Audit risks – going concern

“Going concern” isn’t “a class of transactions” or “an event” within the meaning of assertions but a basis for the preparation and presentation of the financial statements as a whole. If there is significant uncertainty that the basis is appropriate, that clearly concerns presentation which, in accordance with IAS 1, calls for specific disclosures in the notes.

Audit risks that concern the financial statements as a whole are not “pigeon-holed” into assertions that relate to transactions/events/balances – these would require specific “assertion-targeted” responses. So for example, an auditor’s response in relation to going concern risk would include evaluation of management’s assessment of the company’s ability to continue in operational existence for as least 12 months.

There are two main risks related to going concern:
1 – the financial statements are presented on a going concern basis when the company is not a going concern – i.e. the basis if inappropriate – this would give rise to an adverse opinion
2 – the basis is appropriate but disclosure is insufficient/incomplete (e.g. as compared to the requirements of IAS 1) – this would give rise to a qualified opinion.

Just because the words “complete”/”presentation” happen to be used in describing these risks does not mean you are talking about risks “at the assertion level”.

If it’s NOT a going concern – i.e. no doubt – the financial statements should NOT be prepared on a going concern basis. So this would be the risk – that they are prepared on a going concern basis when they should be prepared on an alternative “break up” or “liquidation” basis.

Since the “basis of preparation” of the accounts affects the financial statements “as a whole” – it is pervasive. So if management refused to prepare the financial statements on an alternative basis – the audit opinion would be adverse.

This is “in theory” because in practice, adverse opinions are very, very, very rare. The auditor would remind management of their responsibilities for the preparation of financial statements that show a true and fair view/present fairly and make it clear that the audit opinion will be adverse if the going concern basis is used inappropriately. So management would be persuaded to prepare the accounts on an alternative basis.

The audit of financial statements prepared on a basis other than going concern is not examinable – either in AA – nor in AAA – but I made some notes for an interested student on the AAA forum here https://opentuition.com/topic/break-up-basis