Page 219 - CA Inter Audit PARAM

CA Ravi Taori

QNO Objectives of Auditor Regarding Going Concern Old course-- (M19R/N19R/M21R/M22M)
570.01 Bhaskar CNO- SA570.020 New Course – (S24M)
On the basis of which assumption, the financial statements of a company are prepared. Explain. Also
describe the objectives of the auditor regarding going concern.
OR
When the use of the going concern basis of accounting is appropriate, assets and liabilities are recorded on
the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of
business. Explain stating also the objective of the auditor regarding going concern.
OR
Stay fit Private Limited is a start-up that has been in business for about two years. It runs an application
which provides valuable information pertaining to nutrition and helps its clients to access customized
healthy food. The company’s revenues are expected to grow in the coming period. Although company has
reflected net losses in its financial statements for the last two years, it has managed to meet its financial
commitments. The financial statements for last two years were prepared on going concern basis of
accounting. The management of company wants to follow the same basis of accounting for the current
year. Is the view of management appropriate? How does the “going concern” affect the preparation of
financial statements?
Answer ➢ Going Concern Basis of Accounting
• Under the going concern basis of accounting, the financial statements are prepared on the
assumption that the entity is a going concern and will continue its operations for the
foreseeable future. When the use of the going concern basis of accounting is appropriate,
assets and liabilities are recorded on the basis that the entity will be able to realize its assets
and discharge its liabilities in the normal course of business.
➢ The objectives of the auditor are:
• To conclude, based on the audit evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt on the entity’s ability to
continue as a going concern; and
• To obtain sufficient appropriate audit evidence about the appropriateness of
management’s use of the going concern assumption in the preparation and presentation of
the financial statements;
• To determine the implications for the auditor’s report.

Events & Conditions Creating Old Course -- (P16M/M16M/N16R/N18R/N20E/ N21R)
QNO Significant Doubt New Course -- (M24M)
570.03
Bhaskar CNO- SA570.060
Explain with reference to the relevant Standard on Auditing - Appropriateness of going concern assumption
OR
"Operating Conditions" that may cast doubt about going concern assumption.
OR

Give six examples of operating Conditions that may cast doubt about going concern assumption.
OR
Mention any four financial events or conditions that, individually or collectively, may cast significant doubt
on the entity’s ability to continue as going concern
Answer ➢ Appropriateness of Going Concern Assumption:
• As per SA 570 "Going Concern", in some enterprises, for example, those where the funding
arrangements are guaranteed by the Central Government, going concern risks may arise, but
are not limited to, situations where such type of entities operate on a for-profit basis, where
government support may be reduced or withdrawn, or in the case of privatization.
• Events or conditions that may cast significant doubt on an entity’s ability to continue as a
going concern may include situations where such type of entity lacks funding for its
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