The going concern principle is that you assume a business will continue in the future, unless there is evidence to the contrary.
When an auditor conducts an examination of the accounting records of a company, he has an obligation to review its ability to continue as a going concern; if his assessment is that there is a substantial doubt regarding the company's ability to continue in the future (which is defined as the following year), then he must include a going concern qualification in his opinion of the company's financial statements. This statement is typically presented in a separate explanatory paragraph that follows the auditor's opinion paragraph.
There are no specific procedures that an auditor must follow to arrive at a going concern opinion. Instead, he derives this information from the sum total of all other audit procedures performed. Indicators of a potential going concern problem are:
The going concern qualification is of great concern to lenders, since it is a major indicator of the inability of a company to pay back its debts. Some lenders specify in their loan documents that a going concern qualification will trigger the acceleration of all remaining loan payments. A lender is typically only interested in lending to a business that has received an unqualified opinion from its auditors regarding its financial statements.
An auditor who is considering issuing a going concern qualification will discuss the issue with management in advance, so that management can create a recovery plan that may be sufficient to keep the auditor from issuing the qualification. Thus, the going concern qualification is a major issue, but you will have a chance to find a way around the problem and potentially keep the auditor from issuing it.
When an auditor conducts an examination of the accounting records of a company, he has an obligation to review its ability to continue as a going concern; if his assessment is that there is a substantial doubt regarding the company's ability to continue in the future (which is defined as the following year), then he must include a going concern qualification in his opinion of the company's financial statements. This statement is typically presented in a separate explanatory paragraph that follows the auditor's opinion paragraph.
There are no specific procedures that an auditor must follow to arrive at a going concern opinion. Instead, he derives this information from the sum total of all other audit procedures performed. Indicators of a potential going concern problem are:
- Negative trends. Can include declining sales, increasing costs, recurring losses, adverse financial ratios, and so forth.
- Employees. Loss of key managers or skilled employees, as well as labor difficulties of various types.
- Systems. Inadequate accounting record keeping.
- Legal. Legal proceedings against the company, which may include pending liabilities and penalties related to environmental or other laws.
- Intellectual property. The loss of a key license or patent.
- Business structure. The company has lost a major customer or key supplier.
- Financing. The company has defaulted on a loan or is unable to locate new financing.
The going concern qualification is of great concern to lenders, since it is a major indicator of the inability of a company to pay back its debts. Some lenders specify in their loan documents that a going concern qualification will trigger the acceleration of all remaining loan payments. A lender is typically only interested in lending to a business that has received an unqualified opinion from its auditors regarding its financial statements.
An auditor who is considering issuing a going concern qualification will discuss the issue with management in advance, so that management can create a recovery plan that may be sufficient to keep the auditor from issuing the qualification. Thus, the going concern qualification is a major issue, but you will have a chance to find a way around the problem and potentially keep the auditor from issuing it.
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