Discuss the steps used by an auditor to evaluate an entity's ability to continue as a going concern.

Question

What will be an ideal response?

Answer 1

Auditing standards indicate that the auditor has a responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time (defined as one year beyond the date of the financial statements being audited). The auditor should follow three overall steps in making the going concern evaluation:

Step 1. Consider whether the results of audit procedures performed during the planning, performance, and completion of the audit indicate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time (one year).

Step 2. If there is substantial doubt, the auditor should obtain information about management's plan to mitigate the going concern problem and assess the likelihood that such plans can be implemented.

Step 3. If the auditor concludes, after evaluating management's plans, that there is substantial doubt about the ability of the entity to continue as a going concern, he or she should consider the adequacy of the disclosures about the entity's ability to continue and include an explanatory paragraph in the audit report.

Auditing standards identify four major categories of conditions or events that are used to identify and assess going concern problems: negative financial trends, other financial difficulties, internal problems, and external matters.