


Objectives of

SLAuS 570


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introduction


Objectives of SLAuS 570 Going Concern

Toobtainsufficientappropriateauditevidence

regardingtheappropriatenessofmanagementsuse

ofthegoingconcernassumptioninthepreparation

ofthefinancialstatements

Toconclude,basedontheauditevidenceobtained,

whetheramaterialuncertaintyexistsrelatedto

eventsorconditionsthatmaycastsignificantdoubt

ontheentitysabilitytocontinueasagoingconcern

Todeterminetheimplicationsfortheauditors

report.


Responsibilities of the

Auditor


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introduction


Responsibilities of the Auditor

To obtain sufficient appropriate audit evidence

about the appropriateness of managements use

of the going concern assumption in the

preparation and presentation of the financial

statements

Toconcludewhetherthereisamaterialuncertaintyabouttheentitysabilitytocontinueasagoing concern.

This responsibility exists even if the financial reporting framework used in thepreparation of the financial statements does not include an explicit requirement

for management to make a specific assessment of the entitys ability to continue

as a going concern.


Planning, Risk assessmentProcedures and Related

Activities


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introduction


RiskassessmentProceduresandRelatedActivitiesManagement

preliminary

assessmentofthe

entitysabilityto

continueasa

goingconcern

No

Yes

discusstheassessmentwithmanagement

determinewhethermanagementhasidentified

eventsor

conditions

that,

individually

or

collectively,maycastsignificantdoubtonthe

entitysabilitytocontinueasagoingconcern

managementsplanstoaddressthem

discusswithmanagement

thebasisfortheintended

useofthegoingconcern

assumption

inquireofmanagement

whethereventsor

conditionsexistthat,

individuallyorcollectively,

maycastsignificantdoubt

ontheentitysabilityto

continueasagoing

concern.


RiskassessmentProceduresandRelatedActivitiesWhen performing risk assessment procedures under

planning as required by SLAuS 315,the auditor shall

consider whether there are events or conditions that may

cast significant doubt on the entitys ability to continue as a

going concern.

In so doing, the auditor shall determine whether

management has already performed a preliminary

assessment of the entitys ability to continue as a goingconcern

Theauditorshallremainalertthroughouttheauditforauditevidenceofeventsorconditionsthatmaycastsignificantdoubtontheentitys

abilitytocontinueasagoingconcern.


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RiskassessmentProceduresandRelatedActivities

If such an assessment has not yet been performed, the

auditor shall discuss with management the basis for the

intended use of the going concern assumption, and inquire

of management whether events or conditions exist that,

individually or collectively, may cast significant doubt on the

entitys ability to continue as a going concern.

Theauditorshallremainalertthroughouttheauditforauditevidenceofeventsorconditionsthatmaycastsignificantdoubtontheentitys

abilitytocontinueasagoingconcern.


Events and Conditions thatmay cast doubt about Going

Concern Assumption


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FinancialNetliabilityornetcurrentliabilityposition

Fixedtermborrowingsapproachingmaturitywithout

realisticprospectsofrenewalorrepayment;orexcessive

relianceonshorttermborrowingstofinancelongterm

assets.

Indicationsofwithdrawaloffinancialsupportbycreditors.

Negativeoperatingcashflowsindicatedbyhistoricalor

prospectivefinancialstatements.

Adversekeyfinancialratios.


Events and Conditions that may cast doubt aboutGoing Concern Assumption

Financial Cont)Substantialoperatinglossesorsignificantdeteriorationin

thevalueofassetsusedtogeneratecashflows.

Arrearsordiscontinuanceofdividends.

Inabilitytopaycreditorsonduedates.

Inabilitytocomplywiththetermsofloanagreements.

Changefromcredittocashondeliverytransactionswith

suppliers.

Inabilitytoobtainfinancingforessentialnewproduct

developmentorotheressentialinvestments.


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OperatingManagementintentionstoliquidatetheentityortocease

operations.

Lossofkeymanagementwithoutreplacement.

Lossofamajormarket,keycustomer(s),franchise,license,

orprincipalsupplier(s).

Labordifficulties.

Shortagesofimportantsupplies.

Emergenceofahighlysuccessfulcompetitor.


Events and Conditions that may cast doubt aboutGoing Concern Assumption

OtherNoncompliancewithcapitalorotherstatutory

requirements.

Pendinglegalorregulatoryproceedingsagainsttheentity

thatmay,ifsuccessful,resultinclaimsthattheentityis

unlikelytobeabletosatisfy.

Changes

in

law

or

regulation

or

government

policy

expectedtoadverselyaffecttheentity.

Uninsuredorunderinsuredcatastropheswhentheyoccur.


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Evaluating ManagementsAssessment


Evaluating Managements Assessment

Shall cover the same period as that used by management

to make its assessment

If managements assessment of the entitys ability to

continue as a going concern covers less than twelve months

from the date of the financial statements as defined in

SLAuS 560,the auditor shall request management to extend

its assessment period to at least twelve months from that

date.

In evaluating managements assessment, the auditor shall

consider whether managements assessment includes allrelevant information of which the auditor is aware as a

result of the audit.

Theauditorshallevaluatemanagementsassessmentofthe

entitysabilitytocontinueasagoingconcern


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Period Beyond ManagementsAssessment

introduction


Period Beyond Managements Assessment

Theauditorshallinquireofmanagementas

toitsknowledgeofeventsorconditions

beyondtheperiodofmanagements

assessmentthatmaycastsignificantdoubt

ontheentitysabilitytocontinueasagoing

concern.


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Additional Audit Procedureswhen Events or Conditions are

Identified

introduction


Addit ional Audit Procedures when Events or Condit ions areIdentified

Wheremanagementhasnotyetperformedan

assessmentoftheentitysabilitytocontinueasa

goingconcern,requestingmanagementtomakeits

assessment

Evaluatingmanagementsplansforfutureactions

inrelationtoitsgoingconcernassessment,

whethertheoutcomeoftheseplansislikelyto

improvethesituationandwhethermanagements

plansare

feasible

in

the

circumstances

Theauditorshallobtainsufficientappropriateauditevidence

todeterminewhetherornotamaterialuncertaintyexists

throughperformingadditionalauditprocedures,including

considerationofmitigatingfactors


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introduction


Addit ional Audi t Procedures when Events or Condi tions are

Identified

Wheretheentityhaspreparedacashflowforecast,

andanalysisoftheforecastisasignificantfactorin

consideringthefutureoutcomeofeventsorconditions

intheevaluationofmanagementsplansforfuture

action

(i) Evaluatingthereliabilityoftheunderlyingdata

generatedtopreparetheforecast

(ii)Determiningwhetherthereisadequatesupport

forthe

assumptions

underlying

the

forecast

(d)Consideringwhetheranyadditionalfactsor

informationhavebecomeavailablesincethe

dateonwhichmanagementmadeitsassessment.

introduction


Addit ional Audit Procedures when Events or Condit ions areIdentified

Requestingwrittenrepresentationsfrom

managementand,whereappropriate,those

chargedwithgovernance,regardingtheirplans

forfutureactionandthefeasibilityoftheseplans

Theauditorshallobtainsufficientappropriateaudit

evidencetodeterminewhetherornotamaterial

uncertaintyexiststhroughperformingadditionalaudit

procedures,includingconsiderationofmitigatingfactors


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Audit Conclusion AndReporting


Audi t Conc lusion And Report ing

GoingConcern

Assumption

Appropriate

Yes

Yes

No

UnmodifiedAudit

OpinionEmphasisofMatter(ifmultiple

uncertainties,adisclaimerofopinion

may havetobeexpressed)

Material

Uncertainty

Unmodified

Audit

Opinion

Disclosure

Yes

No Modified

Audit

Opinion

Qualified

Opinion

Adverse

Opinion

Modified

Audit

Opinion

NoAdverse

Opinion


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Audit Reporting When Disclosure of MaterialUncertainty Is AdequateEmphasisofMatterWithoutqualifyingouropinion,wedrawattentiontoNote

Xinthefinancialstatementswhichindicatesthatthe

CompanyincurredanetlossofZZZduringtheyearended

December31,20X1and,asofthatdate,theCompanys

currentliabilitiesexceededitstotalassetsbyYYY.These

conditions,alongwithothermattersassetforthinNoteX,

indicatetheexistenceofamaterialuncertaintythatmay

castsignificantdoubtabouttheCompanysabilitytocontinueasagoingconcern.



Audit Reporting When Disclosure of MaterialUncertainty Is Inadequate Qualified OpinionBasisforQualifiedOpinion

TheCompanysfinancingarrangementsexpireand

amountsoutstandingarepayableonMarch19,20X1.The

Companyhasbeenunabletorenegotiateorobtain

replacementfinancing.Thissituationindicatesthe

existenceofamaterialuncertaintythatmaycastsignificant

doubton

the

Companys

ability

to

continue

as

agoing

concernandthereforetheCompanymaybeunableto

realizeitsassetsanddischargeitsliabilitiesinthenormal

courseofbusiness.Thefinancialstatements(andnotes

thereto)donotfullydisclosethisfact.


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Audit Reporting When Disclosure of MaterialUncertainty Is Inadequate Qualified Opinion Cont)

QualifiedOpinion

Inouropinion,exceptfortheincompletedisclosureofthe

informationreferredtointheBasisforQualifiedOpinion

paragraph,thefinancialstatementspresentfairly,inall

materialrespects(orgiveatrueandfairviewof)the

financialposition

of

the

Company

as

at

December

31,

20X0,

andofitsfinancialperformanceanditscashflowsforthe

yearthenendedinaccordancewith



Audit Reporting When Disclosure of MaterialUncertainty Is Inadequate Adverse OpinionBasisforAdverseOpinion

TheCompanysfinancingarrangementsexpiredandthe

amountoutstandingwaspayableonDecember31,20X0.

TheCompanyhasbeenunabletorenegotiateorobtain

replacementfinancingandisconsideringfilingfor

bankruptcy.These

events

indicate

amaterial

uncertainty

thatmaycastsignificantdoubtontheCompanysabilityto

continueasagoingconcernandthereforetheCompany

maybeunabletorealizeitsassetsanddischargeits

liabilitiesinthenormalcourseofbusiness.Thefinancial

statements(andnotesthereto)donotdisclosethisfact.


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Audit Reporting When Disclosure of MaterialUncertainty Is Inadequate Adverse Opinion Cont)AdverseOpinion

Inouropinion,becauseoftheomissionoftheinformation

mentionedintheBasisforAdverseOpinionparagraph,the

financialstatementsdonotpresentfairly(orgiveatrue

andfairviewof)thefinancialpositionoftheCompanyas

at

December

31,

20X0,

and

of

its

financial

performance

and

itscashflowsfortheyearthenendedinaccordancewith..



Audit Reporting When going concern assumption isinappropriate and management is unwilling to makeany assessmentIf,intheauditorsjudgment,theentitywillnotbeableto

continueasagoingconcern,theauditorshouldexpressan

adverseopinionifthefinancialstatementshavebeen

preparedonagoingconcernbasis.

If

management

is

unwilling

to

make

or

extend

its

assessmentwhenrequestedtodosobytheauditor,the

auditorshouldconsidertheneedtomodifytheauditors

reportasaresultofthelimitationof thescopeofthe

auditorswork.


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Discussion


Thank you.

slaus 570- going concern

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