Definition[ edit ] The going concern assumption is universally understood and accepted by accounting professionals; however, it has never been formally incorporated into U. Reconsideration of defining and incorporating the terms going concern and substantial doubt into U. GAAP The time horizon over which management would evaluate the entity's ability to meet its obligations The type of information that management should consider in evaluating the entity's ability to meet its obligations The effect of subsequent events on management's evaluation of the entity's ability to meet its obligations Whether to provide guidance on the liquidation basis of accounting.
When the long-term viability of a borrower is doubtful, it may cause the CPA to issue a qualified audit opinion — or, worse, to withdraw from the job altogether. Financial statements are generally prepared with an assumption that the business will remain a going concern.
That is, the entity is expected to continue to generate a positive return on its assets and meet its obligations in the ordinary course of business.
How do viability concerns affect financial statements? Possible red flags include: Working capital deficiencies, Loan defaults and debt restructurings, Labor union conflicts and work stoppages, and Pending lawsuits and investigations.
When auditors reject the going concern assumption, they may adjust balance sheet values to liquidation values, rather than historic costs. Footnotes also may report going concern issues. What does an audit opinion mean?
Audit opinions vary depending on available information, financial viability, errors discovered during audit procedures and other limiting factors. An auditor may also issue a qualified opinion if the financial statements appear to contain a small deviation from Generally Accepted Accounting Principles GAAPbut are otherwise fairly presented — or if the borrower limits the scope of audit procedures.
These indicate that there are material exceptions to GAAP that affect the financial statements as a whole. By far the most alarming opinion is a disclaimer. It occurs when an auditor gives up mid-audit.
Reasons for a disclaimer may include significant scope limitations and uncertainties within the subject company itself. Before even starting fieldwork, some auditors will pull the plug on long-term audit clients if they suspect the need to issue a disclaimer or an adverse opinion.
Regardless of who initiated the switch, a sudden, unexpected change of auditors could forewarn of going concern issues. For the last five years, regulators, businesses, auditors and other stakeholders have debated how to reduce diversity in financial reporting about going concern issues.
So, management not external auditors could be responsible for evaluating and disclosing going concern uncertainties in the future.
Stay tuned for a final standard or a revised proposal on going concern assessments, which is expected later this year. Consult with an accounting professional for the latest information on going concern assessments.
How can lenders monitor viability? In the meantime, lenders should pay attention to audit opinion letters. Downgraded opinions warrant your immediate attention.Going concern is a basic business concept which is also a fundamental principle underlying the preparation of the vast majority of annual reports, and in particular, the ﬁnancial.
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As for the actual wording of the auditor's report, when a lack of going concern is determined by the auditor, the disclosure paragraph should state the situation, state the auditor's determination, and state the auditee's plan to correct the situation.
Footnotes (AU Section — The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern): fn 1 This section does not apply to an audit of financial statements based on the assumption of liquidation (for example, when [a] an entity is in the process of liquidation, [b] the owners have decided to commence dissolution or .
Apr 25, · Republicans are likely to embrace the plan’s centerpiece, substantial tax reductions for businesses large and small, even as they push back against the jettisoning of their border adjustment tax. A going concern is a business that functions without the threat of liquidation for elements that are particularly significant to overcoming the adverse effects of the conditions and events and should plan and perform auditing procedures to obtain evidential matter about them.
The fear is that a going-concern opinion can hasten the.