Mastering Going Concern Review | ACCA_F8: Essential Strategies for Exam Success •@financeskul

Summary

This video provides an in-depth explanation of the going concern review process in external audits. It covers the auditor's responsibility to assess whether a client can continue its operations in the foreseeable future, typically by reviewing financial statements, cash flow forecasts, and key financial indicators. The script explores common signs of going concern issues, such as financial difficulties and overdue payments, and outlines the audit procedures used to gather evidence. Finally, it discusses how auditors report their findings, including unmodified or modified opinions based on the going concern assessment.

Takeaways

• 😀 The going concern review is a key part of the external audit, assessing if the client can continue operating in the foreseeable future (1-2 years).
• 😀 Directors are responsible for evaluating the entity's ability to continue as a going concern when preparing the financial statements.
• 😀 If directors are uncertain about the going concern status, they must include additional disclosures to explain any uncertainties.
• 😀 If an entity is unlikely to continue trading, financial statements should be prepared on a break-up basis.
• 😀 The auditor must verify that the financial statements are prepared using the appropriate basis, either going concern or break-up, based on the entity's situation.
• 😀 Common indicators of going concern problems include bank overdrafts, missed payments, failure to pay staff or suppliers, and significant losses.
• 😀 Auditors gather evidence by reviewing external correspondence, board minutes, post-year-end financial information, and cash flow forecasts.
• 😀 Cash flow forecasts must be assessed to ensure the assumptions made are reasonable and that the forecast is reliable.
• 😀 Loan agreements are important for identifying covenants or repayment issues that could indicate going concern concerns.
• 😀 If the auditor agrees with the going concern assumption, no further action is needed; if they disagree, they must modify the audit report accordingly, either with an emphasis of matter or a qualified opinion.
• 😀 The auditor must discuss the going concern assessment with management and, if necessary, company lawyers to ensure that all relevant issues are considered.

Q & A

What is the main goal of the going concern review during an external audit?

The main goal is to ensure the auditor has considered whether the client is likely to continue operating in the foreseeable future and whether they have prepared their financial statements using the appropriate basis, including necessary disclosures.

How should the financial statements be prepared if the entity believes it will continue trading?

If the entity believes it will continue trading, the financial statements should be prepared on the going concern basis, which is the most common method used.

What should be done if the entity is unsure about its ability to continue due to financial difficulties?

If the entity is unsure due to financial difficulties, it should still prepare the financial statements on the going concern basis but include additional disclosures to explain the uncertainties.

What happens if the entity decides it can no longer continue operating?

If the entity decides it can no longer continue, the financial statements should be prepared using the break-up basis, which reflects the entity's liquidation.

What is the director's responsibility regarding going concern when preparing financial statements?

The director is responsible for assessing the entity’s ability to continue as a going concern by reviewing cash flow forecasts, budgets, and considering finance needs, sources of finance, and profitability.

What are some common indicators of going concern problems that the auditor should look for?

Common indicators include imminent bank overdrafts, slow payments to suppliers, failure to pay staff, defaults on loans or tax payments, changes in the industry, loss of market share, and making losses.

What types of audit procedures should an auditor perform to assess going concern?

Audit procedures include reviewing correspondence from external sources, inspecting board minutes, analyzing post-year-end financial statements, evaluating cash flow forecasts, inspecting loan agreements, and making inquiries with management and lawyers.

Why is the review of board minutes important for the auditor?

Reviewing board minutes helps the auditor identify any discussions related to issues that could affect the entity’s ability to continue operating, especially before and after the year-end.

What should an auditor do if they disagree with the going concern basis used by the client?

If the auditor disagrees, they should discuss the issues with the client. If the client refuses to include necessary disclosures, the auditor may issue a qualified opinion, likely an adverse opinion, highlighting the uncertainty in the basis of opinion paragraph.

What is the role of the auditor if the client includes adequate going concern disclosures in the financial statements?

If the client includes adequate disclosures, the auditor can issue an unmodified (unqualified) opinion with an emphasis of matter paragraph, drawing attention to the uncertainty and the disclosures made.