Going Concern Concept and External Auditor

Going Concern & Regulatory provisions

What is going concern Regulatory provision of Auditors assertion on going concern Responsibility of maintain going concern Provision on going concern in Companies Act No 7 of 2007 Going concern relating to government institutions

Challenges and Importance of going concern

Challenges faced when assessing the going concern Significance to the Financial Statements.

Auditors responsibility and collection of evidence on going concern Reporting of going concern

What is going concern?

an entity is viewed as continuing in business for the foreseeable future with neither the intention nor the necessity of liquidation, ceasing trading. usually regarded as at least within 12 months

Responsibility to maintain going concern

According to LKAS 1, the assessment of an entitys ability to continue as a going concern is the responsibility of the entitys management; Responsibility of auditor is reporting in the Audit report the appropriateness of managements use of the going concern assumption.

Section 56 & 57 of Companies Act No 7 of 2007

According to section 56 (2) the Board may obtains a certificate of solvency from the auditors. According to section 57 a company is deemed to satisfy the solvency test if it meets the following criteria - Is able to pay its debts as and when they fall due in the normal course of business. - The value of the companys assets is greater than the value of its liabilities and the companys stated capital

Code of best practice on corporate governance

The Audit Committees written terms of reference includes Assess the Companys ability to continue as a going concern in the foreseeable future

Going concern relating to government institutions

The appropriateness of the use of the going concern assumption in the preparation of the financial statements is generally not in question when auditing either a central government or those public sector entities having funding arrangements backed by a central government.

Challenges assessing going concern

A judgement about future events, which are inherently uncertain. As the effect of the credit crisis and economic downturn .

Issues surrounding liquidity and credit risk

a long-standing history of profits and availability of credit may find it difficult with renewal of facilities. Uncertainty increases with time and judgements can only be made on the basis of information available at any point

Challenges assessing going concern

As the landscape in which entities are operating is rapidly changing. -forecasts and budgets as the recession bites and
-the cost of borrowing rises

Period of Time Considered in Making a Going Concern Assessment - Whether 12 months from the Balance Sheet date or months
from the date the financial statements are published being preferred.

There may be circumstances in which it is appropriate to look further ahead. - Nature of Business
-Associated Risk in the business

Whether or not a company can be classed as a going concern affects how its financial statements are prepared. -usually prepared on the basis that the reporting entity is
a going concern -SLFRS 1 states that 'an entity should prepare its financial statements on a going concern basis - the entity is being liquidated or has ceased trading, or
-the directors have no realistic alternative but to liquidate the entity or to cease trading.'

Significance for the financial statements

Significance for the financial statements

Where the assumption is made that the company will cease trading, the financial statements are prepared using the break-up basis under which:
assets are recorded at likely sale values inventory and receivables are likely to require more provisions, and additional liabilities may arise (severance costs for staff, the costs of closing down facilities, etc.).