Page 222 - CA Inter Audit PARAM

CA Ravi Taori
OR
Procedures to be performed by the auditor in expressing opinion on 'going concern' assumption.
Answer If events or conditions have been identified that may cast significant doubt on the entity's ability to
continue as a going concern, the auditor shall obtain sufficient appropriate audit evidence to determine
whether or not 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 (hereinafter referred to as “material
uncertainty”) through performing additional audit procedures, including consideration of mitigating
factors. These procedures shall include:

Management's Assessment if not prepared yet.
Where management has not yet performed an assessment of the entity's ability to continue as a
going concern, requesting management to make its assessment.

Future Plan
Evaluating management's plans for future actions (Introducing new products, cost cutting, sale of
assets, sale of investments, issue of shares, taking new loans etc.) in relation to its going concern
assessment, whether the outcome of these plans is likely to improve the situation. (E.g., Will such
funds be sufficient to carry on business) and whether management's plans are feasible in the
circumstances. (Can they pull off such big changes in given short span)

Cash flow & forecast
Where the entity has prepared a cash flow forecast, and analysis of the forecast is a significant
factor in considering the future outcome of events or conditions in the evaluation of
management's plans for future actions:
• Evaluating the reliability of the underlying data generated to prepare the forecast; and
• Determining whether there is adequate support for the assumptions underlying the
forecast.
Events
Considering whether any additional facts or information have become available since the date on
which management made its assessment.

Written Representation
Requesting written representations from management and, where appropriate, those charged
with governance, regarding their plans for future actions and the feasibility of these plans.

Case discussion & Conclusion.
Significant shortage of skilled labour, inability to pay creditors on time and overall liquidity crisis
faced by the company are examples of events or conditions that, individually or collectively, may
cast significant doubt on the entity’s ability to continue as a going concern.
In such a situation, management should try to address auditor’s concerns by preparing its future
plan of action including preparation of cash flow forecast showing inflow and outflow of cash.
Auditor should evaluate them as discussed above.

QNO-- Content of Material Uncertainty Over Going Concern Para New Course – (S24R)
570.07.50 Bhaskar CNO – SA570.090

While conducting audit of BYN Limited, CA Y notices that company has lost one of its key markets along with
important customers. Additionally, several highly successful competitors have emerged, impacting business
of the company. Despite the existence of material uncertainty, CA Y finds the use of going concern basis of
accounting appropriate for preparation of financial statements. The company has also disclosed material
uncertainty in notes to accounts adequately. How should he deal with the matter in auditor’s report?
Answer As per SA 570,”Going concern”, If adequate disclosure about the material uncertainty is made in the financial
statements, the auditor shall express an unmodified opinion and the auditor’s report shall include a separate
section under the heading “Material Uncertainty Related to Going Concern” to: -

(a) Draw attention to the note in the financial statements that discloses such matters.

(b) State that these events or conditions indicate that a material uncertainty exists that may cast
significant doubt on the entity’s ability to continue as a going concern and that the auditor’s
opinion is not modified in respect of the matter.

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