Also, when assessing for obligations, remember that it’s not exclusively focused on what’s due or even known at the assessment date. This first category comes down to a company’s available access to liquidity, including lines of credit and other liquid funds like cash and cash equivalents. When gauging access to credit, management must only include credit committed to by the lender that the company can easily access. [34]   See id. at 8 (use of subsequent balance-sheet date for analysis); 8-11 (evidence concerning liquidity arising during subsequent period after balance-sheet date). Members of the Firm’s Business Restructuring and Reorganization Group can assist officers and directors to understand and comply with these obligations.

Companies that have low profitability are highly likely to receive the going concern audit opinion as a poor financial condition raise doubts on their business continuity among investors or auditor (Bayudi and Wirawati, 2017). This research used manufacturing firms registered in the Indonesia Stock Exchange (IDX) from 2015 to 2019 as research population because manufacturing firms were big-scale firms in Indonesia compared to other firms and have the highest economic contribution for the country. The results of the study indicated that the variables of the leverage positively affected the going concern audit opinion, then the audit quality, profitability and liquidity negatively affected the going concern audit opinion, whereas firm size and audit lag did not affect the going concern audit opinion. As the COVID-19 crisis takes an ever-greater toll on the American economy, and as multiple well-known companies declare bankruptcy,[2] the going-concern assessment has taken on new relevance for issuers, auditors, and others in the financial-reporting community. As a result, the number of issuer filings that contain a going-concern disclosure appears to have substantially increased.[3]  In this piece, we review some of the significant considerations that apply to the going-concern analysis from both the issuer’s and the auditor’s perspectives.

Accounting Firms Scramble to Push Out AI Acceptable Use Policies

Gama and Astuti (2014) asserted that audit lag has a positive effect on the going concern audit opinion, which means that the longer time required for auditors to complete auditing process indicates that the company has serious problems, especially in relation to its financial conditions and going concern. On the contrary, findings by Simamora and Hendarjatno (2019) showed that audit lag does not affect the going concern audit opinion because delays in the audit process can occur due to several external factors beyond the company’s financial factors. A negative judgment may also result in the breach of bank loan covenants or lead a debt rating firm to lower the rating on the company’s debt, making the cost of existing debt increase and/or preventing the company from obtaining additional debt financing. They can help business review their internal risk management along with other internal controls. After the auditor has evaluated management’s plans, he concludes whether he has substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time. If the auditor concludes there is substantial doubt, he should consider[10] the adequacy of disclosure about the entity’s possible inability to continue as a going concern for a reasonable period of time,[11] and include an explanatory paragraph (following the opinion paragraph) in his audit report to reflect his conclusion.

• In this case, they will express unqualified opinion with modified going concern, which means that the auditors raise doubts about the entity’s ability to survive.
• The results of the study indicated that the variables of the leverage positively affected the going concern audit opinion, then the audit quality, profitability and liquidity negatively affected the going concern audit opinion, whereas firm size and audit lag did not affect the going concern audit opinion.
• Regardless of where we end up with respect to whether substantial doubt is alleviated or not, the auditor always might be in a situation of having to qualify his or her opinion if the disclosures are not appropriate in the circumstances.
• Join an interview with CPA Recruiter Beth Dierker of Accountingfly, who has advised hundreds of accountants in finding new roles.
• The descriptive statistics in Table 2 indicated that the time needed by PAFs to complete the audit report from the end date of financial statements was, on average, 93.03 days, the minimum duration was 53 days and maximum duration was 209 days, with the deviation standard of 27.73.

IAS 1 contains guidance related to the going concern assumption and outlines when financial statements are prepared on the assumption the entity will continue as a going concern. IAS 1 explicitly states that at each reporting date, management is required to assess the entity’s ability to continue as a going concern and consider all available information about the entity’s future. The audit report with a modified going concern is an indication that from the auditor’s assessment, there is a risk that the company will not survive in its business. The Public Accountant Professional Standards (SPAP), section 341 (Ikatan Akuntan Indonesia, 2001) states that if auditors are not convinced with the ability of a business entity to maintain its survival in the long run, they are obliged to evaluate the management plan. If the management plan is likely to be effective to execute, the auditors should adequately disclose the nature, effects of conditions and events that originally led them to put doubts about continuity of a business entity. In this case, they will express unqualified opinion with modified going concern, which means that the auditors raise doubts about the entity’s ability to survive.

Procedures

Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory. External matters that have occurred—for example, legal proceedings, legislation, or similar matters that might jeopardize an entity’s ability to operate; loss of a key franchise, license, or patent; loss of a principal customer or supplier; uninsured or underinsured catastrophe such as a drought, earthquake, or flood. For more news and reporting on the coronavirus and how CPAs can handle challenges related to the pandemic, visit the JofA’s coronavirus resources page.

• This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
• This statement is typically presented in a separate explanatory paragraph that follows the auditor’s opinion paragraph.
• For example, the auditor should consider the adequacy of support regarding the ability to obtain additional financing or the planned disposal of assets.
• A current definition of the going concern assumption can be found in the AICPA Statement on Auditing Standards No.1 Codification of Auditing Standards and Procedures, Section 341, “The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern” (AU Section 341).

This study is a quantitative study, which collects numeric data and conducts analysis using statistical analysis software, SPSS 24.0. The method of this study involved descriptive-analytical and associative methods with causal relationships, by collecting data that provide a clear depiction of the study object and subsequently analyzing the data to examine the effect and relationship between one variable and another. The present study used secondary data obtained from the IDX, consisting of annual reports and independent audit reports.

Corporate & business organization

The FASB’s use of the term probable in FASB ASC 205 means likely to occur and is consistent with its use with respect to contingencies in FASB ASC 450. Though this assumption is conceptually easy to articulate, it is often extremely difficult to determine when an entity’s continuing existence is in such doubt that management needs to disclose that possibility in a note to its financial statements, and its auditors Going Concern Accounting And Auditing need to modify their report to acknowledge that risk. There also exists the very real possibility of creating a self-fulfilling prophecy when questioning an entity’s ability to continue to operate into the future. Such a disclosure can hasten the entity’s demise by impairing its ability to obtain credit, in turn causing current and potential customers to hesitate to enter into transactions with it.

• The auditor considers such items as negative trends in operating results, loan defaults, denial of trade credit from suppliers uneconomical long-term commitments, and legal proceedings in deciding if there is a substantial doubt about an entity’s ability to continue as a going concern.
• Sometimes management’s plans to alleviate substantial doubt include financial support by third parties or owner-managers (usually referred to as supporting parties).
• The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
• If the auditor concludes there is substantial doubt, he should consider[10] the adequacy of disclosure about the entity’s possible inability to continue as a going concern for a reasonable period of time,[11] and include an explanatory paragraph (following the opinion paragraph) in his audit report to reflect his conclusion.
• We will be discussing the topic in the light of « Guide on auditor’s responsibilities relating to going concern assumption in an audit of financial statement », issued by ICAP.

Whilst the auditing standards are specific in required disclosures where there are events or conditions that may cast doubt on the entity’s ability to continue as a going concern, the accounting standards are not specific. There is therefore judgement involved in how an auditor concludes that the disclosures in relation to going concern are adequate, particularly when the assessment involves significant judgement or material uncertainties. We therefore recommend engaging with the auditor soon after commencement of the audit. The auditor’s consideration of disclosure should include the possible effects of such conditions and events, and any mitigating factors, including management’s plans.

For the going concern framework, management would use March 31, 2022 as the assessment date, the date they issued the financial statements. Therefore, the 12-month look-forward period for evaluating events or conditions that may give rise to substantial doubt would extend to March 31, 2023. In Indonesia, the issue of audit reports and their links with the going concern opinion has emerged since 1995. This phenomenon began with the collapse of the Summa Bank that led to its shutdown, although it previously received unqualified opinion from an independent auditor. Furthermore, since the 1997 economic crisis that hit Indonesia, going concern became quite important in Indonesia. Evidences have indicated that 14 companies, which previously gained unqualified opinion from independent auditors in a year before, collapsed in 1997.

With the economy officially in recession, the « going concern warning » is popping up with some regularity in quarterly financial filings. But in the aftermath of the Great Recession, the warning’s rules have been altered in a way that can cause it to arrive earlier than before, and possibly with greater frequency, yet with no less potency. Join an interview with CPA Recruiter Beth Dierker of Accountingfly, who has advised hundreds of accountants in finding new roles. As well as teach you how to identify and select the right opportunity, interview, follow through, and handle the tricky aspects of your job search. But ask any CPA and they’ll tell you the difference is the seemingly endless series of challenges companies have faced in recent years. Between COVID, economic turmoil, remote working, and everything else the markets and world have thrown at businesses, many continue to struggle just keeping the doors open.

If the accountant believes that an entity may no longer be a going concern, then this brings up the issue of whether its assets are impaired, which may call for the write-down of their carrying amount to their liquidation value. https://kelleysbookkeeping.com/ When an auditor issues a going concern qualification, the way their opinion is disclosed depends on the structure of the business. One of larger repercussions of not being a going concern are potential credit challenges.

Also, since management evaluates going concern over a look-forward period – a rolling 12 months – there’s been significantly more judgment and risk involved since 2020. Well, that’s precisely what a going concern assessment is for investors and, as we’re about to explain, that metaphorical dash light for your operations wields a mighty sword. The following table presents the result of purposive sampling on manufacturing firms listed on the IDX from 2015 to 2019 and consisted of a total sample of 33 companies (Table 1). The data analysis method applied in the present study included the overall model fit test, the goodness-of-fit test, the determinant coefficient test, the logistic regression equation and the hypothesis test. Thus, the value of an entity that is assumed to be a going concern is higher than its breakup value, since a going concern can potentially continue to earn profits.

So, should an auditor inquire about conditions and events that may affect the entity’s ability to continue as a going concern beyond management’s period of evaluation (i.e., one year from the date the financial statements are available to be issued or issued, as applicable)? Regardless of whether substantial doubt has been alleviated by management’s plans, the auditor should evaluate the related financial statement disclosures. If going concern disclosures are not adequate, or if information has been omitted or is incomplete, either a qualified or adverse opinion may be appropriate under the guidance in AU-C 705B. An emphasis-of-matter paragraph in the auditor’s report about the going concern uncertainty is not a substitute for including the required disclosures in the notes to the financial statements.

• By doing so, the auditor is reasonably assured that the business will remain functional during the one-year period stipulated by GAAS.
• Lending institutions have analysts who evaluate a borrower and its financial condition.
• Then, the preparer asks, “Is it probable that the company will be unable to meet its obligations through March 15, 2018?
• Leverage can be an indicator that determines the company’s ability to meet both short- and long-term financial obligations.
• Companies with a good financial condition have a high level of profitability and tend to have reasonable financial reports so that they are very likely to receive a good opinion compared to those with a low level of profitability (Petronela, 2004).

Going concern audit opinion is a modified audit opinion given by the auditor’s judgment and is an indication that from the auditor’s assessment, there is a risk that the company will not survive in its business. Junaidi and Hartono (2010) measured going concern audit opinion by using a dummy variable as a proxy, with which companies receiving going concern audit opinion were coded with 1, while those non-receiving going concern audit opinion were coded with 0. Variables of this study consist of going concern audit opinion as the dependent variable, and firm size, audit quality, profitability, audit lag, liquidity, leverage as the independent variables.