Audit Procedures for Going Concern: Assertions, Procedures, and Risks

Going concern is a fundamental concept in accounting, which assumes that an entity will continue to operate for the foreseeable future and that it has the resources to meet its obligations as they come due.

In an audit, the assessment of going concern is a critical component that determines the appropriate accounting treatment and the scope of audit procedures.

Going Concern

The accounting treatment of going concern is an important consideration in the preparation of financial statements. It assumes that an entity will continue to operate for the foreseeable future and that it has the resources to meet its obligations as they come due. This assumption underlies all of the financial statements and is a fundamental principle of accounting.

The going concern assumption is subject to ongoing review, and if there is evidence to suggest that the entity may not be a going concern, the financial statements must be adjusted to reflect the resulting impact on the assets, liabilities, and financial position of the entity.

For example, if an entity is facing financial difficulties, such as high levels of debt, negative cash flows, or other financial risks, the auditor may need to adjust the financial statements to reflect the impact of these risks on the entity’s ability to continue as a going concern.

This may include reducing the value of assets, recognizing additional liabilities, or adjusting the financial statements to reflect the impact of any restructuring or other actions taken to address the financial difficulties.

It is important to note that the assessment of going concern is a forward-looking analysis, and the auditor must consider the entity’s ability to continue as a going concern based on the information available at the date of the financial statements.

This means that the auditor must consider all relevant information, including the entity’s financial performance, the results of its operations, and the risks and uncertainties that may impact the entity’s ability to continue as a going concern.

In addition to the assessment of going concern, the auditor must also consider the impact of going concern on the valuation and presentation of the financial statements.

For example, if the auditor determines that the entity is not a going concern, the financial statements must be adjusted to reflect the impact of any impairment of assets or other effects on the entity’s financial position.

Audit Risks:

  1. Economic Risks: Economic conditions, such as changes in market conditions, industry trends, and competition, can impact the entity’s ability to continue as a going concern.
  2. Financial Risks: Financial risks, such as inadequate liquidity, high levels of debt, or negative cash flows, can impact the entity’s ability to continue as a going concern.
  3. Operational Risks: Operational risks, such as labor disputes, quality control issues, or operational disruptions, can impact the entity’s ability to continue as a going concern.
  4. Regulatory Risks: Regulatory risks, such as changes in laws and regulations, or enforcement actions, can impact the entity’s ability to continue as a going concern.
  5. Reputational Risks: Reputational risks, such as negative public opinion, loss of customer trust, or damage to the entity’s brand, can impact the entity’s ability to continue as a going concern.
  6. Legal Risks: Legal risks, such as lawsuits, disputes, or regulatory enforcement actions, can impact the entity’s ability to continue as a going concern.
  7. Market Risks: Market risks, such as changes in interest rates, commodity prices, or currency exchange rates, can impact the entity’s ability to continue as a going concern.
  8. Political Risks: Political risks, such as changes in government policies, or geopolitical instability, can impact the entity’s ability to continue as a going concern.
  9. Technological Risks: Technological risks, such as changes in technology, or obsolescence of existing systems, can impact the entity’s ability to continue as a going concern.
  10. Environmental Risks: Environmental risks, such as changes in environmental regulations, or natural disasters, can impact the entity’s ability to continue as a going concern.
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Audit Assertions:

The auditor must make several assertions related to the assessment of going concern, including the following:

  1. Existence: The auditor must assess whether the entity is a going concern and has the ability to continue operating in the foreseeable future.
  2. Completeness: The auditor must ensure that all relevant information related to the assessment of going concern has been disclosed in the financial statements.
  3. Accuracy: The auditor must assess whether the information disclosed in the financial statements is accurate and free from material misstatements.
  4. Valuation: The auditor must assess whether the financial statements are valued appropriately, taking into account the impact of the going concern assessment.
  5. Presentation and Disclosure: The auditor must assess whether the financial statements are presented and disclosed in accordance with accounting standards, including the disclosure of the assumptions used in the going concern assessment.

Walkthrough Testing for Going Concern

Walkthrough testing is a critical component of the audit process when assessing the going concern of an entity. This testing involves the auditor reviewing the procedures used by management to maintain the going concern of the entity, including the identification and assessment of risks, the development and implementation of control processes, and the monitoring of the entity’s financial performance.

The purpose of walkthrough testing is to verify that the entity’s internal control processes are designed and operating effectively to ensure the going concern of the entity. This testing is performed by the auditor in order to identify any areas of weakness or control deficiencies that may impact the entity’s ability to continue as a going concern.

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To perform walkthrough testing, the auditor must have a good understanding of the entity’s business processes, including its accounting and financial reporting processes, as well as its management and control environment.

The auditor must also have a good understanding of the risks and uncertainties that may impact the entity’s ability to continue as a going concern.

Walkthrough testing typically involves the following steps:

  1. Identifying the relevant business processes and control activities that are related to the going concern of the entity.
  2. Reviewing the entity’s internal control processes, including its risk management processes, to determine the effectiveness of its controls.
  3. Evaluating the entity’s financial performance, including its cash flows, liquidity, and other key financial metrics.
  4. Evaluating the entity’s management and control environment, including the culture of the entity, the quality of its management, and the level of oversight and accountability.
  5. Conducting substantive audit procedures to verify the accuracy and completeness of the entity’s financial statements and to identify any areas of weakness or control deficiencies.

Test of Control for Going Concern

Test of control is another critical component of the audit process when assessing the going concern of an entity. This testing involves the auditor evaluating the entity’s internal control processes to determine the effectiveness of its controls in mitigating the risks and uncertainties that may impact the entity’s ability to continue as a going concern.

The purpose of test of control is to assess the effectiveness of the entity’s internal control processes in mitigating the risks and uncertainties that may impact the entity’s ability to continue as a going concern.

This testing is performed by the auditor in order to provide assurance that the entity’s internal controls are operating effectively and that the financial statements are accurate and complete.

To perform test of control, the auditor must have a good understanding of the entity’s business processes, including its accounting and financial reporting processes, as well as its management and control environment.

The auditor must also have a good understanding of the risks and uncertainties that may impact the entity’s ability to continue as a going concern.

Test of control typically involves the following steps:

  1. Identifying the relevant business processes and control activities that are related to the going concern of the entity.
  2. Evaluating the design of the entity’s internal control processes, including its risk management processes, to determine their effectiveness.
  3. Testing the operating effectiveness of the entity’s internal controls, including a review of its financial performance, its management and control environment, and its compliance with accounting standards.
  4. Evaluating the results of the tests of control and determining any areas of weakness or control deficiencies that may impact the entity’s ability to continue as a going concern.
  5. Communicating the results of the test of control to management and determining any necessary remedial actions.
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Substantive Audit Procedures for Going Concern

Substantive audit procedures are a key component of the audit process when assessing the going concern of an entity. These procedures involve the auditor performing a thorough review and analysis of the entity’s financial statements and other relevant financial information to provide assurance that the entity’s financial statements are accurate and complete.

The purpose of substantive audit procedures is to reduce the audit risk associated with the going concern of the entity and to provide assurance to the auditor that the entity’s financial statements are free from material misstatement.

The following are some of the substantive audit procedures that can be performed when assessing the going concern of an entity:

  1. Reviewing management’s assessment of the going concern of the entity, including its analysis of the risks and uncertainties that may impact its ability to continue as a going concern.
  2. Analyzing the entity’s financial performance, including its cash flows, liquidity, and other key financial metrics, to determine its ability to continue as a going concern.
  3. Evaluating the entity’s financial position, including its assets and liabilities, to determine if there are any indications of potential financial difficulties.
  4. Reviewing the entity’s related party transactions to assess the potential impact on its ability to continue as a going concern.
  5. Evaluating the entity’s compliance with laws and regulations that may impact its ability to continue as a going concern.
  6. Analyzing the entity’s debt structure and terms to assess its ability to service its debt obligations.
  7. Reviewing the entity’s contractual obligations and its ability to meet these obligations.
  8. Evaluating the entity’s compliance with accounting standards and its accounting policies and procedures to ensure that its financial statements are complete and accurate.
  9. Reviewing the entity’s historical financial performance and trends, including its operating results and cash flows, to identify any trends or patterns that may indicate potential financial difficulties.
  10. Evaluating the entity’s management and control environment, including its culture, quality of management, and level of oversight and accountability, to determine the effectiveness of its controls and the level of risk associated with the entity’s ability to continue as a going concern.

It is important to note that substantive audit procedures should be tailored to the specific circumstances of each entity, taking into account its size, complexity, and the risks and uncertainties that may impact its ability to continue as a going concern.

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