Identify whether the following statements concerning the responsibilities of auditors and management in relation to going concern are true or false.
a. Management should assess whether the entity will continue in operation for the foreseeable future.
b. Management should prepare financial statements on the appropriate basis.
c The auditor should consider the appropriateness of management’s use of the going concern assumption in the preparation of the financial statements.
d. The auditor should modify the audit opinion if they have identified going concern risk factors during the audit.
The correct answer and explanation is:
Here is the breakdown of each statement:
a. True
Management has the responsibility to assess the entity’s ability to continue operating for the foreseeable future, generally at least for the next 12 months from the balance sheet date. This is part of their duty to evaluate the company’s financial health and ability to continue operations. The assessment includes factors such as liquidity, cash flow, debt obligations, and other financial conditions that might impact the entity’s ability to remain a going concern.
b. True
Management is responsible for preparing financial statements on the appropriate basis, which includes using the going concern assumption unless there is a clear indication otherwise. In this case, the financial statements should be prepared assuming the entity will continue its operations unless management intends to liquidate or cease operations.
c. True
The auditor must assess the appropriateness of management’s use of the going concern assumption. This involves evaluating whether the financial statements are prepared on the correct basis. The auditor looks for conditions that might cast doubt on the entity’s ability to continue as a going concern. If the auditor identifies substantial doubt about the company’s ability to continue, they must carefully evaluate whether management has disclosed this concern adequately in the financial statements.
d. True
If the auditor identifies going concern risk factors during the audit, they are required to modify the audit opinion if substantial doubt exists about the entity’s ability to continue as a going concern. This may lead to a qualified opinion, adverse opinion, or a disclaimer of opinion depending on the severity of the identified issues. If management does not appropriately disclose the going concern risk, the auditor must report this issue in their audit report.
In summary, all four statements are True. The process of evaluating the going concern assumption is critical both for management and auditors, as it ensures the reliability and transparency of financial reporting. If there are concerns about the entity’s ability to continue operations, appropriate actions must be taken, including disclosures and modifications to the audit opinion.