This Auditing Standard deals with the auditor’s responsibilities in the audit of financial report relating to going concern and the implications for the auditor’s report.  (Ref: Para. A1)

Under the going concern basis of accounting, the financial report is prepared on the assumption that the entity is a going concern and will continue its operations for the foreseeable future.  General purpose financial reports are prepared using the going concern basis of accounting, unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so.  Special purpose financial reports may or may not be prepared in accordance with a financial reporting framework for which the going concern basis of accounting is relevant (e.g., the going concern basis of accounting is not relevant for some financial reports prepared on a tax basis in particular jurisdictions).  When the use of the going concern basis of accounting is appropriate, assets and liabilities are recorded on the basis that the entity will be able to realise its assets and discharge its liabilities in the normal course of business.  (Ref: Para. A2)

Some financial reporting frameworks contain an explicit requirement for management to make a specific assessment of the entity’s ability to continue as a going concern, and standards regarding matters to be considered and disclosures to be made in connection with going concern.  For example, Australian Accounting Standard AASB 101 requires management to make an assessment of an entity’s ability to continue as a going concern.^[1] The detailed requirements regarding management’s responsibility to assess the entity’s ability to continue as a going concern and related financial statement disclosures may also be set out in law or regulation.

Australian Accounting Standards^[*] require management to make an assessment of an entity’s ability to continue as a going concern.  In addition, certain legislation, such as the Corporations Act 2001^[#], requires a formal statement as to the solvency of the entity to be made by those charged with governance and included as part of the financial report upon which the auditor’s opinion is expressed.

In other financial reporting frameworks, there may be no explicit requirement for management to make a specific assessment of the entity’s ability to continue as a going concern.  Nevertheless, where the going concern basis of accounting is a fundamental principle in the preparation of a financial report as discussed in paragraph 2 of this Auditing Standard, the preparation of the financial report requires management to assess the entity’s ability to continue as a going concern even if the financial reporting framework does not include an explicit requirement to do so.

Management’s assessment of the entity’s ability to continue as a going concern involves making a judgement, at a particular point in time, about inherently uncertain future outcomes of events or conditions.  The following factors are relevant to that judgement: 

• The degree of uncertainty associated with the outcome of an event or condition increases significantly the further into the future an event or condition or the outcome occurs.  For that reason, most financial reporting frameworks that require an explicit management assessment specify the period for which management is required to take into account all available information. 
• The size and complexity of the entity, the nature and condition of its business and the degree to which it is affected by external factors affect the judgement regarding the outcome of events or conditions. 
• Any judgement about the future is based on information available at the time at which the judgement is made.  Subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made.

Responsibilities of the Auditor

The auditor’s responsibilities are to obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial report, and to conclude, based on the audit evidence obtained, whether a material uncertainty exists about the entity’s ability to continue as a going concern.  These responsibilities exist even if the financial reporting framework used in the preparation of the financial report does not include an explicit requirement for management to make a specific assessment of the entity’s ability to continue as a going concern.

However, as described in ASA 200,^[2] the potential effects of inherent limitations on the auditor’s ability to detect material misstatements are greater for future events or conditions that may cause an entity to cease to continue as a going concern.  The auditor cannot predict such future events or conditions.  Accordingly, the absence of any reference to a material uncertainty about the entity’s ability to continue as a going concern in an auditor’s report cannot be viewed as a guarantee as to the entity’s ability to continue as a going concern.

[Deleted by the AUASB.  Refer Aus 0.3]