United States

Auditor’s consideration of ability to continue as a going concern

FINANCIAL REPORTING INSIGHTS  | 

The American Institute of Certified Public Accountants Auditing Standards Board recently issued Statement on Auditing Standards (SAS) 132, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern. The new SAS clarifies that the auditor’s objectives include separate determinations and conclusions with respect to (a) the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements and (b) whether substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time exists, based on the audit evidence obtained. Other significant changes from existing standards resulting from the issuance of SAS 132 include the following:

  • When management’s plans include financial support by third parties or the entity’s owner-manager and such support is necessary in supporting management’s assertions about the entity’s ability to continue as a going concern for a reasonable period of time, the new SAS requires the auditor to obtain sufficient appropriate audit evidence about the intent and ability of such parties to provide the necessary financial support.
  • The new SAS includes a requirement that the auditor inquire of management regarding its knowledge of conditions or events beyond the period of management’s evaluation that may have an effect on the entity’s ability to continue as a going concern. The inquiries are not intended to require management to extend its evaluation period, but may affect other disclosure requirements or consideration of whether the financial statements are fairly presented.
  • SAS 132 includes guidance for situations when an auditor decides to include an emphasis paragraph to reference management’s disclosures when the auditor concludes that substantial doubt has been alleviated by management’s plans. An example of the emphasis paragraph in those circumstances is provided in paragraph A55.
  • For audits of financial statements prepared in accordance with special purpose frameworks, when the going concern basis of accounting is not relevant, the requirements to obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management’s use of the going concern basis of accounting do not apply. However, irrespective of whether the going concern basis of accounting is relevant in the preparation of special-purpose financial statements, SAS 132 requires the auditor to (a) conclude, based on the audit evidence obtained, whether substantial doubt exists about an entity’s ability to continue as a going concern for a reasonable period of time and (b) evaluate the possible financial statement effects, including the adequacy of disclosure regarding the entity’s ability to continue as a going concern for a reasonable period of time.
  • The SAS amends AU-C 930, Interim Financial Information, to require performing review procedures to address the situations when the applicable financial reporting framework includes requirements for management to evaluate the entity’s ability to continue as a going concern for a reasonable period of time in preparing interim financial information. The amendments also reflect a new requirement for the auditor to include an emphasis-of-matter paragraph in the review report when certain conditions or events exist related to substantial doubt about an entity’s ability to continue as a going concern.

The SAS is effective for audits of nonissuer financial statements for periods ending on or after December 15, 2017 and reviews of interim financial information for interim periods beginning after fiscal years ending on or after December 15, 2017.