How do we assess whether clients are a GOING CONCERN? ASA/ISA570 Explained

Summary

In this video, Dr. Amanda White explains the key aspects of ISA 570 concerning going concern assessments in audits. She highlights the responsibility of management to assess their entity's ability to continue operations for at least 12 months from the report date, while also discussing the auditor's role in evaluating these assessments. Key steps include risk assessment, evaluating management's plans, and identifying material uncertainties. The video emphasizes the importance of clear communication among audit team members and provides insights into the implications of various audit opinions based on management's disclosures and assumptions.

Takeaways

• 😀 Takeaway 1: AS 570 addresses the going concern assumption, crucial for financial reporting, ensuring companies can continue operations for the foreseeable future.
• 😀 Takeaway 2: Management is responsible for assessing the going concern status, making judgments based on available information at a specific time.
• 😀 Takeaway 3: If a company intends to liquidate, it must prepare special financial reports, often using liquidation values.
• 😀 Takeaway 4: Auditors must obtain sufficient appropriate evidence regarding management's going concern assessment during the audit process.
• 😀 Takeaway 5: Risk assessment should be performed at the planning stage to identify any potential risks affecting the going concern status.
• 😀 Takeaway 6: Material uncertainty indicates significant doubt about a company's ability to remain a going concern, requiring auditors to gather additional evidence.
• 😀 Takeaway 7: Auditors need to evaluate the reasonableness of management's plans to address uncertainties and the assumptions underlying financial projections.
• 😀 Takeaway 8: Effective communication between auditors, management, and governance is essential, especially regarding significant going concern issues.
• 😀 Takeaway 9: If management fails to disclose material uncertainties, auditors may issue an adverse or qualified opinion on the financial statements.
• 😀 Takeaway 10: A flowchart in AS 570 provides auditors with a structured approach to assess going concern risks and determine the appropriate audit opinion.

Q & A

What is the main focus of ASA 570?

ASA 570 focuses on the going concern assumption, which is the presumption that a company will continue its operations for the foreseeable future.

Who is responsible for assessing going concern?

Management is responsible for making a specific assessment of the company's ability to continue as a going concern for 12 months from the report's date.

What does the going concern assumption imply when preparing financial statements?

If management prepares financial statements based on historical cost, it implies that they are assuming the company is a going concern.

Why is the timing of the going concern assessment important for auditors?

The timing is crucial because auditors need to consider any potential risks to going concern during the planning stage, which informs their audit strategy.

What are material uncertainties in the context of going concern?

Material uncertainties are situations that cast significant doubt on a company's ability to continue as a going concern, such as financial difficulties or the loss of key personnel.

What should auditors do if they identify material uncertainties?

Auditors must gather sufficient appropriate evidence regarding the uncertainties, evaluate management's plans, and assess their likelihood of success.

What is the purpose of the written representation from management?

The written representation serves to document management's plans and assurances about the company's going concern status, providing the auditor with evidence for their assessment.

How does the auditor's opinion vary based on the going concern assessment?

If the going concern assumption is inappropriate, the auditor will issue an adverse opinion. If there are uncertainties but the assumption remains valid, an emphasis of matter paragraph will be included in the audit report.

What is the significance of communication among the audit team regarding going concern?

Regular communication among team members is vital to ensure that all relevant information is shared and considered, which can help identify potential risks to going concern early in the audit process.

How can auditors effectively use the diagram mentioned in the video?

The diagram serves as a clear guideline for auditors to follow when assessing going concern, helping them determine the appropriate type of audit opinion based on their findings.