Going Concern Accounting and Auditing

going concern

Companies of all sizes in all industries are faced with closures of specific locations or complete shutdowns, employee layoffs and restrictions on work, liquidity issues, and disruptions to their supply chains and customers. While some entities may not be negatively impacted by the COVID-19 global pandemic, entities in many different industries and locations have experienced negative impacts that need to be evaluated. As a result, auditors and financial statement preparers need to brush up on the existing going concern requirements to address those situations. It is the responsibility of the business owner or leadership team to determine whether the business is able to continue in the foreseeable future. If it’s determined that the business is stable, financial statements are prepared using the going concern basis of accounting. Pertinent conditions and events giving rise to the assessment of substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time. If the auditor becomes aware of factors, the effects of which are not reflected in such prospective financial information, he should discuss those factors with management and, if necessary, request revision of the prospective financial information.

  • The Private Securities Litigation Reform Act of 1995 made it much more difficult for a plaintiff to bring suit successfully against a company’s auditors.
  • A company remains a going concern when the sale of assets does not impair its ability to continue operation, such as the closure of a small branch office that reassigns the employees to other departments within the company.
  • For the last thirty years, I have primarily audited governments, nonprofits, and small businesses.
  • If substantial doubt does not exist, then going concern disclosures are not necessary.

The Board tentatively decided that a government filing for Chapter 9 bankruptcy should not be considered a dissolution triggering event in the process of assessing and identifying GCU for disclosure purposes. The Board did, however, tentatively decide that a government filing for Chapter 9 bankruptcy should be considered an example that indicates financial difficulties and, therefore, a relevant factor to evaluate when assessing and identifying GCU. Lenders look at a company’s financial statements to assess creditworthiness and would be reluctant to loan money to a business that is not stable.

Financial Support by Supporting Parties

Asset deficiency is a situation where a company’s liabilities exceed its assets indicating that a company may soon default and be headed for bankruptcy. Accountants who view a company as a going concern generally believe a firm uses its assets wisely and does not have to liquidate anything. Accountants may also employ going concern principles to determine how a company should proceed with any sales of assets, reduction of expenses, or shifts to other products. Negative trends that lead to no longer being a going concern include denial of credit, continued losses, and lawsuits. To be fully effective as loss absorbing capacity, capital should absorb losses at the stage when the entity is still a going concern (and not yet a 'gone concern’). When a company collapses, all stakeholders are affected, from employees to investors, and it eventually erodes the public’s trust in financial markets. Going Concernmeans that the Project facility is producing any commercially saleable product and capable of operating as a going concern, as determined in the reasonable discretion of the Controlling Representative.

  • The auditor evaluates an entity’s ability to continue as a going concern for a period not less than one year following the date of the financial statements being audited .
  • Most organisations are being impacted by the coronavirus (COVID-19) pandemic, either directly or indirectly, and the increased economic uncertainty and risk may have significant financial reporting implications.
  • The threat of receiving a negative going concern opinion may motivate management to go “opinion shopping,” as was alluded to in the WorldCom and Enron business failures.
  • The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
  • By doing so, the auditor is reasonably assured that the business will remain functional during the one-year period stipulated by GAAS.

The government gives the company a bailout and guarantees all payments to its creditors. The valuation of a company is important from the shareholders’ and investors’ perspective. In general, all companies are run with a https://www.bookstime.com/ assumption and, hence, projections and, more importantly, business plans are made considering what should be the next action plan. The valuation of an entity, assuming it’s on a going concern basis, will be higher, as it offers the potential to earn higher profits in the future than its liquidation value. The going concern principle assumes that anyorganization will continue to operate its business for the foreseeable future. The principle purports that every decision in a company is taken with the objective in mind of running the business rather than that of liquidating it.

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Reporting guidance for such situations is provided in section 508, Reports on Audited Financial Statements. Management believes the Company’s present cash flows will not enable it to meet its obligations for twelve months from the date these financial statements are available to be issued. It is probable that management will obtain new sources of financing that will enable the Company to meet its obligations for the twelve-month period from the date the financial statements are available to be issued. Our previous article on “Going Concern Guidance for Audit Engagements” discussed the impact of the current health and economic crisis on an auditor’s evaluation of an entity’s ability to continue as a going concern. It also discussed the required accounting and disclosure requirements for all types of for-profit and nonprofit entities found in FASB ASC , Presentation of Financial Statements – Going Concern.

The auditor’s consideration of disclosure should include the possible effects of such conditions and events, and any mitigating factors, including management’s plans. Nearly half of respondents to a GASB survey of users have evaluated government financial statements that contained a going concern note disclosure.

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