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Hi sir,
1.While reviewing the Medmedia qs june 2010 in that one part pf qs says to describe the impact on the audit report if auditr believes the company is going concern but a material umcertainity exist.
So when uncertainty exist how come company will be a going concern? Iam confused . Can you please explain me in detail .
2.The audtor assess the going concern from the date of F.S which he is auditing to 12 months ryt ?
3.And one more doubt if there is a going concern issue iz it disclosed or the future coming account is prepared on break up basis ?Under the going concern assumption an entity is seen as continuing in business for the foreseeable future . That is there is no intention to curtail operations or cease trading trading ,therefore the entity must be able to realize it’s assets and discharge its liabilities in the normal course of business.
If the company is a going concern but material uncertainty exists, it depends on whether the material uncertainty is adequately disclosed in financial statements .If it is disclosed ,the auditor can still express an unmodified opinion .However before the opinion paragraph , the auditor must write an emphasis of matter parapragh stressing on the matter which has been indentified as the one which may cast significant doubt in the entity’s ability as a going concern. For example ,” Without qualifying our opinion , we draw attention to note X in the …statement .Loan note issued 15 years ago is reaching maturity on 3 March 2016.So far the entity has no arrangement on the renewal or alternative financing in the future .This may pose significant financial problems in the future . ”
In the opinion paragraph the auditor will express an unmodified opinion as following .”Other than the matter stated in the emphasis of matter paragraph ,the financial statements present a true and fair view…
However if financial statements do no adequately disclose material uncertainty , even though the going concern assessment is appropriate , the auditor expresses a modified opinion which is may be a qualified opinion or adverse .Just like the emphasis of matter above , the auditor will have to create a basis of qualification paragraph to highlight the matter which the financial statements do not adequately disclose .Since this is a qualified opinion the report is will be modified.
It is not the responsibility of the auditor to assess going concern . It is the responsibility of the directors of an audit client .The responsibility of an auditor is to assess the appropriateness of management ‘s assessment of going concern .The going concern is about the future not the past .There the assessment should cover the next 12 months at least .However it is the conditions or events deduced from the current financial statements which can tell whether the entity is able to continue as a going concern . For example lack of financial support , over trading , huge claims on litigations which are material ,emergence of a huge successful competitor which is hurting the entity ‘s market share, inability to pay suppliers on time(as indicated by analytical procedures on payables account in current and prior periods ) therefore it is a just a matter of time before more litigations and loss of credit purchases .
When an entity is not going going concern (may not be able to continue in business in the foreseeable future which is assessed on a yearly basis in advance ),other methods of preparing and presenting financial statements are used . Break up basis is one of them.Under break up basis , all non current assets and liabilities become current . Surely the entity is ceasing and these assets and liabilities can no longer be realized and discharged in more than one accounting period respectively .
Mr.Gromit is our tutor ,but wait until he gets to you .
1 – A material uncertainty as to going concern means that the company is not doomed. It simply means there is a risk of failure.
2 – It’s 12 months from date of approval of the FS.
3 – A going concern doubt is disclosed by way of a note in the FS and there will be an emphasis of matter paragraph added into the audit report. If there is no realistic chance of survival, the FS should be prepared on a break-up basis.
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