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Going Concern Meaning, Assumption, Accounting Principle

Going Concern

References in this section to generally accepted accounting principles are intended to include a comprehensive basis of accounting other than generally accepted accounting principles . It can determine how financial statements are prepared, influence the stock price of a publicly traded company and affect whether a business can be approved for a loan. In general, an auditor examines a company’s financial statements to see if it can continue as a https://www.bookstime.com/ for one year following the time of an audit. Conditions that lead to substantial doubt about a going concern include negative trends in operating results, continuous losses from one period to the next, loan defaults, lawsuits against a company, and denial of credit by suppliers. Today’s information age continues to radically and rapidly transform business. The advent of enhanced technology has created a greater ability to develop, value, and understand the components of intricate financial and other real and synthetically derived transactions. These changes have given rise to novel techniques to value and revalue assets and liabilities to make them more closely approximate their true worth at any particular date.

Going Concern

The auditor should not use conditional language regarding the existence of substantial doubt about the entity’s ability to continue as a going concern. Though management’s plans are disclosed, the probability of success is not provided. Auditors will use SAS 132, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, to make going concern decisions. This SAS is effective for audits of financial statements for periods ending on or after December 15, 2017. SAS 132 amends SAS 126,The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.

COVID-19 and Going Concern: What the accounting standards require

Based on the results of the hypothesis test, the significance level with the logistic regression of 0.021 indicated that the leverage affected the going concern audit opinion. This result of the study was suitable with a study by Lennox , who found out that companies tended to frequently receive the going concern audit opinion when their leverage level was high. Because the assets used by the companies to run their operational activities are mostly covered by debts, the companies tend to depend on debts in running their business activities. Consequently, the companies bear a huge debt in which it can cause the company to not be able to afford repaying the debts. According to The Security Exchange Commission , opinion shopping is an activity to look for an auditor with the goal of supporting the accounting treatment proposed by the management to achieve the goal of the company reporting although it may cause the report to be less successful. There are several factors that motivate a manager to conduct an opinion shopping. One of them is a willingness to achieve the target as well as the needs to maintain the continuity of the business.

What makes a business a going concern?

When a company operates as a going concern, it means that it is expected to carry on trading with no threat of liquidation for 12 months or more. The company is not in danger of closure due to insolvency, but can be relied upon to survive or thrive.

ExpensesAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital. DebtDebt is the practice of borrowing a tangible item, primarily money by an individual, business, or government, from another person, financial institution, or state. Net Realizable ValueNet Realizable Value is a value at which the asset may be sold in the market by the company after deducting the expected cost of selling the asset in the market. It is a crucial metric for determining the value of a company’s ending inventory or receivables. GAAS considers this principle a crucial parameter for determining the longevity of a business.

Actions for management to take now

For this reasonable period of time, management is required to identify whether any conditions or events are present when they’re making this evaluation that may cause significant doubt with respect to the ability to continue as a going concern. And management’s evaluation is made based on the conditions or events that are known at the time they are making that evaluation or are reasonably knowable as of that date. It essentially is, at the date of that evaluation, what do they know and then what is their conclusion around that. Are you preparing financial statements and wondering whether you need to include going concern disclosures? Or maybe you’re the auditor, and you’re wondering if a going concern paragraph should be added to the audit opinion. You’ve heard there are new requirements for both management and auditors, but you’re not sure what they are. Continuation of an entity as a going concern is assumed in financial reporting in the absence of significant information to the contrary.

Going Concern

The major issue, however, is not the length of the forward-looking period, but the capability of the auditor to assess management’s evaluation and determine its reasonableness. All forward-looking analyses are subject to error and the dynamics of changing—and sometimes unpredictable—macro- and microeconomic factors. The present study indicated that the opinion shopping and the leverage affected the going concern audit opinion. It showed that the auditor tended to give a going concern audit opinion to the companies applying the opinion shopping and having a high leverage level, whereas audit client tenure, audit lag and liquidity ratio did not affect the going concern audit opinion. Consequently, the auditor tended not to provide a going concern audit opinion over the company’s audit client tenure, audit lag and liquidity ratio. External events – e.g. a natural disaster, geopolitical affairs or pandemic – may cause economic conditions to deteriorate significantly and create economic uncertainty for many companies. And if substantial doubt has been alleviated by management’s plans, then management would disclose the conditions and events that gave rise to the substantial doubt as well as their plans for alleviating it, and in that case there would be no requirement to modify the standard auditor’s opinion.

Going Concern Assumption: Everything You Need to Know

The presumption of going concern for the business implies the basic declaration of intention to keep operating its activities at least for the next year, which is a basic assumption for preparing financial statements that comprehend the conceptual framework of the IFRS. Hence, a declaration of going concern means that the business has neither the intention nor the need to liquidate or to materially curtail the scale of its operations.

CreditworthinessCreditworthiness is a measure of judging the loan repayment history of borrowers to ascertain their worth as a debtor who should be extended a future credit or not. For instance, a defaulter’s creditworthiness is not very promising, so the lenders may avoid such a debtor out of the fear of losing their money. Creditworthiness applies to people, sovereign states, securities, and other entities whereby the creditors will analyze your creditworthiness before getting a new loan. LiabilitiesLiability is a financial obligation as a result of any past event which is a legal binding. Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company. Lenders themselves may be experiencing liquidity issues and may need central bank assistance to be able to continue to provide, or increase, financing. To seek financial support from shareholders and/or government programmes designed to support businesses.

Consideration of Financial Statement Effects

The main purpose of the audit is to provide a sufficient trust that the financial statement has been reasonably presented according to the Generally Accepted Accounting Principles (Boynton et al., 2006). The result of the financial statement audit is an auditor opinion that is regarded as a public trust symbol to the information accountability presented in a financial statement . The conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern, if applicable. SAS 132 provides guidance concerning the auditor’s consideration of an entity’s ability to continue as a going concern.

  • We have received questions from members about whether it would be prudent for management to delay the issuance of its financial statements until some of this uncertainty is resolved.
  • Besides, the population of the study included manufacturing companies registered in ISE from 2009 to 2013.
  • For example, the auditor should consider the adequacy of support regarding the ability to obtain additional financing or the planned disposal of assets.
  • ShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company.
  • An organisation or entity is no longer a going concern if management either intends to liquidate the entity or cease trading, or have no realistic alternative but to do so.
  • The principle highlights the assumption that companies intend to keep assets and generate profits in the future—assets won’t be sold in between.
  • Staff analysis will take into account observations from the Board’s oversight activities, audit firms’ methodologies, academic research, recent reporting trends, the activities of other standard setters and regulators, and information from investors and other stakeholders.

Sometimes management’s plans to alleviate substantial doubt include financial support by third parties or owner-managers . The auditor should remain alertthroughout the audit for conditions or events that raise substantial doubt. So, after the initial review of Going Concern issues in the planning stage, the auditor considers the impact of new information gained during the subsequent stages of the engagement. According to this principle, financial statements are prepared, assuming the company intends to continue operations for the foreseeable future and has no motive or need to shut down. Consistency PrincipleAccording to the Consistency Principle, all accounting treatments should be followed consistently throughout the current and future periods unless compelled by law to change or the change provides a better accounting presentation. This concept prevents accounting fraud and ensures that financial statements are comparable across historical periods. In other words, a gong concern will continue to exist in the long run, with no intention to shut down.

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