As mentioned earlier, it is not the auditor’s responsibility to determine whether, or not, an entity can prepare its financial statements under the going concern presumption; this is the responsibility of management. The auditor’s responsibility under ISA 570 is to obtain sufficient appropriate audit evidence about the appropriateness of management’s use of the going concern assumption in the preparation of the financial statements, and to conclude whether there is a material uncertainty about the entity’s ability to continue as a going concern.
In the June 2010 exam, question 5(c) required candidates to: ‘Explain the audit procedures that the auditor of Medimade should perform in assessing whether or not the company is a going concern.’
When faced with such a requirement, candidates must be careful not to produce a list of generic audit procedures, but instead identify and highlight the factors from the scenario that may call into question the entity’s ability to continue as a going concern. Once these factors have been identified, candidates should then be able to think about the procedures the auditor may adopt to establish whether the factors mean the going concern presumption is appropriate in the circumstances, or not.
In Question 5(c) of the June 2010 exam, if candidates simply wrote ‘Obtain confirmation from the bank that the overdraft facility will be renewed’ this will generate no marks for two reasons:
The scenario clearly says that Medimade’s bankers will not make a decision on the overdraft facility until AFTER the audit report is completed.
A bank, or other financial institution, is not going to give this sort of information directly to the auditor.
Candidates should generate the audit procedures specifically from information contained in the scenario to demonstrate application skills, and candidates should refer to the model answer in the June 2010 exam to make sure the procedures they have generated are specific to the scenario.
Many candidates fall into the trap of relying on ‘discussions with management/directors’ and ‘obtaining a written representation’. Candidates must appreciate that while discussion/inquiry is a valid audit procedure under ISA 500, Audit Evidence, such a procedure is always used in addition to other procedures – in other words, inquiry on its own will not generate sufficient appropriate audit evidence. Similarly ISA 580, Written Representations recognises that while written representations
do provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal.
Other procedures that the auditor may adopt to establish whether the use of the going concern presumption is appropriate in an entity’s particular circumstances could be:
Reading minutes of shareholders’ meetings to identify any current, or potential, cash flow difficulties.
Liaising with the entity’s legal advisers concerning any ongoing litigation or future litigation and assessing the reasonableness of management’s assessments of their outcome and the estimate of their financial implications.
Evaluating the entity’s plans to deal with unfulfilled customer orders.
Obtaining and reviewing reports of regulatory actions.